Xomox Sanmar Ltd. Vs Commissioner of GST and Central Excise (CESTAT Chennai)
Summary: M/s. Xomox Sanmar Ltd. was engaged in manufacture of industrial valves, valve actuators, enclosed gears and other engineering products and also rendered engineering-related services to M/s. Xomox International GmbH & Co., Germany (“Xomox Germany”) concerning goods manufactured by M/s. Sanmar Foundries Limited, Viralimalai (“SFL”). It received USD 2,000 per month in convertible foreign exchange and treated the receipts as export of services. Two connected Service Tax Appeals were before the CESTAT Chennai: ST/41517/2016, covering April 2009 to March 2014, and ST/42199/2016, covering April 2014 to March 2015. The first demand was Rs.6,91,329/- and the second was Rs.14,476/-, besides interest and penalties.
The Department classified the activity as Technical Inspection and Certification Service, relying particularly on inspection and quality-related work performed at SFL. The appellant contended that the contractual assignment was substantially broader engineering work and relied on contemporaneous documents, including the job description, emails, Debit Note No.009 dated 31.12.2007 describing the consideration as “Service Engineer Charges”, the letter dated 29.02.2008 to the Central Excise Audit authorities, and the letter dated 05.05.2009 from Xomox Germany confirming USD 2,000 per month towards engineering services.
On classification, the Tribunal examined the substance of the contracted and actually rendered service. The job description covered “Engineering”, “Development”, “Quality” and “Dispatch”. It included drawing release, clarification, translation and correction, dimension deviations and modifications, technical issues, development and rectification of castings and patterns, material specifications, PED requirements, inspection plans, corrective-action reporting, packing and dispatch-related technical assistance. The Tribunal found that inspection was only one component of a wider engineering assignment. There was no separate inspection charge and no evidence that Xomox Germany had engaged the appellant as an independent inspection or certification agency. The Tribunal distinguished Commissioner of Central Excise, Mangalore v. SGS India (Pvt.) Ltd., 2010 (17) S.T.R. 92 (Tri.-Bang.), because that decision concerned an activity whose essential character was inspection, examination and certification. The services here were held to be engineering advice, consultancy and technical assistance. For the period up to 30.06.2012, they were classifiable as Consulting Engineer Service under Section 65(105)(g) read with Section 65(31) of the Finance Act, 1994; for the later period, the nature of the activity continued to be engineering service under the then-applicable statutory framework.
The Tribunal separately considered export treatment for three statutory periods. For 27.02.2010 to 30.06.2012, it relied on the Supreme Court judgment in Commissioner of Service Tax-III, Mumbai v. Vodafone India Ltd., 2025 INSC 914; 2025 (8) TMI 938; (2025) 33 Centax 152 (S.C.). The Tribunal noted that the requirement that the service be “provided from India and used outside India” had been omitted from Rule 3(2) with effect from 27.02.2010. Since Xomox Germany was the contractual recipient outside India and consideration was received in convertible foreign exchange, the physical performance of some engineering activities at SFL could not by itself restore the omitted condition.
For April 2009 to 26.02.2010, when the “provided from India and used outside India” condition applied, the Tribunal found that Xomox Germany was the contractual recipient and payer and that SFL was not shown to be the recipient or user of the service. On the material available, the Department had not established that the service was used in India so as to deny export treatment.
For 01.07.2012 onwards, the Tribunal applied Rule 6A of the Service Tax Rules, 1994 and the Place of Provision of Services Rules, 2012. Rule 3 is the general rule under which the place of provision is the recipient’s location, while Rule 4 applies where goods are required to be physically available in order to provide the service. The Tribunal held that physical availability of the castings was not established as necessary for the engineering service as a whole. The fact that some inspection and quality-related activities occurred at SFL did not bring the entire assignment within Rule 4. Rule 3 therefore applied and the place of provision was outside India. The services from 01.07.2012 to March 2015 consequently satisfied Rule 6A and qualified as export of services.
