By TIOL News Service

NEW DELHI, SEPT 12, 2017: VERIZON India is registered with the Service Tax Department under the category of 'Business Support Services'.

They entered into a Master Supply Agreement with Verizon US for rendering connectivity services for the purpose of data transfer.

Since Verizon US, company located outside India, does not have the capacity to provide such services in all geographical areas across the globe, it utilises the services of other Verizon entities including Verizon India to provide connectivity to its customers.

Verizon India is not privy to the contracts entered into by Verizon US with its customers in the US.

Verizon India contends that it satisfied the twin requirement under the Export of Services Rules, 2005 (ESR) for the service rendered by it to Verizon US to be considered to be an export of service viz., the recipient of the service is located outside India and the payment for the service rendered is received by Verizon India in convertible foreign exchange.

The refund claims filed under Rule 5 of CCR, 2004 were rejected by the Assistant Commissioner, Service Tax on the ground that the services provided by Verizon India do not qualify as 'export of services' as they are provided within India.

The challenge in the three petitions is to the above orders passed by the Respondent rejecting the Petitioner's refund claims.

The fourth petitionchallenges a SCN dated 11th November 2016 issued to Verizon India by the Department demanding service tax in the sum of Rs. 2,65,25,46,712/- along with applicable interest and penalty in respect of the amounts received by Verizon India from Verizon US towards the alleged export of services. The case of the Department is that telecommunication services rendered by Verizon India during the period April 2011 to September 2014 do not qualify as 'export of services'.

In the process of gathering the data from the entities in India for transmission to Verizon US, Verizon India avails of the services of a telecommunication services providers like Vodafone and Airtel. These service providers raise invoices on Verizon India which includes the service tax component. Verizon India pays these service providers the requisite charges including the service tax thereon. Verizon India thereafter raises an invoice on Verizon US for the export of the business support services provided by it to Verizon US. Since the recipient of the service (Verizon US) is outside India, Verizon India treats it as an export of service and, therefore, exempt from service tax under the ESR. Therefore, no service tax is collected on these charges by Verizon India. Verizon US in turn raises invoices on its customers in the US.

Observations of the High Court:

+ The refund claims of Verizon India pertain to the period January 2011 to September 2014. For the period prior to 1st July 2012, under Rule 3 (1) (iii) of the ESR, two conditions were to be fulfilled for the provision of telecommunication service by Verizon India to be considered export of service. One of the conditions was that payment for the service had to be received by Verizon India in convertible foreign exchange. On this there is no issue. The only question is whether under the Master Supply Agreement the recipient of the service can be said to be Verizon US and whether the place of provision of such service can be said to be within India?

+ For the period after 1st July 2012, the issue is regarding the compliance with Rule 6A (1) (b) and (d) of the ST Rules. What requires to be examined is who can be said to be the 'recipient of the service' and whether the place of the provision of service is outside India.

+ The stand of the Department is the “telecommunication services” are provided within India and hence there is no 'export of service'. In support of this plea reference is made to the Circular No. 90/1/2007  dated 3rd January 2007.

+ Circular No. 90/1/2007  dated 3rd January, 2007 concerned provision of telephony services to subscribers of international telephone service providers who may be on a visit to India and are availing the inbound roaming services.

+ The said Circular dated 3rd January 2017 did not deal with telecommunication services involving transfer of electronic data.

+ Then came the  Circular No. 96/7/2007-ST dated 23rd August, 2007 . Paragraph 6 of the Circular dated 23rd August, 2007 makes it explicit that "all circulars", clarifications and communications issued from time to time stands superseded. There is nothing to replace what has been superseded as far as the Circular dated 3rd January, 2007.

+ In any event the Circular dated 3rd January 2007 would not apply to the services provided by Verizon India to Verizon US.

+ In order to determine who the 'recipient' of a service is, the agreement under which such service has been agreed to be provided has to be examined. When the Master Supply Agreement between Verizon India and Verizon US is examined, it is plain that the recipient of the service is Verizon US and it is Verizon US that is obliged to pay for the services provided by Verizon India.

+ The position does not change merely because the subscribers to the telephone services of Verizon US or its US based customers 'use' the services provided by Verizon India.

