By TIOL News Service

MUMBAI, MAR 03, 2016: APPELLANT is a manufacturer of pharmaceutical products that are exported to Ukraine for which agreements were entered into with M/s Biogenetica Ltd, M/s Nicocardia Ltd and M/s Selesta Holding Company Ltd for market promotion and publicity. The balance sheets of the appellant for 2004-05, 2005-06 and 2006-07 revealed that payments of Rs.26.44 crores, Rs.24.28 crores and Rs.48.49croreswere effected in these respective years to these Cyprus-based entities in foreign currency and these had been booked as 'advertisements and business promotion expenses".

Proceedings were initiated against the appellant, a 100% EOU, for recovery of tax under the category 'advertising agency services' on reverse charge basis. The demand pertains to the period from 18th April 2006 to 31st March 2008.

In appeal against the order passed by CCE, Nasik, the primary contention is that no service is rendered in India and hence tax liability will not arise. The appellant reiterates the claims made before the original authority, along with the evidences of connected invoices, that these payments were in the nature of reimbursements for publicity material that were paid for, on their behalf, by the three entities. It is also claimed that the bulk of the payments made related to services rendered prior to 2006-07 and should have been excluded. Reliance is placed on the decision in KPIT Cummins Infosystems Ltd - 2013-TIOL-1568-CESTAT-MUM which has set the issue at rest in their favour.

The AR justified the demand by reiterating the stand taken by the original authority.

We reported the stay order as 2011-TIOL-1733-CESTAT-MUM.

The appeal was heard last August and the order has been passed recently.

The Bench inter alia observed -

++ The appellant is an exporter registered under an export promotion scheme whose objective is to generate employment and contribute to the inflow of 'convertible currency.' That the appellant exports its entire production to Ukraine is not in dispute.

++ Services that are not connected with manufacture or with the transport of goods till the customs frontier of the country can be disassociated from use within the country and hence would not lie within the ambit of the legal fiction of import of services. Services that are undeniably rendered by a foreign 'service provider' in relation to the goods sold abroad cannot be presumed to be covered by the legislative intent to tax. To tax a service using the legal fiction of import and then reimburse that tax because the service was not required for any activity within the country is an exercise in futility and is contrary to the objectives of and means devised for export promotion by the State.

++ The tax liability has been crystallized in the impugned order by recourse to Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 by deeming the provision of 'advertising agency service' by the three Cyprus-based entities to be an import of service into India.

++ From the context in which the appellant has entered into agreements with three providers who were held to be rendering 'advertising agency services' it would appear that these are intended to relate to the activities of the appellant in relation to export goods after their arrival in Ukraine. At no stage are they required for any activity of the appellant in India. The service itself is not warranted except in relation to export by the appellant and hence tax, even if leviable, is not to burdened onto the export goods.

++ The original authority has failed to take note of the destination of the goods manufactured by the appellant and has deemed the services rendered in Ukraine to have been imported into India for business and commerce. From our examination of the scheme of 'deeming of import of services' for taxation supra, it can be reasonably inferred that the 'business or commerce' in Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is not intended tax services that are rendered in connection with business or commerce outside the territory of India.

++ Since the appellant has no requirement of 'advertising agency service' for manufacture and export of goods, the tax demanded in the impugned order is not on the consideration for a service received in India but a tax on the funds transferred in a cross-border transaction. Such a tax is not contemplated in Finance Act, 1994.

Holding that the demand of tax on the appellant is not in accordance with law, the impugned order was set aside and the appeal was allowed.

(See 2016-TIOL-529-CESTAT-MUM)