On limitation, the first Show Cause Notice dated 16.10.2014 covered April 2009 to March 2014 and invoked the extended period. The Tribunal noted that the Department had already raised an audit query in 2008 and that the appellant had disclosed the arrangement, activities, Debit Note and balance-sheet particulars by letter dated 29.02.2008. Referring to Anand Nishikawa Co. Ltd. v. CCE, 2005 (188) E.L.T. 149 (S.C.), Pahwa Chemicals Pvt. Ltd. v. CCE, 2005 (189) E.L.T. 257 (S.C.) and Continental Foundation Joint Venture v. CCE, 2007 (216) E.L.T. 177 (S.C.), the Tribunal held that extended limitation requires wilful suppression, misstatement or contravention with intent to evade tax and cannot be invoked merely because the Department later takes a different view. It found no material establishing deliberate suppression and held the extended period not invocable. The second notice was within the normal period but independently failed on merits.
Interest under Section 75 was held consequential upon a sustainable service tax liability. Since the substantive demands failed, interest could not survive. Penalties under Sections 76 and 78 also could not survive, while no independent contravention warranting penalty under Section 77 was established.
The Tribunal therefore held that the services rendered to Xomox Germany qualified as export of services during the disputed periods, that the services were classifiable as Consulting Engineer Service for the pre-negative-list period, and that the demands of Rs.6,91,329/- and Rs.14,476/-, with consequential interest and penalties, were unsustainable. The extended limitation invoked for the first demand was also held unsustainable. Both Orders-in-Appeal Nos.27/2016 and 57/2016 were set aside and both appeals were allowed with consequential relief, if any, in accordance with law.
Cases Discussed
- Commissioner of Service Tax-III, Mumbai v. Vodafone India Ltd., 2025 INSC 914; 2025 (8) TMI 938; (2025) 33 Centax 152 (S.C.)
- Commissioner of Central Excise, Mangalore v. SGS India (Pvt.) Ltd., 2010 (17) S.T.R. 92 (Tri.-Bang.)
- Anand Nishikawa Co. Ltd. v. CCE, 2005 (188) E.L.T. 149 (S.C.)
- Pahwa Chemicals Pvt. Ltd. v. CCE, 2005 (189) E.L.T. 257 (S.C.)
- Continental Foundation Joint Venture v. CCE, 2007 (216) E.L.T. 177 (S.C.)
FULL TEXT OF THE JUDGMENT/ORDER OF CESTAT CHENNAI
Service Tax Appeal No. ST/41517/2016 filed by M/s. Xomox Sanmar Limited is directed against Order-in-Appeal No. 27/2016 dated 04.05.2016, passed against Order-in-Original No. 18/2015 dated 18.05.2015, covering the period April 2009 to March 2014. Service Tax Appeal No. ST/42199/2016, also filed by M/s. Xomox Sanmar Limited, is directed against Order-in-Appeal No. 57/2016 dated 20.09.2016, passed against Order-in-Original No. 06/2016 dated 31.03.2016, covering the period April 2014 to March 2015. Since both appeals relate to the same activity and involve common questions of classification and export of services, they are taken up together for disposal by this common order.
2. The appellant, engaged in the manufacture of industrial valves, valve actuators, enclosed gears and other engineering products, also rendered engineering-related services to M/s. Xomox International GmbH & Co., Germany (“Xomox Germany”), in relation to goods manufactured by M/s. Sanmar Foundries Limited, Viralimalai (“SFL”), for which it received USD 2,000 per month in convertible foreign exchange and treated the receipts as export of services. The first Show Cause Notice dated 16.10.2014, covering April 2009 to March 2014, alleged the activity to be Technical Inspection and Certification Service and, from 01.07.2012, invoked Rule 4 of the Place of Provision of Services Rules, 2012. Order-in-Original No.18/2015 dated 18.05.2015 confirmed service tax of Rs.6,91,329/-, with interest and penalties, which was upheld by Order-in-Appeal No.27/2016 dated 04.05.2016. The second Show Cause Notice dated 07.09.2015, covering April 2014 to March 2015, resulted in Order-in-Original No.06/2016 dated 31.03.2016, confirming service tax of Rs.14,476/-, with interest and penalties, upheld by Order-in-Appeal No.57/2016 dated 20.09.2016. Aggrieved by the said orders, the appellant is before the Tribunal.
