ST - For a service to fall under Rule 3(1)(iii) of Export Rules 2005, deciding factor is location of service receiver - Place of performance of service is irrelevant: CESTAT Larger Bench

2023-TIOL-656-HC-P&H-ST

ST - Revenue is in appeal against order of CESTAT dated 24.10.2018 whereby appeal of respondent was allowed - Brief facts are that the respondent had vide agreement entered into on 12.01.2007 [ w.e.f 01.02.2007] rented out to M/s Gateway District Parks Ltd. [GDL], Mumbai the CFS located on plot along with all buildings and permanent structures etc.; that recipient was required to pay Rs.35 crore lump-sum as upfront fee in advance to the respondent along with annual fee of Rs.10 crore; that respondent apportioned the upfront fee of Rs.35 crore in ten equal yearly parts and thus, reflected income of Rs.3.5 crore annually on this amount in their balance sheets; that respondent corporation was paying service tax on annual fee of Rs.10 crore under the category of "Renting of Immovable Property Service" w.e.f. 01.06.2007 but no service tax was paid on apportioned upfront fee received by the respondent corporation - Initially, show cause notice dated 11.10.2011 was issued by Raigad Commissionerate to the respondent on the ground that respondent corporation had provided franchise service; this demand was confirmed by adjudicating authority but remanded by Tribunal - Another demand notice was issued on 12.10.2012 demanding the service tax on the said upfront fee of Rs.35 crores under the category of "Renting of Immovable Property Service" by invoking the extended period of limitation - The Tribunal held that since the service rendered by the respondent did not fall under the category of "Franchise Service", the same demand of service tax issued in another show cause notice was against the principles of res-judicata - It is this order which the department is aggrieved with.

Held : Even though the respondent-corporation was registered at Chandigarh, for the purpose of service tax, the Chandigarh Commissionerate had no jurisdiction to issue notice with respect to the franchise service of Rs.35 crore received by the respondent-corporation towards "Franchise Service" - Jurisdiction to issue this notice was with the Raigad Commissionerate, which had already set aside the notice vide order dated 30.04.2014 - Rather, apart from notice dated 11.10.2011, two more notices dated 25.01.2011 and 10.10.2012 have also been set aside - The above said three notices were issued for the period from January, 2007 to March, 2012 - No ground is made out to interfere in the impugned order as the same has been passed after appreciating the evidence in the right perspective - Appeal is dismissed: High Court

- Appeal dismissed: PUNJAB AND HARYANA HIGH COURT

ST - The Appellant-company, is a wholly-owned subsidiary of Arcelor Mittal Stainless International, Paris, France Arcelor France - It was appointed as a sub-agent by Arcelor France, a commission agent for steel mills situated outside India, for procuring sale orders for the products manufactured by these mills from customers across the world - Arcelor France does not have any office in India - A prospective customer in India is either approached by Arcelor India or a prospective customer contacts Arcelor India regarding stainless steel requirement, but in either case the request is forwarded by Arcelor India to the foreign steel mills with the technical requirements of the Indian customer - Once the foreign mills and the Indian customer come to an understanding on the terms and conditions of supply, a written contract is executed between the Indian customer and the foreign mills or a purchase order is placed on the foreign mills - The documents are prepared by the foreign mills in the name of the Indian customer and the Indian customer, in turn, pays the foreign mills - Thus, the goods directly pass from the foreign mills to the Indian customer - A part of the commission received by Arcelor France, as the main agent, from the foreign mills is paid to Arcelor India based on the volume of sales in each quarter in convertible foreign currency - A dispute arose in relation to such commission received by Arcelor India from Arcelor France for the period from April 2005 to January 2009. According to Arcelor India, there is no privity of contract between it and the steel mills located outside India and it received the consideration only from Arcelor France - It, therefore, did not collect or pay service tax on the commission received from Arcelor France from April 2005 to January 2009 - The Department, however, believed that service tax was leviable on the commission received by Arcelor India from Arcelor France since the services were performed and consumed in India and they would not qualify as 'export of service' under the Export of Service Rules, 2005 the 2005 Export Rules - Arcelor India believed that it was not required to pay service tax on the commission received from Arcelor France as the service qualified as 'export of service' - However, Arcelor India paid service tax under protest during investigation for the period April, 2005 to January, 2009 with interest, but subsequently filed refund claims.

