By TIOL News Service

MUMBAI, AUG 31, 2016: THE fact of the case is that the assessee is engaged in export of IT services.

Apart from providing services from India to abroad, the branch offices of the assessee located in South Africa and UK are also providing services to overseas clients. For these services, invoices are raised by the branch offices of South Africa and UK and payment there against were also received by the branches.

A part amount was repatriated to India out of the proceeds received by branches for the service provided by the South Africa and UK based branches.

The assessee claimed refund u/r 5 of CCR, 2004 in respect of service tax paid on the input service used for export of services.

The Adjudicating authority rejected a part of the refund claimed amounting to Rs.9,13,701/- on the ground that the turnover of services provided by the assessee's branches located South Africa and UK is not qualified as export turnover of the assessee.

The Commissioner (Appeals) inter alia upheld the principle laid down by the original authority that the turnover of the services provided by the branches located in South Africa and UK is not part of the assessee's export turnover. However, the lower appellate authority sanctioned the refund claim of Rs.7,68,757/- by interpreting the term ' total turnover ' by excluding the value of services provided by overseas branches and resultantly denied the amount of Rs.1,44,944/-.

Both, the assessee and Revenue are in appeal before the CESTAT.

The appellant assessee submitted that as per the Explanation 4 to Section 65B(44) of the FA, 1994, the branch of the assessee is treated as having an establishment in that territory and, therefore, the turnover of the branches has to be included in the assessee's turnover;that the Commissioner had overlooked the definition of 'Location of Service Provider' Rule 2(4)(b)(iii); that the service provided from branch office falls under the definition of export of service as provided under Rule 6A of the STR, 1994. Inasmuch as the turnover of the services provided by the branches located in South Africa and UK ought not to have been excluded from the net export turnover , emphasized the appellant.

The AR while reiterating the findings of the Commissioner (A) made against the assessee submitted that the Commissioner (A) had wrongly reduced the value of services provided by the overseas branches of the assessee from 'total turnover' for the reason that turnover of the assessee's branches is also part and parcel of ' Total turnover ' of the assessee. In short, the grant of refund of Rs.7,68,757/- was not legal and correct, the AR pleaded.

After extracting the provisions contained in section 65B(44) of FA, 1944 and the POPS Rules, 2012, the CESTAT gave its findings on the issues mentioned belowin the appeals by

Assessee and Revenue respectively -

(a) Whether, in the facts of the present case, the turnover of branches of assessee's located in South Africa and UK should be treated as export turnover of the assessee.

+ As per explanation 3(b) of section 65B (44), if a person is having two establishments, one in taxable territory and other in non taxable territory both shall be treated as distinct persons. In the present case the branch office of the assessee is in non-taxable territory, therefore, the branches are distinct persons. In such case the business turnover of the said branches (distinct persons) cannot be treated export turnover of the assessee.

+ In terms of Rule 2(h) definition of 'location of service provider' is applicable only in taxable territory. If the service provider is located in non-taxable territory, he will be treated as distinct person and this definition of 'location of Service provider' will not apply.

+ As per Rule 3 of Place of Provisions of Services Rules, 2012 place of service, in normal course, shall be location of service recipient. In case location of service receiver is not available, the place of provision shall be the location of the provider of services.

+ In the present case the provision of service is by the branches in South Africa and UK and recipients are also located outside India, therefore the branches of the assessee is the location of the provider of service and not the assessee.

+ As per Rule 6A(a) of Service Tax Rules, 1994, for the purpose of 'Export of Service' the branches of the assessee who are provider of service and being not located in taxable territory, for this reason also, the service provided by the branches of the assessee are not export of service.

(b) Whether the value of service provided by the overseas branches of the assessee should be included in the 'total turnover' of the assessee.

+ Services provided by the overseas branches being other than export services is based on the interpretation of the provisions referred above that the overseas branches of the assessee are distinct person. Moreover, the service value was also received by the overseas branches only.

+ Department cannot take contrary stand that, on one hand the branches turnover is not export turnover and on other hand, it is addable in total turnover of the assessee. Once it is held that branches' turnover is not export being branches are distinct persons, the same principle will apply for the purpose of total turnover of the assessee.

+ Branches turnover will neither be included in export turnover nor in the total turnover of the assessee.

Both the appeals were dismissed.

(See 2016-TIOL-2262-CESTAT-MUM)