3.1 The Ld. Advocate Ms. Radhika Chandrasekaran, for the appellant, submitted that the impugned orders proceeded on an erroneous assumption that the service was essentially inspection and certification. The contractual and contemporaneous evidence, according to learned Counsel, establishes that Xomox Germany engaged the appellant for engineering services and that inspection was only one component of a wider engineering assignment.
3.2 The Ld. Counsel submitted that the job description covered engineering, development, quality and dispatch activities, including drawing release and correction, drawing clarification and translation, dimension deviations and modifications, technical issues, development of castings, pattern development and rectification, material specifications, PED requirements, inspection plans, corrective action reporting, packing and dispatch requirements and other engineering assignments. Reliance was placed upon the contemporaneous email correspondence, the job description, the letter dated 29.02.2008 addressed to the Superintendent of Central Excise (Audit), Debit Note No.009 dated 31.12.2007 describing the amount as “Service Engineer Charges”, and the letter dated 05.05.2009 issued by Xomox Germany confirming payment of USD 2,000 per month towards engineering services.
3.3 The Ld. Counsel further submitted that, for the period prior to 01.07.2012, the service was classifiable under Rule 3(1)(iii) of the Export of Services Rules, 2005. Particular reliance was placed upon the judgment of the Hon’ble Supreme Court in Commissioner of Service Tax-III, Mumbai v. Vodafone India Ltd., 2025 INSC 914; 2025 (8) TMI 938; (2025) 33 Centax 152 (S.C.), especially in relation to the statutory amendment effective from 27.02.2010 whereby the requirement of “provided from India and used outside India” was omitted. For the period from 01.07.2012, learned Counsel submitted that Rule 3 of the POP Rules applied and Rule 4 was not attracted merely because some activities were performed at SFL’s premises. Reliance was also placed upon the case laws cited in the written submissions on limitation, particularly Anand Nishikawa Co. Ltd. v. CCE, 2005 (188) E.L.T. 149 (S.C.); Pahwa Chemicals Pvt. Ltd. v. CCE, 2005 (189) E.L.T. 257 (S.C.); Continental Foundation Joint Venture v. CCE, 2007 (216) E.L.T. 177 (S.C.) and others.
4. The Ld. Authorized Representative Ms. G. Krupa reiterated the findings in the impugned orders and submitted that the appellant had deputed specially trained personnel to SFL for inspection and examination of castings and related quality activities. According to Revenue, the actual activity performed in India and the physical availability of the goods were determinative. Reliance was placed upon Commissioner of Central Excise, Mangalore v. SGS India (Pvt.) Ltd., 2010 (17) S.T.R. 92 (Tri.-Bang.), besides the provisions relied upon in the respective show cause notices.
5. Upon rival submissions and scrutiny of the appeal papers, the following questions arise for determination: –
i. Whether the services rendered by the appellant were classifiable as Consulting Engineer Service or as Technical Inspection and Certification Service?
ii. Whether the services qualified as export of services during the respective periods and, consequently, whether the demands of service tax, interest, limitation and penalties are sustainable?
6. We now proceed to examine the issues framed for determination sequentially.
Issue No. (i): Classification of the Services
7. The first Show Cause Notice dated 16.10.2014 covers April 2009 to March 2014. For the period prior to 01.07.2012, the Department alleged that the activities undertaken by the appellant at SFL, particularly inspection and examination of castings and quality-related activities, constituted Technical Inspection and Certification Service taxable under Section 65(105)(zzi) read with Section 65(108) of the Finance Act, 1994. For the period from 01.07.2012 to March 2014, the Department continued to proceed on the basis that the activity was inspection/examination of goods and invoked Rule 4 of the POP Rules. The second Show Cause Notice dated 07.09.2015, covering April 2014 to March 2015, proceeded substantially on the same basis.
