Commissioner of Central Tax Vs Exilant Technologies Pvt. Ltd. (CESTAT Bangalore)
The CESTAT Bangalore adjudicated two appeals filed by the Revenue against orders passed by the Commissioner of Central Tax, Bengaluru, who had dropped service tax demands raised against the respondent. The core issue was whether service tax was payable on amounts transferred by the respondent to its overseas branches and on alleged services received from foreign vendors under Section 66A of the Finance Act, 1994.
The respondent was engaged in providing services such as Information Technology Software Services, Management/Business Consultant Services, and Works Contract Services. The Revenue issued show-cause notices alleging that the respondent had incurred foreign currency expenditure for services received from overseas vendors and was therefore liable to pay service tax under the reverse charge mechanism. However, the Commissioner found that there was no evidence establishing that any taxable service had been rendered or received, and accordingly dropped the proceedings.
The respondent contended that its overseas branches were not independent entities but extensions of the head office. The funds transferred to these branches were used to meet operational expenses such as rent, utilities, and other day-to-day costs, as the branches were not self-sustaining. It was also submitted that no invoices were raised, no consideration was charged, and no services were provided by the branches to the head office. Further, services provided by overseas vendors were received and consumed outside India by foreign branches, and therefore could not be taxed in India.
The Commissioner observed that the show-cause notices contained only general assertions without analysis or supporting documentary evidence to establish that any service had been rendered or received. It was noted that the entire case of the Revenue rested on the fact of fund transfers to overseas branches, without demonstrating that such transfers were in consideration of any taxable service. The Commissioner concluded that in the absence of evidence of service provision, the question of tax liability did not arise.
For the period after 01.07.2012, the Commissioner held that the transactions were merely transfers of money without any consideration for services, and therefore fell outside the scope of “service.” It was further observed that agreements with overseas entities related to lease of space, staffing solutions, and virtual office services, and there was no basis to classify them under Information Technology Software Services. The Commissioner also found that services rendered by overseas branches were provided to customers abroad, and invoices were raised on those customers, not on the head office in India.
The Revenue argued that the respondent had entered into agreements with foreign entities for software-related services and that such services were received in India, attracting service tax. It also contended that branch offices provided infrastructural and support services to the head office and should be treated as distinct persons for tax purposes. However, the Tribunal found that the Revenue had not produced any evidence demonstrating that services were rendered by the overseas branches to the head office or that such services were received in India.
The Tribunal noted that agreements and invoices showed that services were rendered and consumed outside India by overseas branches. It also accepted the respondent’s explanation that funds transferred were for operational expenses and not consideration for services. The Tribunal found no material to contradict the findings of the Commissioner.
Relying on earlier decisions, including those in cases involving similar facts, the Tribunal observed that service tax liability under Section 66A arises only when services are received in India. In the absence of evidence showing receipt or consumption of services in India, tax liability cannot be imposed. The Tribunal further noted that the burden of proving the taxable event lies with the Revenue.
On limitation, it was submitted that the department was aware of the transactions through records and audits, and therefore allegations of suppression of facts were not sustainable. The Tribunal did not find merit in the Revenue’s arguments.
Based on the above findings, the Tribunal upheld the Commissioner’s orders and dismissed the appeals filed by the Revenue, concluding that no service tax was leviable in the absence of evidence of service provision or receipt in India.
FULL TEXT OF THE CESTAT BANGALORE ORDER
These two appeals are filed by the Revenue against the Order-in-Original No. 15 & 16/2017-18 dated 28.09.2017 and Order-in-Original No. 18/2017-18 dated 23.10.2017 passed by the Commissioner of Central Tax GST Commissionerate, Bengaluru.
2. Briefly the facts are that the respondent M/s. Quest Global Engineering Services (earlier known as M/s. Exilant Technologies Pvt. Ltd.) are into rendering of services under the category of Information Technology Software Services (ITSS), Management/Business Consultant Services, Works Contract Services, etc. The Revenue issued show-cause notices on the ground that the respondent had incurred foreign currency expenditure for receiving services from some of the overseas vendors and accordingly, as per Section 66A(2) of the Finance Act, 1994 they are liable to pay service tax. The Commissioner in the impugned order held that there being no evidence for any service being rendered, there is no ground for classifying the services provided by the third-party vendors either under the category of Business Support Services or ITSS, hence, dropped all the proceedings initiated by the Revenue. Aggrieved by this, the Revenue is in appeal before us.