Held - The reasoning adopted by the Department is that the services of commission agent were used in India to cater to the Indian markets - It is not possible to accept this reasoning of the Department - The Circular dated 24.02.2009 also categorically states that for the services to fall under rule 3(1)(iii) of the 2005 Export Rules, the relevant factor is the location of the service receiver - In other words, the place of performance of the service or the place where the customers of the service receiver are located is irrelevant - The appeal may now be listed for hearing before the Division Bench: CESTAT LB

+ In the present case, Arcelor India is a sub agent of Arcelor France which is an agent for the steel mills situated outside India. For procuring sale orders for the products manufactured by the foreign mills from customers in India, the requests of prospective customers identified by Arcelor India is forwarded to the foreign mills who, thereafter, directly get in touch with the Indian customer to determine the terms and conditions and execute a contract after which the goods are supplied by the foreign mills directly to the Indian customers. For this provision of service, Arcelor India receives consideration from Arcelor France in convertible foreign exchange. Thus, there exists a relationship of service provider and service recipient between Arcelor India and Arcelor France;

+ A service recipient is a person who makes a request for a service, in exchange of a consideration. In fact, he is the person who is liable to pay for the services received. Service recipient is not a person who is affected by the performance of the service. The Finance Act does not define the term 'service recipient'. It is, therefore, clear that the recipient of service is the person at whose desire the activity is done in exchange for a consideration, i.e., the person who is obliged to make payment for the service. The recipient of service would, therefore, be a person at whose instance and expense the service is provided, whether or not he is the beneficiary of the service;

+ Arcelor France and Arcelor India act as main agent and sub-agent for foreign mills and not as an agent or service provider for the customers in India. There is no contractual relationship between Arcelor India and the customers in India. Therefore, even though the goods in the form of steel products are being supplied to customers in India, the actual recipient of BAS provided by Arcelor India is Arcelor France. Arcelor France has used the services of Arcelor India to provide services as main agents to the mills located outside India;

+ As noticed above, it was the consistent view of the High Courts and the Tribunal that export of service would take place under rule 3(1)(iii) of the 2005 Export Rules if a person residing in India provides a service to a foreign entity to enable it to book orders for customers in India. This is for the reason that the foreign entity is located outside India and the payment is received by the person residing in India in convertible foreign exchange;

+ The division bench, while making the reference, intended to deviate from this settled position of law only because, in its considered view, the decision of the Supreme Court in GVK Industries. The division bench, after recording a finding that there was no dispute that Arcelor India was providing BAS to Arcelor France, noted that the dispute was only as to whether the service rendered by Arcelor India will qualify as export of service in terms of the 2005 Export Rules. The division bench concluded that since the services provided to Arcelor France was for developing its business in India, the services received by Arcelor France, even though it is located outside India, would be in relation to business activities in India in view of the decision of the Supreme Court in GVK Industries. Reliance placed by the division bench on GVK Industries, as noticed above, is misplaced. The decision of Supreme Court in GVK Industries is based on an interpretation of Explanation (2) to section 9(1)(vii)(b) of the Income Tax Act, under which the income is deemed to have accrued in India. The Finance Act and the 2005 Export Rules do not contain a provision providing a deeming fiction. The distinguishing features of the decision of the Supreme Court in GVK Industries have been pointed in the earlier paragraphs of this order. The decision of the Supreme Court in GVK Industries, therefore, cannot be applied to the facts of the present case.

- Case remanded: MUMBAI CESTAT