Case Law Details
Confederation of Indian Industry Vs Commissioner of CGST (CESTAT Delhi)
The Setup
Like most major industry bodies operating internationally, the Confederation of Indian Industry (CII) maintained liaison offices in several countries. These were not subsidiaries, not revenue-generating businesses, and not independent entities in any meaningful sense. They were essentially outposts staffed by CII’s own employees, funded through expense reimbursements from the Delhi headquarters, and limited in their function to coordination, communication, and trade promotion.
The tax department saw things differently. Its position was that the money flowing from CII India to these overseas offices represented payment for services rendered services that CII India was “receiving” from abroad and was therefore liable to pay service tax on, under the reverse charge mechanism embedded in Section 66A(2) of the Finance Act, 1994. Four show cause notices were issued across nearly a decade, covering periods from 2007-08 to 2014-15. The aggregate demand came to approximately ₹5.89 crore, with an equal amount in penalties.
At first read, the department’s theory has a certain logic to it. Section 66A was introduced precisely to rope in services received from abroad to prevent the tax base from being eroded simply because the service provider happened to sit outside India. But whether that provision could be applied to a company’s own offices is quite a different question, and it is that question which the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, addressed in its April 2026 ruling.
Can One Provide a Service to Oneself?
The core of the department’s case rested on Section 66A(2) and its Explanation, which created a legal fiction: for the purpose of service tax, a business entity and its permanent establishment abroad are to be treated as separate persons. In other words, even though they are the same legal entity, the law deemed them distinct, meaning a transaction between them could, in theory, be taxed as if it were a transaction between two independent parties.
“It is an accepted legal position that one cannot provide a service to one’s own self. If the permanent establishment abroad is treated as a service provider to its own head office, it amounts to charging service tax for an activity provided to oneself.”
That principle articulated in the earlier CESTAT ruling in Torrent Pharmaceuticals v. Commissioner (2015) became the foundation of CII’s defence, and the Tribunal in the present case endorsed it. The legal fiction in Section 66A(2), the Tribunal reasoned, was never designed to tax a company for its own internal operations. It was meant to handle situations where an Indian business genuinely received a service from an independent foreign provider, and the mechanism of reverse charge was the tool for capturing that within the tax net.
But none of that applies when the “service provider” is simply an overseas office of the same entity operating under the same management, using the same employees, and serving the same organisational purpose. No independent transaction is happening. No fee is being charged. There is no service in any commercial or legal sense, only an internal allocation of resources.
There is also the further point, which the Tribunal noted without much elaboration but which matters considerably, that Section 66A(2) itself became obsolete from 1 July 2012 when the negative list-based service tax regime came into force. Since three of the four show cause notices covered periods after that date, the department’s reliance on the provision was doubly problematic.
The Liaison Office Question
Running alongside the Section 66A argument was a factual question: what, exactly, were these overseas offices? The department’s case implicitly treated them as permanent establishments entities with a sufficiently independent existence to be capable of providing services to the head office.
The Tribunal rejected this characterisation. Under Rule 2(e) of the Foreign Exchange Management (Establishment in India of Branch or Offices) Regulations, 2000, a liaison office is defined as one that “merely acts as a channel of communication” for the head office. By definition, such an office cannot engage in business activity of any kind. CII’s overseas offices fell squarely within that definition: they generated no revenue, entered into no contracts, and provided no services to any third party. Their entire function was representational and communicatory.
KEY PRINCIPLE MILIND KULKARNI V. CCE (2016)
The very existence of a branch presupposes some kind of activity that benefits the primary establishment in India and the organisational structure inherently prescribes allocation of financial resources… Mere identification of a service and the legal fiction of separate establishment is not sufficient to tax the activities of the branch.
The department, for its part, produced no evidence to the contrary, nothing to suggest that these offices were in fact carrying out activities beyond their representational mandate. That absence of evidence was, in itself, sufficient for the Tribunal to find in CII’s favour on this issue.
When Reimbursement Is Not Payment for a Service
Even if one were to accept, for the sake of argument, that some taxable service had been identified, the second issue would still need to be addressed: what exactly was being taxed? The amounts transferred by CII India to its overseas offices were reimbursements of actual expenses salaries, rent, utilities, and the like, not fees charged for any identifiable service.
The department had sought to tax these reimbursements under Rule 5 of the Service Tax (Determination of Value) Rules, 2006, which had purported to include reimbursable expenses within the taxable value of a service. But that provision was struck down by the Supreme Court in Union of India v. Intercontinental Consultants and Technograts Pvt. Ltd. (2018).
The Supreme Court’s reasoning was straightforward: Section 67 of the Finance Act the charging provision for service tax valuation spoke only of the gross amount charged for “such” taxable service. Reimbursements are not charged for the service; they are charged to recover costs already incurred. Rule 5 had gone beyond the mandate of Section 67 and was therefore ultra vires. With that ruling in place, the demand in the CII case which entirely covered the pre-amendment period had no legal foundation to stand on.