8. The question of classification has to be determined from the substance of the service contracted for and actually rendered. Section 65A of the Finance Act, 1994 prescribed the principles for classification of taxable services. Where a service was prima facie classifiable under more than one taxable category, the more specific description was to be preferred and, where a composite service could not be so classified, its classification was to be determined by the service which gave it its essential character.
9. The question before us is therefore whether the substance of the assignment was Technical Inspection and Certification Service or a broader engineering service.
10. The definition invoked by the Department, namely Technical Inspection and Certification Service, contemplated inspection or examination for the purpose of certifying that specified standards or characteristics were maintained. The Revenue relies upon the portions of the job description dealing with prototype casting inspection/approval, inspection plans, bulk/series inspection approval, inspection report coordination and corrective action reporting. These activities undoubtedly contain an element of inspection and quality control. However, the job description cannot be read selectively.
11. The job description placed on record sets out the assignment under four heads, namely, “Engineering”, “Development”, “Quality” and “Dispatch”. Under “Engineering”, it refers to drawing release, drawing clarification and translation, drawing correction in CIMCAD, dimension deviations/modifications and technical issues. Under “Development”, it refers to prototype casting inspection/approval, material specification clarification and PED requirements. Under “Quality”, it refers to development of inspection plans, bulk/series inspection approval, inspection-report coordination and corrective-action reporting. Under “Dispatch”, it refers to packing methods, alternate packing materials, rust-protection methods, coordination, documentation and dispatch details of critical items.
12. The email correspondence dated 23.03.2005 concerning the “Job Description & Activity Status”, and the response from the German side, is significant because it predates the dispute and demonstrates that the assignment was understood by the foreign customer as an engineering role. The letter dated 05.05.2009 from Xomox Germany is even more specific. It records payment of USD 2,000 per month for the services of Mr. G. Saravanan, or another person performing the same role, for engineering services towards development of castings, pattern development, pattern rectification and other engineering assignments.
13. Debit Note No.009 dated 31.12.2007 describes the consideration as “Service Engineer Charges”.
14. The letter dated 29.02.2008 addressed to the Superintendent of Central Excise (Audit), enclosing the activities undertaken under the arrangement and the Debit Note, further corroborates the nature of the engagement. There is no separate charge for inspection and no evidence that Xomox Germany engaged the appellant as an independent inspection or certification agency. The consideration was a monthly amount for the services of an engineer performing the wider assignment.
15. The decision in Commissioner of Central Excise, Mangalore v. SGS India (Pvt.) Ltd., 2010 (17) S.T.R. 92 (Tri.-Bang.), relied upon by the Revenue, is distinguishable on facts. In that case, the Tribunal was concerned with activities having the essential character of inspection, examination and certification of goods, and accordingly considered the service under the category of Technical Inspection and Certification Service. In the present case, however, the contractual and other contemporaneous documents establish a broader engineering assignment comprising drawing-related assistance, development and rectification of castings and patterns, technical clarification, material specifications, quality coordination and dispatch-related technical assistance, with inspection forming only one part of the overall assignment. The ratio of SGS India, therefore, cannot be applied to classify the entire engineering assignment as Technical Inspection and Certification Service merely because certain inspection and quality-related activities were performed in the course of rendering the service.
16. We accordingly find that the services rendered by the appellant throughout the periods in dispute were in the nature of engineering advice, consultancy and technical assistance, and not an independent service of technical inspection and certification. For the period up to 30.06.2012, the services are therefore classifiable as Consulting Engineer Service under Section 65(105)(g) read with Section 65(31) of the Finance Act, 1994. For the period from 01.07.2012 onwards, although the negative-list regime came into force and the statutory framework governing taxation of services underwent a change, the nature of the activity continued to remain the same. The service was accordingly an engineering service rendered to Xomox Germany, and its taxability/export status for the said period has to be determined under the provisions then in force, including Section 66B, Rule 6A of the Service Tax Rules, 1994 and the Place of Provision of Services Rules, 2012. The classification issue is therefore decided in favour of the appellant.
