Tribunal sets aside Rs.637 crore Service Tax demand against Tech Mahindra - Reimbursements made to Overseas Branch Office by Head Office in India are not liable to service tax: CESTAT
By TIOL News Service
MUMBAI, MAR 23, 2016: THE appellant is in the business of developing software for overseas customers, particularly, mobile operators, and, admittedly, renders ‘Information technology service' taxable as per section 65(105)(zzzze) of FA, 1994; however, being an exporter, they are exempt from tax. These services are rendered through ‘on-site' and ‘offshore' operations and, for the former, engineers are deputed from India.
The appellant has established a network of branches and subsidiary companies at different locations outside the country. On the value of services rendered by subsidiaries to the parent company, appellant has been discharging service tax liability under the ‘reverse charge mechanism' prescribed in section 66A of Finance Act, 1994.
The branches of the appellant act as salary disbursers of the staff deputed from India to client locations besides carrying out other assigned activities. The salaries so disbursed, as well as other expenses of the running the branch, are met from the coffers of the appellant. Payments made by customers are also received in branches and transmitted to the head office after netting the expenses incurred by the branch.
| Convinced that the payments made to the branches were in the nature of consideration for taxable services rendered by the branch to the head office and that M/s Tech Mahindra Ltd. was liable to tax on ‘reverse charge' basis for having been recipient of ‘business auxiliary services' rendered by the branches to the head office, proceedings were initiated by Revenue. |
For the period 16 th May 2008 and 31 st July 2013 , notice was issued on 24 th October 2013 seeking recovery of Rs.637,66,00,962/- as tax besides interest and for imposition of penalties under section 77 and 78 on M/s Tech Mahindra Ltd., its Chairman and a few other key functionaries.
The Commissioner of Central Excise, Pune-I had no qualms in confirming the weighty demand on 11/02/2015 along with interest and penalties galore.
The Appellant is before the CESTAT and inter alia submitted –
++ That tax liability will arise only for services received in India which the adjudicating authority failed to establish;
++ That, without there being a client relationship, business auxiliary service cannot be said to have been rendered;
++ That reimbursements are not consideration and is not rendering service;
++ That overseas branches did not charge any consideration for any service;
++ That the Tribunal in re Torrent Pharmaceuticals Ltd. - 2014-TIOL-2467-CESTAT-AHM has held that branches are not service providers within the meaning of section 66A of Finance Act, 1994;
++ That salaries, sub-contracting costs and expenditure on services that were rendered outside the country cannot be taxed under section 66A of Finance Act, 1994;
++ That activities taxed overseas cannot be taxed under Finance Act, 1994;
++ That the entire demand is revenue neutral as CENVAT credit could be taken and refund claimed;
++ Amount paid to employees is in pursuit of employment contract;
++ That regular information was being furnished to service tax authorities and the books had been subject to service tax audits.
The Special Counsel for the Revenue justified the legality of the demand by adverting to section 65(105)(zzb) and section 65B(51) of FA, 1994; section 66A of FA, 1994 r/w rule 3(iii)(c) of Taxation of Services (Provided from outside India and received in India) Rules, 2006 and Explanation 3(b) and 4 of section 65B(44) of FA, 1994 besides countering the contention of appellant on revenue neutrality and invoking of penal provisions.
The Member (Technical) writing the verbose order for the Bench observed –
+ The appellant-assessee has established branches for furthering its commercial objectives. The benefit of assigned activities of the branch will, undoubtedly, accrue to the appellant.
+ There is no dispute that it is the appellant-assessee who enters into contractual agreements with overseas customers for supply of ‘information technology services' which have “off-shore” components rendered directly to the overseas entity by the appellant-assessee. ‘On-site' activity is undertaken by deputing employees working at the site of the customer.
+ As section 66A(2) is limited to being a charging section in a specific context, it is not elastic enough to govern the corporate intercourse and commercial indivisibility of a headquarters and its branches. Therefore, any service rendered to the other contracting party by branch as a branch of the service provider would not be within the scope of section 66A.
+ Merely because there is a branch and that branch has, in some way, contributed to the activities of the appellant-assessee in discharging its contractual obligations, the definition of ‘business auxiliary service' in section 65(19) of Finance Act, 1994 may not apply.
+ That is where the impugned has erred in not reading section 65(105) along with section 66A and Rules framed for the purpose of charging tax on services received from abroad. Unless both are applied together, the jurisdiction to tax would be in question.
+ From the Rules, 2006 & Place of Provision of Services Rules, 2012, it is apparent that mere identification of a service and legal fiction of separate establishment is not sufficient to tax the activities of the branch.
+ The very existence of a branch presupposes some kind of activity that benefits the primary establishment in India and the organizational structure inherently prescribes allocation of financial resources by the primary establishment to the branch to enable undertaking of the prescribed activity. The application of Finance Act, 1994 to such a business structure within India does not provide for a deemed segregation.
+ It is noticed that the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 also mirrors the Export of Services Rules, 2005. Reference to section 93 as an authority for prescribing the Rules would make it appear that the purpose of the said two set of rules is to exclude from tax such services that do not fall within the three classifications predicating the import of service. The residuary provision in the Rules of 2006 make it clearly that such services have to be received by a recipient located in India for use in relation to business or commerce. The provisions of the successor Rules are no different .
+ A service is taxable under section 66A of Finance Act, 1994 only when such service is rendered in India. A forced disaggregation merely for the purpose of tax when similar domestic structures are not taxed and when commercial soundness calls for establishment of branches would be clearly inequitable.
+ Section 66A requires taxing of taxable services rendered by an overseas branch to its head office and the two sets of Rules limit tax demand only to the extent that these services are received in India in relation to business or commerce. A plain reading would make it apparent that the services referred to must be for pursuit of business or commerce in India.
+ Mere existence as a branch for the overall promotion of the objectives of the primary establishment in India which is essentially an exporter of services does not render the transfer of financial resources to the branch taxable under section 66A.
+ The legal fiction of service rendered by overseas branch to its primary headquarters would appear to be intended to prevent escapement from tax by resort to branches specifically to take advantage of the principle of mutuality. When a service to be rendered in India by the primary establishment is deliberately routed through an overseas branch or when a service that would otherwise be contracted from an overseas entity is, instead, sourced through an overseas branch, this legal fiction will come into play.
+ A branch, by its very nature, cannot survive without resources assigned by the head office. The activity of the head office and branch are thus inextricably enmeshed. Its employees are the employees of the organization itself. There is no independent existence of the overseas branch as a business.
+ The transfer of funds – by gross outflow or by netted flow – is, therefore, nothing but reimbursements and taxing of such reimbursement would amount to taxing of transfer of funds which is not contemplated by Finance Act, 1994 whether before 2012 or after.
Holding that the demand of tax is without authority of law, the same was set aside and the appeals were allowed.
(See 2016-TIOL-709-CESTAT-MUM)