The Limitation Question
There is one further dimension worth noting, though the Tribunal dispatched it quickly. All four show cause notices invoked the extended period of limitation under Section 73(1) of the Finance Act, which allows the department to go back five years (as opposed to the normal 18 months or one year) in cases of suppression of facts or wilful misstatement.
The trouble is that invoking the extended period requires something , some allegation, some evidence, some finding of suppression. The show cause notices in this case contained none of that. There was no suggestion that CII had concealed the existence of its overseas offices, or failed to disclose the reimbursements, or done anything else that might constitute wilful evasion. The department’s own circular of 1996, based on a Supreme Court ruling, had made it clear that the grounds for invoking the extended period must be explicitly stated in the notice. They were not, and so that ground too fell away.
Why This Matters Beyond CII
The significance of this ruling is not confined to CII or to industry bodies. A large number of Indian companies manufacturing firms, professional services organisations, export houses, technology companies maintain representative or liaison offices abroad for purposes of business development and market intelligence. In most cases, the model is essentially the same: the overseas office is staffed by the company’s own people, carries out no independent commercial activity, and is funded through reimbursements from India.
The revenue department’s theory, if accepted, would have treated all such arrangements as taxable service imports, a result that would be both commercially disruptive and legally incoherent. The Tribunal’s ruling, drawing on a consistent line of precedent, confirms that internal arrangements of this kind are simply outside the scope of service tax. There is no transaction, no service, and no tax.
For practitioners, the case also offers a useful reminder on the limits of legal fictions. Section 66A(2) created a fiction of separateness between a company and its overseas establishments but fictions are instruments of convenience, not mechanisms for transforming internal operations into taxable events. When there is no underlying economic reality to support the tax charge, the fiction cannot be stretched to create one.
FULL TEXT OF THE CESTAT DELHI ORDER
The present appeal is filed to assail the Order-in-Original No. 05-08/2020 dated 29.01.2021 which is the common order with respect to four show cause notices as follows:
(i) Show Cause Notice No. 37/2013-14 dated 22.04.2013 for demand of service tax amounting to Rs.3,15,82,400/- in respect of taxable service rendered during 2007-08 to 2011-12.
(ii) Show Cause Notice No. 76/2014-15 dated 08.05.2014 proposing demand of service tax amounting to Rs.91,88,214/- in respect of taxable service rendered for the period April 2012 to March 2013.
(iii) Show Cause Notice No. 10/2014-15 dated 17.04.2015 proposing demand of Rs. 96,05,189/- for the period from April 2013 to March 2014.
(iv) Show Cause Notice No. 71/2016 dated 13.04.2016 proposing the demand of Rs. 85,34,937/- in respect of taxable services rendered by the appellant during the period from April 2014 to March 2015.
1.1 It was alleged in the show cause notices that the appellant has set up overseas branch offices in several countries where appellant has employed its own staff but has not paid the service tax on the amount paid in lieu of receiving those services. The nature of activity was observed to be for co-ordination, exploring the business opportunities and playing kee role in trade promotion by providing a number of support services through those overseas offices i.e. in furtherance of enhancement of its business of commerce. Based on the aforesaid allegations, the proposed demand under the respective show cause notices have been confirmed vide the impugned order. Penalties of equal amount have been imposed. Being aggrieved, the appellant is before this Tribunal.
2. We have heard Ms. Rupali Singh, learned counsel for the appellant and Shri S.K. Meena, learned Authorized Representative for the department.
3. Learned counsel for the appellant has submitted that the appellant had established liaison offices in various countries to assist and held the activities allowed for representative offices in the international trade parlance which are the activities of Confederation of Indian Industry i.e. the appellant. It is submitted that these liaison offices are not engaged in any business activity and do not generate any revenue. These offices are managed by the employees of the Confederation of Indian Industry itself and the expenses are reimbursed by Confederation of Indian Industry/the appellant on actual basis. Section 66A(2) of the Finance Act, 1994 has wrongly been invoked.
3.1 It is further submitted that issue has already been decided in favour of the appellants by this Tribunal, Mumbai Bench, in the case of Milind Kulkarni Vs. Commissioner of Central Excise, Pune-I reported as 2016 (44) STR 71 (Tri.-Mumbai). The order under challenge is contrary to the said adjudication. Accordingly, the order under challenge is prayed to be set aside and the appeal is prayed to be allowed.
4. Learned Departmental Representative has reiterated the findings arrived at in the impugned order. However, has acknowledged that the issue stands already decided in favour of the appellant.
5. Having heard both the sides and perusing the records. The issues to be adjudicated is observed as follows:
(i) Whether the liaison offices of the appellants in different countries are the permanent establishments for being taxable under the Finance act.
(ii) Whether the amount in question is reimbursable expenses and whether service tax can be demanded upon the said amount.
