By TIOL News Service

MUMBAI, DEC 21, 2015: THE appellants are engaged in manufacture of 'Vacuum Interrupters' [Chapter 85]. Testing for performance standards requires that the goods be sent to M/s Kema High Voltage Laboratories (M/s KHVL) Netherlands for calibration testing.

After test, Vacuum Interrupters are returned back to the appellant. In July 2008, an amount of Rs.34,92,469/- was paid to M/s KHVL towards testing charges. Revenue authorities persuaded the appellant to pay the service tax of Rs.4,27,478/- and interest amounting to Rs.1,34,258/- towards delayed payment of service tax.

A SCN came to be issued alleging that the the services received fell under the category of Technical testing and Analysis and by applying rule 2(1)(d)(iv) of Service Tax Rules, 1994 read with section 66A of the FA, 1994, it has to be construed that taxable service was received in India; and in terms of Rule 3(ii) of the Taxation of Services (Provided from outside India and received in India) Rules, 2006, the services was held to be partly performed in India, hence to be considered as performed in India and leviable to service tax.

In adjudication, the Asstt. Commissioner confirmed the service tax demand and appropriated the amount already paid. He also imposed penalties under section 76, 77 and 78 as well as late fee under section 70 for not filing ST-3 returns.

As the Commissioner (Appeals) upheld this order,the Appellant is before the CESTAT.

After considering the submissions made by both sides, the Bench observed -

"4. We note that the service in question is purely a testing service which is performed in the laboratory of M/s KHVL, Netherlands. The certificate from KHVL shows that the test was conducted in their laboratory in Netherlands. Under section 66(A), any service received by a person in India from outside India shall be treated as if the recipient had himself provided the service. Rule 3 of the Taxation of Services (Provided from Outside India and received in India) Rules, 2006 determine the fact as to when a service is considered to be received in India. In the present case, admittedly during the period in question, the service categorized under section 65(105)(zz) is covered under Rule 3(ii). The lower authorities have failed to understand the provisions of Rule 3 ibid, particularly Rule 3(ii). Proviso to Rule 3(ii) states that when a service is partly performed in India, it shall be treated as performed in India. Revenue has not justified how the service is performed outside India. Therefore, it cannot be said that the service has been received in India. The service tax is clearly not payable by the appellant in the present case. As tax is not payable, the question of interest and penalties and other fees does not arise."

The impugned order was set aside and the Appeal was allowed with consequential relief.

(See 2015-TIOL-2724-CESTAT-MUM)