No Service tax payable if benefit of service accrued to the foreign clients outside the Indian territory
In the instant case, the services rendered by the appellant were consumed abroad where the appellant’s clients used the service of inspection/test/analysis to decide whether the goods intended to be imported by them from India conformed to the requisite specifications and standards. In other words, the benefit of the service accrued to the foreign clients outside the Indian territory . By no stretch of imagination can it be said that there was no export of service. The services, in question, were exported. Export of service has ever been tax-free as observed by the CBEC. This exemption has never been affected by Notification no. 6/99-ST or its recession. Ultimately, therefore, we hold that no service tax was leviable from the appellant.
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL, MUMBAI
APPEAL NO. ST/164/07-MUM
Arising out of Order-in-Original no. 05/STC/SJS/07-08 Dated: 18.07.2007
Passed by the Commissioner of Central Excise, Mumbai
Date of Decision: 10.02.2011
SGS INDIA PVT LTD
COMMISSIONER OF SERVICE TAX, MUMBAI
Per: P G Chacko:
1. In this appeal filed by the assessee, the short question to be considered is whether the services viz. “Technical Inspection and Certification Services” and “Technical testing and Analysis Services” rendered by them during the period of dispute (1.7.2003 to 19.11.2003) were liable to be charged to service tax. The appellant-company was engaged by foreign importers who imported certain goods from Indian exporters. The foreign parties wanted the appellant to inspect/test/analyse samples of the goods in India and provide certificates to enable them to ascertain the quality of the goods before importation. Accordingly, the appellant inspected/tested/analyzed samples of the goods and sent certificates to their foreign clients and the latter, having been satisfied of the import-worthiness of the goods, cleared the same, which were exported by the Indian exporters. The consideration for the services provided by the appellant was paid in convertible foreign exchange. The department demanded service tax on this consideration paid by the foreign parties to the appellant. In adjudication of the relevant show-cause notice, the learned Commissioner of Service Tax confirmed this demand amounting to Rs.82,16,553/- against the appellant for the aforesaid period (1.7.2003 to 19.11.2003), demanded interest thereon and imposed penalties.
2. In the present appeal filed against the Commissioner’s order, it is the case of the appellant that the service rendered by them was utilized by their clients abroad and, therefore, the transaction involved export of service and hence exempt from payment of service tax. In support of this plea of the appellant, the learned counsel has relied on the Finance Minister’s speech dated 25.4.2003, the Board’s Circular no. 56/6/2003-ST dated 25.4.2003 and the Supreme Court’s judgment in All India Federation of Tax Practitioners vs. Union of India 2007(7)STR 625(SC) etc. The Finance Minister, in his speech, had clarified thus: “I want to clarify that a service tax is location-based. Whatever service it be through outsource computer or medical, it will, by law, be outside the proposed code of service tax.” The Circular of the Board, which examined Notification no. 6/99-ST dated 9.4.99, which was rescinded by Notification 2/2003-ST dated 1.3.2003, and clarified thus: “In this connection, I am directed to clarify that the Service Tax is destination-based consumption tax and it is not applicable on export of service. Export of services would continue to remain tax free even after withdrawal of notification no. 6/99, dated 9.4.99.” In the case of All India Federation of Tax Practitioners (supra), the apex court discussed the reasons for imposition of service tax. In this context, in dealing with the nature of service tax, their Lordships held thus:
“7. In the light of what is stated above, it is clear that Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is non commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country. Service Tax is a value added tax.”
3. On the above basis, it has been argued that the benefit of the two services viz. “Technical Inspection of Certification Service” and “Technical; Testing and Analysis Service” rendered by the appellant was enjoyed by their clients overseas and hence neither of the services was liable to be taxed under the Finance Act, 1994. Without prejudice to these arguments, the learned counsel further submits that notification no. 21/2003-ST dated 20.11.2003 is textually identical to Notification no. 6/1999-ST dated 9.4.99 and further that, as the later notification was issued for granting exemption for payment of service tax on the taxable services in respect of which payment was received in India in convertible foreign exchange, as a measure of relief to the service sector which had been encountering difficulties on account of having to pay service tax on export of services, it (Notification no. 21/2003-ST) should be held to be clarificatory in nature and should be given retrospective effect. In this context, the learned counsel has also claimed support from the Supreme Court’s judgment in W.P.I.L Ltd. vs. Commissioner 2005(181)ELT 359(SC) , wherein the apex court considered notification no. 46/94-Ce dated 1.3.1994 which granted exemption in respect of power-driven pumps and also considered Notification no.95/94-CE dated 25.4.94 which granted exemption to parts of such pumps and took the view that the later notification was clarificatory and hence retrospective.
