By TIOL News Service

CHENNAI, OCT 11, 2017: THE Appellant is a General Sales Agent (GSA) for Saudi Arabian Airline Limited (Saudia) for the territories of Tamil Nadu, Andhra Pradesh, Karnataka and Kerala and registered under the category of Air Travel Agent Service.

In terms of the agreement made between the Appellant and Saudia, the Appellant is entitled to receive overriding commission (ORC) at a fixed percentage on the quantum of revenue on account of general sales agency service. As per the agreement, the Appellant had received 3% on passenger ticket sales and 2.5% on cargo sales transportation overseas as over-riding commission.

Department issued SCNs proposing imposition of service tax on the overriding commission and the incentives received from Saudia on the ground that the receipts received as overriding commission do not fall under Export of Services.

Service Tax demands were confirmed and, therefore, the appellant is in appeal before the CESTAT.

After extracting Rule 3 of the Export of Services Rules, 2005 [which came into force on 15.03.2005] and which were later amended on twelve occasions till they were finally superseded by  Notification No.28/2012-ST dt. 20.06.2012 , the Bench inter alia observed -

++ The major requirement of a Business Auxiliary Service to be considered as export of service is that such services are provided and used in or in relation to commerce and industry and the recipient  of such services are located outside India. We find that the services provided by appellant are definitely in relation to commerce. Further, it is not disputed that these services were provided on the agreement signed between the appellant and their client Saudi Arabian Airlines Corporation, Jeddah, Saudi Arabia. Thus the first two conditionalities are satisfied. It is the last conditionality concerning receipt of payment in convertible foreign exchange that is the hub of this controversy in these appeals.

++ On this contentious issue (whether payment has been received in foreign exchange), in a recent judgment in the case of Suprasesh General Insurance Services & Brokers (P) Ltd. = 2015-TIOL-2225-HC-MAD-ST, High Court held that the services were provided/used in relation to commerce and industry, that the service recipient being foreign company was located outside India, it amounted to 'export of service' and there was no requirement to receive consideration in foreign exchange.

++ We are aware that the Suprasesh judgment has been appealed against by the department and the Hon'ble Apex Court after condoning the delay has issued notice, however, as no stay of the Suprasesh judgement has been ordered by the Hon'ble Apex Court, we intend to follow the ratio thereof as laid down by the High Court of Madras.

++ No doubt, the proviso in Rule 3 (3) of Export of Service Rules, 2005 does require that the payments are received in convertible foreign exchange. But viewed in the light of decisions discussed supra, and in particular, that of the Hon'ble Apex Court judgement in J.B. Boda & Company - 2002-TIOL-2578-SC-IT and that of the Hon'ble High Court of Madras in Suprasesh General Insurance Services (supra), even when the said payment to the appellant has been received in Indian rupees, however, there is a saving of foreign exchange since appellant has retained that portion and not sent the same in foreign exchange to the service recipient along with the other sale proceeds. Outflow of foreign exchange has been reduced to the extent of the commission/payment retained by the appellant within India. Such retention will then have to be necessarily treated as saving of foreign exchange and by implication is akin to receipt of monies in convertible foreign exchange.

++ Surely, the department would not have any dispute if the appellant had remitted entire proceeds to Saudia, Jeddah and in turn the commission, determined as a percentage of such proceeds, in convertible foreign exchange is transferred to them from Jeddah.

++ In our view, the procedure of retaining the commission amount and only remitting the remaining portion of the proceeds, during the periods of dispute, would have the same end effect . In any case, we understand that the roundabout procedure insisted upon by the department is being followed by the appellants after this period of dispute.

++ We are of the considered opinion that even by retaining the amount of overriding commission while remitting the proceeds to their foreign client, without receiving it subsequently from the client in convertible foreign exchange, the conditionalities of Rule 3(3) of the Export of Service Rules, 2005 as amended and as was applicable during the different periods involved in these appeals will be deemed to have been satisfied by the appellant.

In fine, it was held that the services rendered by the appellant to the foreign recipient will be nothing but export of Business Auxiliary Services which are exempted from liability to service tax.

The impugned orders were set aside and the appeals were allowed with consequential relief.

(See 2017-TIOL-3659-CESTAT-MAD)