3. The Learned Counsel submits that the branch office abroad was not self-sustainable and are extended arms of Head Office, hence, mere fund transfer to the branches without any service provided by the branch to the Head Office, there cannot be any liability of tax. Further, there is no documentary evidence available with the department to establish the provision of services. It is also stated that the service was provided by the overseas vendors outside India which was received by foreign branches outside India and there is no question of service being received in India. Any service provided outside India is nontaxable service and the same cannot be taxed in India.
3.1. Further, it is submitted that the activities of the branch offices are not separate from the activities of the Head Office, but an extension of the activities of the entity as a whole. The funds so transferred was to meet the day-to-day expenses of the branches, since the branches were not self-sustainable and to maintain the branches outside India. There is neither invoices raised nor any consideration charged and there is no service provided by the branch to the Head Office. No documentary evidence is brought on record either to prove that the services were received from the branches or even to classify the said services as ‘Business Support Service’. Placing reliance on the decision of the Hon’ble Supreme Court in the case of Union of India Vs Intercontinental Consultants and Technocrats Pvt. Ltd [2018 (10) G.S.T.L. 401 (S.C.)], it is stated that the Respondent was only reimbursing the expenses incurred by the branches for the day-to-day activities. Also, referring to the CESTAT Bangalore decision in the case of Infosys Ltd vs. CST: 2015 (37) STR 862 (Tri-Bang) and KPIT Cummins Infosystems Ltd. vs. CCE: 2014(33) STR 105 (Tri Mumbai) it is submitted that the Commissioner had justified the reasons for dropping the proceedings.
3.2. With regard to limitation, it is submitted that the Department was aware of the transactions since all these are documented in their records and the audit initially did not question the fund transfers, hence, the question of misrepresentation or suppression of facts does not arise.
4. The learned Authorised Representative (AR) for the Revenue submits that during the audit, it was noticed that the respondent had incurred expenditure on account of import of software development services from foreign service providers for the period from April 2009 to March 2013 for which no service tax was discharged under the Reverse Charge Mechanism (RCM), hence, two show-cause notices were issued. The learned Commissioner vide the impugned orders dropped the proceedings based on an erroneous conclusion that no services were rendered by the branch office of the respondent. Referring to the provisions of Section 66A of the Finance Act, 1994, it is submitted that the Respondent entered into agreements with M/s. Info Objects Inc., and M/s. Empower Consultancy Services Inc. for receipt of services such as software requirements gathering, analysis, design, development and maintenance which falls under category of ITSS services. It is further submitted that for the period from 01.07.2012 since the place of provision of service is the location of the service recipient and the Respondent being located in India, service tax is liable to be paid. Further, it is submitted that the financial statements of the respondent themselves record the expenditure incurred for these services, indicating the receipt and payment for the same.
5. Heard both sides. The Commissioner in the impugned
orders referring to the Section 66A observes as follows:
“26.2 In view of the statutory provisions as above, I find that the very first issue to be determined, before wading into the legal quagmire of whether the assessee and their overseas branches constitute separate persons, is whether any service specified in section 65(105) of the Finance Act 1994 has been provided from outside India and received in India. All other issues are subsidiary to this main issue.
27.4 On scrutiny of the SCN I find that there is only a bland assertion in para 14 of the SCN that the assessee had established branches overseas and all expenditure incurred by the branches located overseas while providing services are reimbursed by the Head Office located in India and yet another assertion to the effect that the nature of services appears to be in the nature of business support services (sic). Other than such bland tautological assertions, there is absolutely no analysis / discussion as to whether the activity in question constitutes a service at all and if so how it could be classified as BSS, nor is there any supporting documentary evidence to the above effect.
27.5 In the instant case the whole case against the assessee rests only on the basis of the fact that there was a transfer of money from the assessee to their overseas branches in order to meet the operational expenses of the branches.
28.1 When there is no evidence of provision of taxable services by the overseas branches to the assessee, clearly there is no liability to pay service tax and therefore the question as to whether the assessee and their overseas branches constitute separate business entities is reduced to a mere academic question.”