6. Issue No. 1
6.1 We observe that liaison office has been defined under Rule 2(e) of Foreign Exchange Management (Establishment in India of Branch or Offices or other Places of Business) Regulation, 2000. Accordingly, to which the offices which merely act as channel of communication of the head office are called as liaison office. The very definition falsifies that the liaison offices are permanent establishments. Otherwise also they are not engaged in doing any business activity, not even of providing any service to the head office. Similar is the submission of the appellant. The department has not produced any evidence to falsify the same. This observation is sufficient to hold that the liaison offices are not permanent establishment. Section 66A(2) of the Finance Act is held to have wrongly been invoked. The issue stands already adjudicated by this Tribunal in the case of Torrent Pharmaceuticals Limited Vs. Commissioner reported as 2015 (39) STR 97, wherein it was held as follows:
“Section 66A(1) above is talking of service provider and service recipient as ‘persons’ which has to mean as different business persons. Section 66A(2) and its Explanation I only make a clarification and to fix service tax liability on recipient of services under reverse charge mechanism that both the permanent establishments in India and abroad of a business person are to be treated as separate persons. The above clarification/distinction made in Section 66A in our opinion is only for making an consumed in India or abroad. It is an accepted legal position that one can not provide service to one’s own self. If the ‘permanent establishment’ of the appellant abroad is treated as a service provider to its own head office in India then it will amount to charging service tax for an activity provided to one’s own self.”
The Tribunal held that there is no service tax liability.
6.2 Similar view was taken in the case of Kusum Heathcare Private Limited Vs. Commissioner Central Excise (Final Order No. 50314-15/2018), wherein it was held as follows:
“The ratio of the above decision and also the close reading of the proviso to Section 66A alongwith explanation therein is make it clear that the legal fiction of considering a branch of an assessee as a separate establishment is not to tax a service rendered to tis head office. Further, here there is no such service also has bee indentified with supporting evidence.”
6.3 Similar view was taken in the case of Milind Kulkarni Vs. Commissioner reported as 2016 (44) STR 71, wherein it was held as follows:
“From the above, it is apparent that mere identification of a service and the legal fiction of separate establishment is not sufficient to tax the activities of the branch. The very existence of a branch presupposes some kind of activity that benefits the primary establishment in India and the organizational structure inherently prescribes allocation of financial resources by the primary establishment to the branch to enable undertaking of the prescribed activity.”
6.4 It is also observed that Section 66A(2) of the Finance Act has become obsolete w.e.f. 01.07.2012. The period under show cause notices 2, 3 and 4 is beyond the said date. In view of the entire above discussion, Issue No. 1 stands decided in favour of the appellants.
7. Issue No. 2
7.1 There is no denial to the fact that the liaison offices of the appellant, the expenses thereof, were reimbursed by the head office of appellant in India as is apparent from the show cause notice itself. The appellant while filing the reply to the said show cause notice had enclosed the copy of letters from the bank acknowledging that all amounts spend in overseas branch are reimbursement of expenses. The reimbursement of expenses were made taxable in terms of Rule 5 of Service Tax Rules. However, Hon’ble Supreme Court in the case of Union of India Vs. Intercontinental Consultants and Technograts Pvt. Ltd., reported as 2018 (10) GSTL 401 (SC) has held that rules are Ultra Vires. The relevant paragraph is as follows:
“24. In this hue, the expression ‘such’ occurring in Section 67 of the assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing ‘such’ taxable services. As a foritiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such ‘taxable service’. That according to us is the plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 1, 2006) or after its amendments, with effect from, May 1, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasized that Rule 5 of the Rules went much beyong the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the Valutation of taxable service, the value of taxable service shall be the gross amount charged by the service provider ‘for such service’ and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.”
7.2 Though there came amendment in Section 67 of the Finance Act itself w.e.f. July 2015 for making the reimbursable expenses taxable again but in the present case the entire period under four of the show cause notices is prior the said date. Hence, it is clear that the amount paid towards reimbursed expenses is wrongly held taxable. The demand of service tax on the said amount is therefore liable to be set aside. With these observations, Issue No. 2 is also decided in favour of the appellant.
8. Finally, coming to the plea of wrong invocation of extended period of limitation while issuing the show cause notices. It is observed that show cause notice has not pointed out anything to support alleged suppression or misstatement which is mandate to attract the extended period of limitation in terms of Section 73(1) of the Finance Act, 1994. The absence thereof itself is sufficient to hold that the extended period is not invocable in the present case. Department’s own Circular No. 268/102/96 dated 14.11.1996 which is based upon the judgment of Hon’ble Supreme Court in the CCE Vs. HMM Ltd. reported as 1995 (76) ELT 497 clarifies that it is absolutely necessary for show cause notice to clearly state the grounds for invoking extended period of limitation. In absence thereof and in absence of any finding to that effect in the order under challenge and also in light of entire above discussion, we hold that the extended period has wrongly been invoked while issuing the impugned show cause notices.
9. In the light of entire above discussion, the order under challenge is set aside. Consequent thereto, the appeal is allowed.
[Dictated and pronounced in the open Court]
Author Bio
