Case Law Details
Karnataka Lingayat Education (KLE) Society Vs Commissioner of Central Excise (CESTAT Bangalore)
The Karnataka Lingayat Education (KLE) Society secured a victory against the Commissioner of Central Excise at the CESTAT Bangalore. The tribunal ruled that services provided by KLE to the University of Sains Malaysia (USM) qualified as “export of services” under the Finance Act, 1994, thereby overturning a significant service tax demand. KLE, a charitable education society, had a ten-year agreement with USM, a Malaysian government-funded university, to conduct medical education courses in Belagavi. USM selected the students, and upon completion, they were obligated to serve in Malaysian government hospitals. The dispute arose because the tax authorities considered these services as “support service for business or commerce,” making them taxable under Indian law, rather than an export.
The core issue was whether the services were provided to USM in Malaysia, as argued by KLE, or to the USM branch in Belagavi, as claimed by the tax authorities. KLE’s counsel, Bharat Raichandani and Advocate Raaghul Piraanesh J R, argued that all conditions for export of services under Rule 6A of the Service Tax Rules, 1994, were met. They emphasized that USM, the service recipient, was located in Malaysia, payments were received in foreign currency, and the services were not specified under Section 66D of the Finance Act. They also pointed out that the agreement was with USM in Malaysia, not its Belagavi branch. The counsel cited precedents, including Vodafone Idea Ltd Vs. Union of India and Verizon Communication India Pvt., Ltd., Vs. Assistant Commr., which established principles for determining the recipient of services in similar cross-border transactions.
The CESTAT Bangalore, after hearing both sides, agreed with KLE’s arguments. The tribunal noted that KLE had fulfilled all the conditions of Rule 6A for export of services. It highlighted the Verizon Communication case, which clarified that the “recipient” of the service is determined by the contract and who is responsible for payment, not merely who “uses” the service. The tribunal also found that the adjudicating authority’s finding that KLE had not provided evidence of receiving payment in foreign currency was incorrect, as KLE had submitted invoice copies proving this. Furthermore, the CESTAT emphasized that under Rule 3 of the Place of Provision of Service Rules, 2012, the service’s place of provision is the recipient’s location, which in this case was Malaysia.
In addition to the main issue, the tax authorities had also levied service tax on KLE for “manpower recruitment or supply agency” and “renting of immovable property.” Regarding manpower services, the tribunal found that merely providing a list of qualified staff did not constitute recruitment and that no consideration was received for such a service. On the renting of immovable property, KLE argued they were already paying service tax on the rent received, a fact the adjudicating authority had overlooked. The CESTAT agreed, overturning these demands as well. The tribunal also waived penalties, citing established jurisprudence that no penalty should be imposed when the issue involves interpretation of statutory provisions. The CESTAT’s order effectively reverses the tax demand and provides clarity on the criteria for classifying cross-border services as exports.
The matter was argued by Ld. Counsel Bharat Raichandani along with Advocate Raaghul Piraanesh J R
FULL TEXT OF THE CESTAT BANGALORE ORDER
The issue in the present appeal is whether the services of support service for business or commerce provided by the Appellant can be considered as ‘taxable services’ under section 65B(44) r/w section 65B(49) of the Finance Act, 1994 or they can be considered as ‘export of service’.
2. The brief facts are M/s. Karnataka Lingayat Education Society (KLE), the Appellant is a Charitable Education society and registered under service tax. The appellant has entered into an agreement with University of Sains Malaysia (USM), a university established under the Universities and Universities Colleges Act, 1971 of Malaysia on 30.11.2009 and is funded by Malaysian government for conducting medical education course for the Malaysian students and the students so promoted by USM shall on completion of the curriculum are required to serve the government hospitals in Malaysia. The agreement was for a period of 10(ten) years and as per the said agreement, the Appellant has to assist the USM Medical by following the USM Medical curriculum in the teaching center in GNMC, Belagavi and degree shall be awarded by USM, Malaysia. The selection of students to the program shall be done by USM only and KLE shall not anyway interfere with the selection process unless requested in writing by USM. The maximum number of students to be admitted for program shall be determined by USM upon consultation with KLE, however the same shall be in accordance with the Malaysia Medical Council (MMC) requirements. Since the services provided by the Appellant to students of the USM is not falling under Export of Services Rules, 2005, service Tax was demanded on the ground that the services provided by the appellant are Support Services for Business or Commerce and are ‘taxable services’ under section 65B(44) r/w section 65B(49) of the Finance Act, 1994. Accordingly, 2(two) Show Cause Notices dated 05.04.2016, and 30.012017 were issued for the Financial Year 2014-15 and 2015-16. Further, the show cause notices alleges that the appellant has provided manpower recruitment or supply service, which is a taxable service under section 65B(44) of the Finance Act, 1994 and also provided ‘renting of immovable property’ service, which is a declared service in terms of clause (a) of section 66E r/w section 65B(41) of the Finance Act, 1994.