5.1 Referring to the provisions of law after 01.07.2012, he observed as follows:
“As discussed above, the transaction between the overseas branches and the assessee is a mere transaction in money and there is no evidence of any consideration being paid to the overseas branches in lieu of any activity carried out by them for the assessee. Therefore, the whole activity would fall outside the scope of service and is therefore not liable for levy of service tax. Therefore, the demand of service tax on the reimbursements made to the overseas branches is not sustainable for the period after 1/7/2012 also.”
5.2 Further, referring to the various agreements entered into between the respondents and overseas vendors, he observed that the agreements are in respect of lease of space, staffing solutions and provision of virtual office services and he finds that there is no ground to classify these services under ITSS and accordingly, holds against the Revenue. He also observes that the Master Service Agreement entered between the respondent and the branch officers is to provide services to the customers worldwide and not to the respondent. It is also stated that the invoices are raised on the customers abroad based on the manpower supplies, therefore, the question of taxing the services rendered abroad is out of question either prior to 01.07.2012 or after 01.07.2012.
6. Countering the above, the Revenue in their grounds of appeal submit that ‘being a branch, the branch also offers infrastructural support services, customer service and also fulfills the services promised by the head office. These activities are not only covered under the main limb of the definition but also under inclusive definition of ‘Support Services of Business or Commerce’ given under 65(104c)’. The Revenue nowhere explains as to how and where the services are rendered and no work orders or agreements are seen except to state that unless Indian laws or the foreign laws provide for it, there cannot be any agreement. Referring to the amended definition from 01.07.2012, it is submitted branch office located outside India would be a ‘distinct person’ and any service rendered by the overseas branch office to the head office is liable to service tax. However, we do not find any services being rendered by the branch office to the head office. The revenue however submits that the Respondent had entered into agreements with M/s. Info Objects Inc., and M/s. Empower Consultancy Services Inc. for receipt of services such as software requirements gathering, analysis, design, development and maintenance which falls under category of ITSS services, which were done on behalf of the head office. The Commissioner in the impugned order on perusal of the Master Service Agreement entered into between the appellant having its principal office at Bangalore and branch office at California, USA on the one hand and M/s. Empower Consulting Services, California USA and another agreement with M/s. Info Objects Inc; observed that M/s. Info Objects Inc. were supplying skilled manpower to the overseas branch of the appellant which was also evident from the invoices raised on the appellants branch office at California. Similarly, the appellants branch office renders software development and maintenance services to the clients abroad. Thus, from the agreements and that invoices it is seen that the services are rendered and received outside India and hence not liable to tax.
6.1. We also find that in the reply to the show-cause notice, the respondent had clearly stated that in order to keep the branches functional, certain amounts are transferred for expenses such as rent, electricity bills, telephone and internet expenses etc.; thus, explaining that the amounts transferred were on account of operational expenses and not against any services rendered by them. Though the Commissioner has in detail based on facts and agreements explained the circumstances under which the payments were made, nothing is forth coming from the Revenue to dispute these facts. Therefore, we are in agreement with the reasoning given in the impugned orders and accordingly, we uphold the order of the Commissioner.
6.2. We also find that in similar set of facts this Tribunal in the case of Infosys Ltd. Versus Commissioner of Service Tax, Bangalore 2015 (37) S.T.R. 862 (Tri. – Bang.) dated 26.02.2014 has observed as follows:
“7.5 If the service has been rendered in USA or Canada received by the branch office of the appellant in USA or Canada and utilised by the branch office at USA or Canada and paid for out of the foreign exchange earned, unless the Revenue is able to show that the service has been received in India, or the benefit of service rendered abroad has been received in India, the tax, in our opinion, would not be payable.
7.6 The taxable event when Service Tax is paid by the service receiver under reverse charge mechanism is the receipt of service and of course their liability would arise when payment is made. Unlike the case of availment of Cenvat credit where the receipt of service is required to be proved and shown to the Department by the assessee, in the case of determination of liability for Service Tax in the hands of receiver or provider, it is for the Department to show that taxable event has taken place. This issue is no longer res integra and there are several decisions in the case of Central Excise matters and Customs matters wherein it has been held that taxable even has to be proved by the Revenue. In the case of Central Excise duty, it is for the Revenue to show that manufacture has taken place and if the Revenue cannot show it, no liability arises. Therefore in this case the observation of the Commissioner that payment has been made by Infosys and when the payment is made by the branch, it has been made by Infosys through their branch and therefore obviously service has been received cannot be a conclusion and especially in this case when such an allegation is made and is rebutted, such rebuttal will have to be properly considered and evidence shown to show why such rebuttal is not accepted which, in our opinion, has not been admitted even.