+ In the telecom sector, operators have network sharing and roaming arrangements with other telecom service providers whose services they engage to provide service to the former's subscribers. Yet, the 'recipient' of the service is determined by the contract between the parties and by reference to (a) who has the contractual right to receive the services; and (b) who is responsible for the payment for the services provided (i.e., the service recipient). This essential difference has been lost sight of by the Department.

+ In the present case there is no privity of contract between Verizon India and the customers of Verizon US. Such customers may be the 'users' of the services provided by Verizon India but are not its recipients.

+ Also, for providing such service Verizon India might use the services of a local telecom operator. That does not mean that the services to Verizon US are being rendered in India. All these steps are taken by Verizon India as part of its contract with Verizon US to provide services to Verizon US located outside India. The place of provision of such service to Verizon US remains outside India. This is made explicit by  Circular No. 111/05/2009  dated 24th February, 2009.

+ Circular No. 141/10/2011 dated 13th May, 2011  also throws light on this aspect. It was clarified that the words 'accrual of benefit' was not restricted to mere impact on the bottom-line of the person who pays for the service. It had to be given a harmonious interpretation in the context where the effective use and enjoyment of the service has been obtained.

+ The position becomes even clearer in the post July 2012 period during which the POPS Rules, 2012 apply. As already noted, provision of telecommunication services does not have a specific rule and so Rule 3 of the POPS Rules, which is the default option, applies. In terms thereof, the place of provision of telecommunication service shall be the location of the recipient of service.

++ In the considered view of the Court, the judgment of the CESTAT in Paul Merchants Ltd v. CCE, Chandigarh (2012-TIOL-1877-CESTAT-DEL) is right in holding that " The service recipient is the person on whose instructions/orders the service is provided who is obliged to make the payment from the same and whose need is satisfied by the provision of the service."

++ In Vodafone Essar Cellular Ltd. v. CCE (2013-TIOL-566- CESTAT-Mum), the CESTAT explained the arrangement lucidly in the following words:

“Your customer's customer is not your customer. When a service is rendered to a third party at the behest of your customer, the service recipient is your customer and not the third party. For example, when a florist delivers a bouquet on your request to your friend for which you make the payment, as far as the florist is concerned you are the customer and not your friend.”

+ The Department was also not justified in characterising the arrangement of provision of services as one between related persons viz., Verizon India and Verizon US. In doing so the Department was applying a criteria that was not stipulated either under the ESR or Rule 6A of the ST Rules.

Conclusion:

(i) It made no difference that Verizon India may have provided 'telecommunication service' and not 'business support services' since to qualify as export of service both had to satisfy the same criteria.

(ii) The provision of telecommunication services by Verizon India during the period January 2011 till 1st July 2012 complied with the two conditions stipulated under Rule 3 (1) (iii) of the ESR to be considered as 'export of service'. In other words, the payment for the service was received by Verizon India in convertible foreign exchange and the recipient of the service was Verizon US which was located outside India.

(iii) That Verizon India may have utilised the services of Indian telecom service providers in order to fulfil its obligations under the Master Supply Agreement with Verizon US made no difference to the fact that the recipient of service was Verizon US and the place of provision of service was outside India.

(iv) The subscribers to the services of Verizon US may be 'users' of the services provided by Verizon India but under the Master Supply Agreement it was Verizon US that was the 'recipient' of such service and it was Verizon US that paid for such service. That Verizon India and Verizon US were 'related parties' was not a valid ground, in terms of the ESR or the Rule 6A of the ST Rules, to hold that there was no export of service or to deny the refund.

(v) Even for the period after 1st July 2012 the provision of telecommunication service by Verizon India to Verizon US satisfied the conditions under Rule 6A (1) (a), (b), (d) and (e) of the ST Rules and was therefore an 'export of service'. The amount received for the export of service was not amenable to service tax.

The denial of refund of the CENVAT credit to Verizon India and the raising of a demand of service tax on the consideration received by it for export of telecommunication services to Verizon US was held to be not sustainable in law.

The petitions were allowed.

(See 2017-TIOL-1863-HC-DEL-ST)