4. The learned counsel further submits that the issue involved in this case can be best settled in view of the Tribunal’s decision in Commissioner vs. B.A.Research India Ltd. 2010(18)STR 404(Tri-Ahd) ) , wherein the Bench considered taxability of “technical testing and analysis service” provided by the assessee to clients located outside India and took the view that the service became complete when the test report was delivered to the overseas client. The Bench, thus, held it to be an export of service which was found to be exempt from payment of service tax by virtue of Rule 3 of the Export of Service Rules, 2005. The learned counsel pointed out that the said decision was followed by a single Member in the case of KSH International Pvt. Ltd. vs. Commissioner 2010(18)STR 404(Tri-Mum) wherein it was held that export of services could take place even when all the relevant activities took place in India so long as the benefits of these services accrued outside India. The learned counsel also relies on Circular no. 111/5/09-ST dated 24.2.2009 which was relied on by the Tribunal in the case of KSH International Pvt. Ltd. vs. Commissioner (supra).
5. The learned counsel submits that it has never been the intention of the Parliament or the Government to levy service tax on any taxable service where it was exported against payment in foreign exchange. It is reiterated that this factual position was acknowledged by the Central Board of Excise & Customs in the relevant circulars. Accordingly, it is prayed that the demand of service tax, penalties etc. be set aside.
6. The learned SDR argues that the activity undertaken by the appellant was a performance within India , falling in category (II) mentioned in the Board’s Circular no. 111/5/2009-ST ibid, and, therefore, it will be erroneous to hold that any service was exported. The Central Board of excise & Customs categorized certain services such as ‘Rent-a-cab operator’ service, ‘Market research agency’ service, ‘Security Agency’ service, ‘Storage and Warehousing’ service etc. in category (II) covered by rule 3(1)(ii) of the Export of Services Rules, 2005 and stated that a place of performance of service could be established in respect of these services and held that the provision of such service would be export, if they were performed wholly or partly outside India. The learned SDR has heavily relied on this clarification of the Board contained in the above Circular. He has also invited our attention to para 7 of the apex court’s judgment in All India Federation of Tax Practitioner’s case (we have already reproduced this part of the judgment). The learned SDR has relied on the above judgment in support of his argument that service tax is a ‘value added tax’ leviable only on services provided within the country. According to the learned SDR, the appellant was providing services within India by inspecting, testing and analyzing samples of the goods in India . The learned SDR means to say that there was no export of service in this case. It is his further submission that export of services was exempted from payment of service tax for the first time with the promulgation of Export of Services Rules, 2005 and, therefore, the appellant cannot claim such exemption for any prior period. The learned SDR further submits that none of the Notifications cited by the learned counsel referred to export of services. Therefore, according to hi, the issuance or withdrawal of any such notification would be of no consequence. In any case, admittedly, there was no exemption notification in force during the period of dispute granting exemption from payment of service tax on any taxable service rendered against payment of convertible foreign exchange and, therefore, the appellant has to pay service tax for such period.