Issue No. (ii): Export, Limitation, Interest and Penalties
17. Having determined the nature of the service, the question whether the same qualified as export has to be examined separately for the different statutory periods, namely April 2009 to 26.02.2010, 27.02.2010 to 30.06.2012 and 01.07.2012 onwards, since the statutory provisions governing export of services underwent material changes during these periods.
27.02.2010 to 30.06.2012
18. The Ld. Counsel has placed particular reliance upon the judgment of the Hon’ble Supreme Court in Commissioner of Service Tax-III, Mumbai v. Vodafone India Ltd., 2025 INSC 914; 2025 (8) TMI 938; (2025) 33 Centax 152 (S.C.). We have examined the said judgment. The Hon’ble Supreme Court considered the successive versions of Rule 3 of the Export of Services Rules, 2005 and the distinction between the different categories of services. The Court noted the legislative changes governing export of services and, in particular, the position after 27.02.2010.
19. The significance of Vodafone, as relied upon by the appellant, is that the requirement that the service should be “provided from India and used outside India” was omitted from Rule 3(2) with effect from 27.02.2010. The Hon’ble Supreme Court examined the statutory scheme governing the export of services after the said amendment and the conditions applicable to the relevant category of services. The decision is therefore relevant while determining whether the Department can rely upon the physical performance of the service in India despite the omission of the aforesaid requirement.
20. In the present case, having held that the services were classifiable as Consulting Engineer Service, the appellant’s contention that the same fell under Rule 3(1)(iii) of the Export of Services Rules, 2005 requires consideration. Xomox Germany was the contractual recipient located outside India and the consideration of USD 2,000 per month was received in convertible foreign exchange. Once the requirement of “provided from India and used outside India” ceased to form part of the applicable statutory test from 27.02.2010, the mere fact that the engineer physically performed certain activities at SFL’s premises cannot, by itself, revive that omitted requirement. We therefore find considerable force in the reliance placed by learned Counsel on Vodafone.
April 2009 to 26.02.2010
21. The position for the period April 2009 to 26.02.2010 requires separate consideration. During this period, Rule 3(2)(a) required the service to be provided from India and used outside India. The contractual engagement was with Xomox Germany; Xomox Germany made the payment in convertible foreign exchange; and the relevant documents describe the assignment as engineering services relating to development of castings, patterns, pattern rectification and related engineering requirements. SFL was not the contractual recipient and did not make payment for the service.
22. The Department has not established from the contractual documents or other material on record that SFL was the recipient or user of the engineering service. On the contrary, the contractual engagement was with Xomox Germany, which made the payment in convertible foreign exchange, and the documents describe the assignment as engineering services undertaken for the foreign customer’s requirements relating to development of castings, patterns, pattern rectification and other engineering matters. SFL was not the contractual recipient and did not make payment for the service. On the material available on record, we therefore find that the Department has not established that the service was used in India so as to deny the appellant the benefit of export treatment.
01.07.2012 onwards — Rule 6A and Place of Provision
23. For the period from 01.07.2012 onwards, Rule 6A of the Service Tax Rules, 1994 governs the determination of export of services. The provider was located in the taxable territory, the recipient was located outside India, the service was not one specified in Section 66D, consideration was received in convertible foreign exchange and there is no dispute that the provider and recipient were not merely establishments of a distinct person. The principal controversy is therefore Rule 6A(1)(d), namely, whether the place of provision of the service was outside India.
24. Rule 3 of the Place of Provision of Services Rules, 2012 is the general rule and provides that the place of provision is the location of the recipient, subject to specified exceptions. Rule 4 is one such exception and applies to services in respect of goods which are required to be made physically available to the service provider, or a person acting on his behalf, in order to provide the service.
25. The statutory test under Rule 4 is therefore not merely whether the goods were physically present at the place where the service provider happened to perform some activity. What has to be established is that physical availability of the goods was necessary for providing the service. In the present case, the relevant documents establish a continuing engineering assignment covering drawing release and correction, technical clarification, development and rectification of castings and patterns, material specifications, PED requirements, quality procedures and dispatch-related technical assistance. The Department has not established that physical availability of the castings was necessary for providing the engineering service as a whole.