7.7 It is not the case of the appellant that money was not paid. It is the case of the appellant that whatever consideration is received for services rendered by them abroad goes into EEFC account and the appellant is entitled to spend 75% of such receipts in EEFC account for payments abroad. Therefore the fact that appellants have made payment from EEFC account and not from funds in the hands of Infosys in India would go to show that whatever payments were made were made from export earnings only. This would mean that services were paid for by the earnings abroad. In a similar case in the case of KPIT Cummins Infosystems Ltd. v. CCE, Pune-I in the Final Order No. A/676/2013/CSTB/C-I, dated 6-3-2013 [2014 (33) S.T.R. 105 (Tri.-Mum.)], the Tribunal had taken the view that in such cases there will be no liability of Service Tax on the assessee in India as a receiver of service. In that case in Para 5.1 the Tribunal observed as follows :-
5.1 The provisions of Section 66A are attracted only when services are received in India by a person situated in India even if such persons may have permanent establishment abroad. In the present case, the appellant has provided services through their branches abroad to customer located abroad. Therefore, it is not a case of the appellant receiving the services but it is a question of rendering services abroad. Further, the appellant has not made any payments for the receipt of any services whereas on the other hand, the appellant has received proceeds of the service rendered abroad by their branches, after deduction of expenditure incurred for rendering of services abroad. Therefore, prima facie, we are of the view that the provisions of Section 66A are not at all attracted.
The observations made by the Tribunal in the case of KPIT are similar to the one which we have also made above. There also there was no evidence to show that KPIT had received some services. In that case also, they had paid. The only difference being in that case, there was evidence to show that the appellants had received payments for the services provided abroad and the payments made were much less than the amounts received. In our opinion, when payments are made from EEFC account, it would automatically mean that the amount received for services provided are much more than the amount payable. In any case, the appellants have produced evidence to show that according to agreements and the invoices, the payments were received for services rendered abroad, utilised abroad and paid from funds received abroad. That being the position, concrete evidence to show that the payments made by the appellants either directly or through their branches to the sub-contractors in different countries has to be linked with service received in India and in the absence of any evidence to show that such receipt of service in India, the demand for Service Tax in the hands of receiver cannot be sustained.”
6.3. Similarly, in the case of KPIT Cummins Infosystems Ltd. Versus Commissioner of C. EX., PUNE-I 2014 (33) S.T.R. 105 (Tri. – Mumbai) dated 06.03.2013 the Tribunal observed as follows:
“5.1 The provisions of Section 66A are attracted only when services are received in India by a person situated in India even if such persons may have permanent establishment abroad. In the present case, the appellant has provided services through their branches abroad to customers located abroad. Therefore, it is not a case of the appellant receiving the services but it is a question of rendering services abroad. Further, the appellant has not made any payments for the receipt of any services whereas on the other hand, the appellant has received proceeds of the service rendered abroad by their branches, after deduction of expenditure incurred for rendering of services abroad. Therefore, prima facie, we are of the view that the provisions of Section 66A are not at all attracted.
5.2 Secondly, if the services rendered abroad have been subject to local taxation, the question of levying Service Tax in India on the very same transactions would not arise at all. There cannot be two taxing jurisdictions for the same transactions. Service tax is a destination based consumption tax and taxability would arise only at the place where the consumption takes place. In the instant case, the service has been rendered to the clients abroad and, therefore, the consumption of the service is not in India but abroad. Therefore, the question of subjecting the said activity to Service Tax in India does not appear to be sustainable in law. The appellant has assured that they will be able to lead evidence regarding payment of GST/VAT on the services rendered abroad if opportunity is given to them.
5.3 Thirdly, even if it is assumed that the appellant has received the service from abroad from their branches, since the service have been consumed by the clients abroad, it would amount to export of service under Rule 3 of the Export of Service Rules, 2005 in which case also there would not be any Service Tax liability. In the case of permanent establishment of the appellant situated abroad, the service has been provided by foreign service providers abroad and the service has also been consumed abroad”.
7. In view of the above settled decisions and based on the detailed observations of the Commissioner in the impugned orders, we do not find any merit in the appeals filed by the Revenue.
Appeals are dismissed.
(Order pronounced in Open Court on 13.03.2026.)
