ST - Requirement of accounting standards which mandates that financials of overseas branch are to be included in financials of corporate entity is not sufficient to conclude that services were rendered by foreign service providers to Indian HQ - not liable to tax u/s 66A: CESTAT
By TIOL News Service
MUMBAI, DEC 28, 2016: THE appellant is in the business of software development and its export and has branches and subsidiaries outsides India. These overseas branches incur expenses for consultancy and professional services rendered in the respective countries which were sought to be assessed to tax on 'reverse charge' basis for having received 'business auxiliary services'.
Demand notices were issued and vide the impugned order the adjudicating authority held the appellant liable to tax u/s 66A of FA, 1994 as recipient of service and dropped that portion of the demand pertaining to the period prior to 18th April 2006 when Section 66A was incorporated in Finance Act, 1994.
The first demand pertains to expenditure incurred by the Dubai branch of the appellant for marketing and promotion of their software package outside India. The other notices pertain to commission paid to foreign service providers by the Dubai branch for procurement of business and sales promotion of their software packages.
While ordering pre-deposit, the Bench - 2014-TIOL-57-CESTAT-MUM had observed thus -
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ST - From the teaming agreement it is clear that the agreement is made between the applicant and the foreign service provider - therefore, it cannot be said that the foreign service provider has provided service to Dubai office and not to the present applicant in India - in view of provisions of s.66A of FA, 1994, applicants are liable to pay ST in r/o services received from foreign service provider on reverse charge mechanism -ratio of decision in Paul Merchants is not applicable as in that case both, service provider and recipient are located outside India - duplication of SCN prima facie evident - in the totality of facts, pre-deposit ordered of Rs. 1 Crore: CESTAT
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The appeal was heard in August 2016.
Before the CESTAT, the Appellant contended that the amount reflected in the balance sheet has been incurred by a branch outside the country and is not taxable in the hands of the appellant. It is also contended that the branch is a separate entity bound by the statutes of the country of operation and the use of any services by the branch does not lead to the allegation that the appellant is the recipient thereof. Reliance is placed on the decisions in - British Airways - 2014-TIOL-979-CESTAT-DEL, Reliance Industries Ltd. - 2016-TIOL-1654-CESTAT-MUM, Tech Mahindra - 2016-TIOL-709-CESTAT-MUM and Genom Biotech Pvt Ltd. - 2016-TIOL-529-CESTAT-MUM.
The AR reiterated the findings of the adjudicating authority and also drew support from the Tribunal decision in Torrent Pharmaceuticals - 2014-TIOL-2647-CESTAT-AHM as justification for considering branch and headquarter to be a single entity which received the service.
The Bench observed -
+ In re British Airways, the issue for consideration was whether the existence of a business establishment of a foreign airline in India was sufficient to fasten tax liability on 'reverse charge' on consideration paid to foreign service provider arising from agreement of the overseas headquarters with the service provider.
+ In re Torrent Pharmaceuticals, the issue for consideration was whether the services rendered by overseas branch was liable to tax owing to the disaggregation of branch and headquarters by section 66A(2) of Finance Act, 1994.
+ The present dispute is on entirely different footing, viz. that the payment for service rendered by foreign service provider, though claimed to be effected by branch in Dubai, was, in effect, made by the appellant.
+ We have addressed this issue in our decision in reTech Mahindra which examined the nature of overseas branches of a software exporting entity headquartered in India. Having considered the provisions of Section 66A(2) of Finance Act, 1994 and the role of the overseas branches, we held that the symbiotic business and structural relationship is not susceptible to interpolation into the specific context of section 66A and each transaction of the overseas branch would have to be scrutinized to ascertain if taxable service has been rendered by branch to headquarters and vice versa.
+ The impugned order has overlooked the requirements of accounting standards which mandates that financials of the branch are to be included in the financials of the corporate entity that has established the branch. Such inclusions owing to accounting standards do not suffice to conclude that services were rendered by foreign service providers to the Indian headquarters. No effort has been undertaken by adjudicating Commissioner to ascertain the nature of the transactions for which payments were made by branch in Dubai and the demand in the impugned order lacks appropriate robustness in consequence.
+ Even if the payments are attributable to service rendered by foreign service providers to the appellant, the scope of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 needs ascertainment.
+ Section 66A of Finance Act, 1994 is a special enabling provision engineered to tax import of services, both to countervail the taxing of domestic transactions and to afford a national treatment to the service, and the determination of taxability is with reference to the Rules supra. The Rules draw its origin also from the exemption powers devolving on the Central Government under Section 93 of Finance Act, 1994; accordingly, any situation that is not envisaged in the specific framework of taxability in rule 3 is beyond the ambit of tax. The impugned order has erred in merely relying on the provisions of Section 66A(2) of Finance Act, 1994 and the non-exclusion of section 65(105)(zzb) of Finance Act, 1994 from rule 3 to conclude that tax liability arises.
+ The adjudicating Commissioner has not rendered a finding that the appellant is the recipient of service, indeed, he could have done so only by examining the relationship between the appellant and branch in the context of the payments effected to foreign service provider which he, probably, did not feel obliged to in the absence of any allegation to that effect in the show cause notice. Unless the recipient is located in India, section 66A cannot be invoked.
+ The other crucial aspect is receipt of service for use in relation in business or commerce which would, in most circumstances, be the key to determine if service was rendered to the recipient. There is no doubt that, on export, the scheme of taxation divests the tax element. Services rendered by foreign provider are subject to tax by the deeming fiction in Section 66A of Finance Act, 1994 that recipient is the provider of the service.
+ The objective of taxing such services in relation to domestic activities of a recipient is well within the scheme of levy of the service tax. Levy of tax through section 66 of Finance Act,1994 on all domestic entities receiving services from domestic providers is also within the scheme of taxation of services because the service is not attributable, at that stage, to domestic consumption or exports.
+ From this it would appear that the reference to 'business or commerce' in rule 3(iii) in Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is restricted to 'business and commerce' in India and not to 'business and commerce' outside India. We find no allegation in the notice or conclusion in the impugned order that service have not been used for business or commerce outside India.
Concluding that the evidences adduced in the show cause notice leading to the impugned order do not sustain the finding that the services obtained by overseas branches of appellant are liable to tax under section 66A of FA, 1994, the appeals were allowed.
(See 2016-TIOL-3340-CESTAT-MUM)