7. We have given careful consideration to the submissions. It is not in dispute that ‘Technical Inspection and Certification Service’ and ‘Technical Testing and Analysis service’ were taxable services during the period of dispute (1.7.2003 to 19.11.2003). It is, again, not in dispute that these very services were provided by the appellant to their clients located abroad. Both sides have agreed that the said services are performance based services falling in category (II) mentioned in the Board’s Circular no. 111/05/2009-ST. The Circular is clarificatory and hence must have retrospective operation. This very circular clarified that the phrase ‘used outside India ‘ was to be interpreted to mean that the benefit of the service should accrue outside India . This Circular was considered by this Tribunal in KSH International Pvt. Ltd. vs. Commissioner (supra). In that case, the appellant had procured purchase orders in India for suppliers of goods located abroad, and transmitted the same by courier to the said suppliers. Acting upon those supply orders, the suppliers exported the goods to buyers in India and directly collected payment from them. Upon receipt of price of the goods, the suppliers paid commission to the appellant in convertible foreign exchange. The question arose whether the appellant provided ‘Business Auxiliary Service’ (under section 65(105)(zzb) of the Finance Act, 1994) to their foreign clients and whether the transaction could be treated as ‘export of service’. In this context, the Tribunal referred to the Board’s Circular as contained in Circular no. 111/5/2009-ST ibid, which was to this effect: “the phrase ‘used outside India ‘ is to be interpreted to mean that the benefit should accrue outside India . Thus, it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefit of these services accrued outside India . What is accrued outside India is the benefit in terms of promotion of business of a foreign company.” In the said case, the Bench found this clarification of the Central Board of Excise & Customs to be in conformity with the Rules 2 and 5 of the Export of Services Rules, 2005. After discussing the transactions, it was held that the provision of service was complete only when the purchase orders canvassed by the appellant in India were received by the foreign companies. Foreign companies were found to have obtained the benefit of the services by acting upon the purchase orders supplied by the assessee. Accordingly, the transaction was held to be an export of ‘business auxiliary service’ by the appellant and the demand of service tax thereon was set aside. The decision of the Tribunal in the case of B.A.Research India Ltd. (supra), which was relied on KSH International Pvt. Ltd. vs. Commissioner is also to a similar effect. The facts of the case of B.A.Research India Ltd. are similar to the facts of the instant case. The Tribunal held that the respondent has exported ‘Technical Testing and Analysis service’ by way of testing and analysis in India and transmission of the test/analysis report to the foreign client. It was held that the service was complete when the report was delivered to the foreign client. The delivery of report to the foreign client was considered to be an essential part of the service. Accordingly, it was held that the service was exported. By applying relevant provisions of the Export of Services Rules, 2005, the Tribunal set aside the demand of service tax. The present appellant is fully supported by the case law discussed above.
8. The view taken by the Central Board of excise & Customs vide Circular no. 66/2005-ST is that export of services would continue to remain tax-free even after withdrawal of Notification no. 6/94-ST dated 9.4.1999. The Board was examining the effect of withdrawal of Notification no. 6/99-ST. This Notification exempted the taxable service specified in section 65(48)( of the Finance Act, 1994 provided to any person, in respect of which payment was received in India in convertible foreign exchange, from payment of service tax. The Notification, in a proviso, laid down that nothing contained in the notification shall apply when the payment received in India in convertible foreign exchange for taxable services rendered was repatriated from or sent outside India . It was this Notification which was rescinded by Central Government by issuing Notification no. 2/2003-ST dated 1.3.2003. The Board was called upon to consider representations received from service sector, wherein an apprehension was raised that export of service would be affected adversely in the international market on account of withdrawal of notification no. 6/99-ST. The Board dispelled this apprehension by clarifying that export of services would continue to remain tax-free even after withdrawal of notification no. 6/99-ST. This clarification is certainly binding on the Revenue. Consequently, it has to be held that the reinstatement of the above exemption through notification no. 21/2003-ST dated 20.11.2003 cannot detract from the correct legal position clarified by the Board. For this reason, we hold that there can be no demand of service tax on the appellant on the ground that exemption notification no. 6/99-ST was withdrawn in March 2003 and identical exemption was reintroduced in November 2003. As a matter of fact, none of then notifications referred to ‘export of services’. Again, as a matter of fact, the Central Board of Excise & Customs held ‘export of services’ to be tax-free notwithstanding the notifications. The law which categorically exempted export of services from payment of service tax was brought into force for the first time through the Export of Services Rules, 2003. Undoubtedly, the period of demand, in the present case, is prior to 2005.
9. The view taken hereinbefore is supported by the judgment of the Hon’ble Supreme Court in All India Federation of Tax Practitioner’s case (supra), wherein it was held that service tax was a destination-based consumption tax in the sense that it was on commercial activities and was not a charge on the business but on the consumer. The emphasis is on consumption of service. In the instant case, the services rendered by the appellant were consumed abroad where the appellant’s clients used the service of inspection/test/analysis to decide whether the goods intended to be imported by them from India conformed to the requisite specifications and standards. In other words, the benefit of the service accrued to the foreign clients outside the Indian territory . By no stretch of imagination can it be said that there was no export of service. The services, in question, were exported. Export of service has ever been tax-free as observed by the CBEC. This exemption has never been affected by Notification no. 6/99-ST or its recession. Ultimately, therefore, we hold that no service tax was leviable from the appellant.
10. Having settled the issue on merits in favour of the appellant, we have not found it necessary to examine any other issues in this case.
11. In the result, the impugned order is set aside and this appeal allowed.
(Dictated in Court.)