3. Thereafter Adjudication authority confirmed demand of Rs.15,60,75,175/- for the financial year 2014-2015 and 2015-2016 in respect of service of provision of infrastructure, confirmed demand of service tax amounting to Rs. 1,54,45,204/- under the category of ‘manpower recruitment or supply agency’ services and demand of service tax amounting to Rs. 1,05,647/- under ‘renting of immovable property’ services along with interest and imposed penalties under the provisions of the Finance Act 1994. Aggrieved by the said order, present appeal was filed before this Tribunal.
4. When the Appeal came up for hearing, the Learned Counsel for the Appellant submitted that as per Rule 3 of the Place of Provision of Service Rules, 2012, the place of provision shall be the place of the recipient of service and as per the contract entered by the Appellant and also as per the conditions, the recipient of the service is M/s USM in Malaysia and not M/s. USM in Belagavi as alleged by the Respondent. Learned Counsel for the Appellant further submitted that the infrastructure service provided by the Appellant to USM is exempted from service tax due to the reason that same will be qualified as export of service in terms of Rule 6A of the Service Tax Rules, 1994.
“RULE 6A. Export of services-(1) The provision of any service provided or agreed to be provided shall be treated as export of service when-
(a) The provider of service is located in the taxable territory.
(b) The recipient of service is located outside India.
(c) The service is not a service specified in the Section 66D of the Act.
(d) The place of provision of the service is outside India.
(e) The payment for such service has been received by the provider of service in convertible foreign exchange, and
(f) The provider of service and recipient and service are not merely establishments of a distinct person in accordance with item (b) of the Explanation 2 of clause (44) of Section 65B of the Act. “
5. The Learned Counsel submits that as regards condition No.1, it is an admitted fact that the Appellant is in the taxable territory. As regards condition No.2, the agreement was entered by the Appellant with USM in Malaysia and the USM is situated in Malaysia and thereby fulfilled the condition No.2. However, to overcome the above, the Adjudication authority as per the impugned order considered Deputy Dean of USM, Belagavi, who is one of the employees of USM in Malaysia as recipient of the service to reject the claim of the Appellant that the services as export of services. Ld. Counsel further submits that the services rendered by the Appellant are not specified in Section 66D of the Finance Act, 1994 and thereby fulfilled the condition No.3. As regards condition No.4, since place of provision of the service is outside India, appellant complied with condition No.4. Since the payment for the service has been received in convertible foreign exchange, appellant complied with condition No.5. Since recipient of service USM’s Malaysia and Appellant are distinct persons, appellant complied with condition No.6. Facts being so, the Appellant fulfilled all the conditions under Rule 6A of Service Tax Rules, 1994.
6. The Ld. Counsel further submits that the issue is squarely covered by large number of decisions including the following:-
i. M/s Vodafone Idea Ltd Vs. Union of India & Ors (2022-TIOL-997-HC-MUM-GST)
ii. M/s Vodafone Idea Ltd Vs. Union of India – 2023 (78) G.S.T.L 495 (Del)
iii. M/s Verizone Communication India Pvt., Ltd., Vs. Assistant Commr., ST, Delhi – 2018 (8) G.S.T.L 32 (Del)
iv. Commissioner of Service Tax, Ahmedabad Vs. M/s B.A Research India Ltd – 2010 (18) S.T,R 439 (Tri. Ahmd)
v. M/s Apotex Research Pvt., Ltd., Vs. Comm. of C.Ex, ST, Bangalore – 2022 (63) G.S.T.L 99 (Tri. Bang)
vi. Commissioner of Service Tax, Mumbai-II Vs. M/s SGS India Pvt Ltd – 2014 (34) S.T.R 554 (Bom.)
6. As regards demand under ‘manpower recruitment or supply agency’ services, the Learned Counsel submitted that service tax is to be levied on the gross receipt and not on the expenditure as done by the Adjudication authority. Even if the service tax is payable, it should be levied on the consideration received by the service provider from the service recipient. However, as per the impugned order, service tax is demanded on the expenditure incurred by the Appellant.
7. As regards manpower recruitment and supply of services the Learned Counsel submitted that the Appellant merely provided a list of staff to USM and USM has appointed the staff on the basis of the Malaysia’s Medical Council requirement. Facts being so, the demand confirmed in the impugned order under the category of ‘manpower recruitment or supply agency’ services is unsustainable. Further there is no consideration received towards any such service to confirm service tax.