26. The fact that some inspection and quality-related activities were carried out at SFL’s premises cannot, therefore, by itself bring the entire engineering assignment within Rule 4. The contractual recipient remained Xomox Germany, the consideration was payable by Xomox Germany and the Debit Note was raised in relation to the foreign customer. SFL was not the recipient of the contracted service. We therefore hold that the specific exception in Rule 4 has not been established and that the general rule under Rule 3 applies, resulting in the place of provision being outside India.
27. Consequently, the services rendered by the appellant during the period from 01.07.2012 to March 2015 satisfy the conditions of Rule 6A and qualify as export of services. The service tax demands of Rs.6,91,329/- for April 2009 to March 2014 and Rs.14,476/- for April 2014 to March 2015 are therefore unsustainable on merits.
Limitation
28. The first Show Cause Notice dated 16.10.2014 covering April 2009 to March 2014 invoked the extended period on the allegation that the appellant had not disclosed the true nature of the services and had wrongly treated the receipts as export. However, the record shows that the Department had raised an audit query in 2008 regarding the applicability of service tax to the amount received from Xomox Germany and that the appellant, by letter dated 29.02.2008, furnished details of the activities undertaken under the arrangement, together with the relevant Debit Note and balance-sheet particulars.
29. The appellant has relied upon Anand Nishikawa Co. Ltd. v. CCE, 2005 (188) E.L.T. 149 (S.C.); Pahwa Chemicals Pvt. Ltd. v. CCE, 2005 (189) E.L.T. 257 (S.C.); and Continental Foundation Joint Venture v. CCE, 2007 (216) E.L.T. 177 (S.C.). We find the principles in Anand Nishikawa, Pahwa Chemicals and Continental Foundation particularly relevant. Extended limitation requires the statutory ingredients of wilful suppression, misstatement or contravention with intent to evade tax and cannot be invoked merely because the Department subsequently takes a different view of the assessee’s tax position.
30. In the present case, the appellant had disclosed the arrangement to the Department in 2008 and had consistently treated the receipts from Xomox Germany as export of services. The essential facts relating to the activity were therefore within departmental knowledge well before issuance of the first Show Cause Notice. There is no material establishing deliberate suppression with intent to evade tax. The extended period is consequently not invocable. The second Show Cause Notice, covering April 2014 to March 2015, was within the normal period; however, that demand independently fails on merits for the reasons already recorded.
Interest and Penalties
31. Interest under Section 75 is consequential upon a legally sustainable service tax liability. Since the substantive demands fail on merits, the consequential interest cannot survive.
32. The penalties imposed under Sections 76 and 78 also cannot survive once the substantive service tax liability itself is held not to arise. As regards Section 77, no independent contravention warranting such penalty has been established on the facts of the present case. The appellant had disclosed the transaction to the Department and had consistently maintained its claim that the receipts represented export of services. The circumstances therefore do not warrant penal consequences.
33. We accordingly hold that the services rendered by the appellant to Xomox Germany qualified as export of services during the periods in dispute. The first demand is also unsustainable to the extent the extended period has been invoked. Consequently, the demands of service tax, interest and penalties are liable to be set aside. Issue No. (ii) is accordingly decided in favour of the appellant.
34. For the reasons recorded above, we hold that the services rendered by the appellant to M/s. Xomox International GmbH & Co., Germany, are classifiable, for the period to which the pre-negative-list classification provisions apply, as Consulting Engineer Service, and qualified as export of services during the periods in dispute. Consequently, the service tax demands of Rs.6,91,329/- and Rs.14,476/-, together with consequential interest and penalties, are unsustainable. We further hold that the invocation of the extended period of limitation in respect of the first demand is not sustainable.
35. Accordingly, the impugned Order-in-Appeal No.27/2016 dated 04.05.2016, and Order-in-Appeal No.57/2016 dated 20.09.2016, are set aside. Thus, the Service Tax Appeal Nos. ST/41517/2016 and ST/42199/2016 are allowed with consequential relief, if any, in accordance with law.