8. As regards ‘renting of immovable property’, the Appellant admits that as per the agreement, they were providing renting of immovable property services to USM and received a consideration of Rs.7,76,980/-for the financial year 2014-2015 and total service tax liability is Rs. 1,05,647/- for the financial year 2014 to 2016. The Appellant were paying service tax for the amount received as rent and these facts were not considered by Adjudication authority while confirming the service tax demand. Accordingly, the demand of service tax under renting of immovable property is also unsustainable.
8. As regards penalty, the Learned Counsel submitted that the issue in the case involves interpretation of the statutory provision and it is well settled that when interpretation is involved, no penalty can be imposed. Appellant relied on the following decisions:-
i. CCE Vs. M/s Sarup Tanneries Ltd -2005 (184) E.L.T 217 (T)
ii. CCE Vs. M/s Explicit Trading -2004 (169) E.L.T 205 (T)
iii. M/s Goyal M G Gases Ltd Vs. CCE -2004 (168) E.L.T 369 (T)
iv. M/s Kanthuria Portfolios Vs. CCE -2003 (158) E.L.T 355 (T)
v. M/s Goenka Woolen Mills Vs. CCE-2001(135) E.L.T 873 (T)
10. Learned Counsel further submitted that the Appellant were under a bonafide belief that they are not liable to pay service tax and as per the decisions of Tribunal in the matter of Flyingman Air Courier Pvt Ltd Vs. CC, Jaipur reported in 2006 (3) STR 283 (Tri-Del.) and Commr of Service Tax, Mumbai, Vs. Gamma Consultancy Pvt Ltd reported in 2006 (4) STR 591 (Tri-Mumbai)
11. Learned Authorised Representative (AR) for the Revenue reiterated the finding in the impugned order and submitted that the Appellant had provided the entire services in the premises of KLE, Belagavi. As per Paragraph 4.5 of the agreement, they have to provide all infrastructure like lecture halls, theaters, administrative block, examination hall, clinical labs, etc. They have also provided skilled manpower in the form of professors, readers, lecturers, residence, technician, etc. Even the number of students admitted into the program has to be determined in consultation with the Appellant. Further the Appellant has to select the suitable staff and only the formal appointment is done by USM. Moreover, the Appellant has to obtain all approvals and accreditation required from Indian authorities before commencement of a program. Facts being so, the service cannot be considered as provided to USM in Malaysia but provided to the Dean of KLE Teaching Center, Belagavi, as held by Adjudication Authority.
12. Heard both side and perused the records.
13. We find that the limited issue in the present appeal is whether the service provided by the Appellant can be considered as export of service. As per the chart and details furnished by the Appellant, they have fulfilled all the conditions as applicable under Rule 6A of the Service Tax Rules, 1994 to consider the service as export of service. Moreover, the issue is considered in catena of decisions including in the matter of M/s Vodafone (Supra).
14. Further in the matter of M/s Verizone communication (supra), it is held that:-
39. 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?
40. 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.
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46. 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. Indeed, 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.
15. As per paragraph 20 of the impugned order, the Adjudication authority admits that the representative of the Appellant, who appeared for the personal hearing had submitted the invoice copies to support that the amount is received in foreign currency. However, in paragraph 30.2, the Adjudication authority has given a finding that no evidence is provided regarding fulfillment of the condition of payment in convertible foreign exchange, such a finding is unsustainable. As per Rule 3 of the Place of Provision of Service Rule, 2012, the place of provision shall be the place of the recipient of service and as per the contract entered by the Appellant, the recipient of the service is M/s USM in Malaysia and not an employee of USM in Belagavi as alleged by the Respondent. Considering the above, the issue is squarely covered in favour of the assessee, the services are falling under the category of export of services and demand is unsustainable.
16. As regarding demand under ‘manpower recruitment or supply agency’ services, merely by providing a list of staff qualified for appointing as faculty in a center under the USM cannot be considered as manpower recruitment. There is no evidence regarding the consideration received by the Appellant for confirming demand of Rs.1,54,45,204/- under the ‘manpower recruitment or supply agency’ services. As regards renting of immovable property services, the Appellant were paying service tax for providing immovable property service to USM during the relevant period. Facts being so, there is no justification for confirming service tax demand of Rs.1,05,647/- under ‘renting of immovable property’ services as confirmed in the impugned order. Since there is no service tax payable by the appellant for the relevant period, penalty imposed vide the impugned order is also unsustainable.
17. In view of the above discussion, Appeal is allowed with consequential relief, if any in accordance with law.
(Order pronounced in Open Court on 09.12.2024)
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