Case Law Details
Lakshmi Electrical Drives Limited Vs Commissioner of CCE & ST (CESTAT Chennai)
CESTAT Chennai held that service receiver (appellant) not liable to pay service tax invoking provisions of section 66A of the Finance Act under reverse charge mechanism (RCM) as inspection service is performed in India.
Facts- During the course of audit of accounts of the appellant, it was noticed that a payment was made in foreign currency to the Canadian Standards Association operating as M/s. CSA International, Canada for factory certification which is similar to ISO Certification. It appears that services provided by M/s. CSA International, Canada falls under the category of “Technical Inspection and Certification Service” and the assesse is liable for payment of service tax u/s. 66A of the Finance Act, 1994 read with Rule 2(1)(d) of the Service Tax Rules, 1994, under Reverse Charge Mechanism (RCM), as the person who provided the service is located outside India. Consequently a Show Cause Notice dated 15.06.2012 was issued to the appellant which was duly adjudicated demanding appropriate service tax along with interest and also imposing penalties u/s. 77 and 78 of the Act. The period of dispute is from 01.04.2009 to 31.03.2010.
Conclusion- Held that the records clearly reveal that the inspection service got performed in India though the certificate was issued by M/s. CSA International, Canada. As M/s. CSA International, Canada has got its 100% Subsidiary in Bangalore, invoking the provisions of Section 66A of the Finance Act and fastening the tax liability on the appellant on RCM basis is not legally sustainable and as such, we hold that the appellant succeeds on merits.
FULL TEXT OF THE CESTAT CHENNAI ORDER
Briefly stated, the facts in this appeal are that M/s. Lakshmi Electrical Drives Limited, Coimbatore (M/s. LEDL in short) are engaged in the manufacture of electrical motors. They have registered for payment of Service Tax under the categories of “Transport of Goods by Road and Maintenance of Repair Services”. During the course of audit of accounts of the appellant, it was noticed that a payment was made in foreign currency to the Canadian Standards Association operating as M/s. CSA International, Canada for factory certification which is similar to ISO Certification. It appears that services provided by M/s. CSA International, Canada falls under the category of “Technical Inspection and Certification Service” and the assesse is liable for payment of service tax under Section 66A of the Finance Act, 1994 read with Rule 2(1)(d) of the Service Tax Rules, 1994, under Reverse Charge Mechanism (RCM in short), as the person who provided the service is located outside India. Consequently a Show Cause Notice dated 15.06.2012 was issued to the appellant which was duly adjudicated demanding appropriate service tax along with interest and also imposing penalties under Sections 77 and 78 of the Act. The period of dispute is from 01.04.2009 to 31.03.2010.
2.1 Learned Chartered Accountant representing the appellant has argued that M/s. CSA International, Canada, provided the Technical and Inspection service along with its 100% subsidiary M/s. CSA Private Limited, Bangalore, who are also holding service tax registration number. According to them they had no direct contact with M/s. CSA International, Canada and they have approached the Subsidiary Company in India only to get Canadian Standards Association Certificate from M/s. CSA International, Canada. Based on the Technical Inspection of the factory of the appellant and finding Report of the Subsidiary Company in India, the above CSA Certificate was issued to the appellant. The total service charges for issuing the certificate were remitted by the appellant to the holding company in foreign currency. It has been put forth that without various liaison works rendered by 100% subsidiary company in India, M/s. CSA International, Canada could not have completed the service of “Technical and Inspection Certification”.
2.2 It has been further submitted that the foreign entity had business establishment in India at Bangalore which was accepted by the lower appellate authorities and as there is a relationship of the holding company with 100% Subsidiary Company, the decision of the Hon’ble Apex court in the case of State of UP Vs. Renusagar Power Co. AIR 1988 SC 1737 has been relied on. In terms of Taxation of Services (Provided from outside India and received in India) Rules 2006, if service is partially rendered in India is also service performed in India and there is no ground for invocation of larger period as their case could not come under any of the situations described under the proviso to Section 73 of Chapter V of the Finance Act, 1994, as there is not a case of fraud, not a case of collusion, not a case of wilful mis-statement, not a case of suppression of facts and the appellant had not contravened any of the provisions of the Service Tax Act with an intent to evade payment of tax.
2.3 As per Section 66A of Finance Act, 1994, service recipient is liable for payment of service tax in certain situations. It was put forth that the provisions of 66A are not applicable if the services are performed in India by the service provider. Technical Inspection service was performed by M/s. CSA Private Ltd., Bangalore and only Certificate issue was performed by M/s. CSA International, Canada. As such, it was argued that RCM liability cannot be fastened on to the appellant under 66A of the Finance Act, 1994, as in the SCN and the orders of the lower adjudicating authority findings are there, that M/s. CSA International, Canada, is carrying out their business through a branch in India at Bangalore.
3. Learned AR Shri M. Ambe representing the Revenue has argued that the service of Technical Inspection and Certification was rendered by M/s. CSA International, Canada to whom the payment was made by the appellant and as such, the appellant is required to pay the service tax under RCM under 66A of the Finance Act, 1994. He has drawn our attention to the provisions of Section 68(2) read with 66A of the Finance Act, 1994, in respect of certain categories of service where the service receivers were made liable to pay tax as against the service provider on the amount paid by them to the Foreign Service provider. He has argued that the appellant has not produced any records to show that they had received the services from Bangalore establishment and all the invoices pertaining to the receipt of service were issued by M/s. CSA International, Canada, whose establishment is in a foreign country. A particular reference has been made to the second proviso to Section 66A (1) which reads as under:-
“Where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided”.
He has submitted that as invoices were raised and payment was made directly to M/s. CSA International, Canada, the appellant is required to pay service tax under RCM.
4.1 We have heard both sides. The main issue that is to be decided in this appeal is whether the appellant is liable or not for payment of service tax under Section 66A of the Finance Act, 1994 under Reverse Charge Mechanism. For ease of reference, relevant statutory provisions are extracted below:-
“66A- Charge of Service Tax on services received from outside India
(1) Where any service specified in clause (105) of Section 65 is,-
(a) Provided or to be provided by a person who has established a business of has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and
(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence in India, such service shall, for the purposes of this section, be the taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply:
Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:
Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.
(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.
Explanation 1.—A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.
Explanation 2.—Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted.]”
Provisions of Section 68 (2) of the Finance Act, 1994 reads as under:-
“Payment of service tax
(1) Every person providing taxable service to any person shall pay service tax at the rate specified in Section (66N) in such manner and within such period as may be prescribed.
(2) Notwithstanding anything contained in sub-section (1), in respect of [such taxable services as may be notified] by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section [66B] and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service:”
4.2 For ease of reference relevant Notification No. 36/2004-S.T dated 31.12.2004 and its subsequent amendments are extracted below for ready reference.
a) Service Tax payment in relation to specified services
“In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 (32 of 1994), the Central Government hereby notifies the following taxable services for the purposes of the said subsection, namely:-
(A) the services,-
(i) in relation to a telephone connection or pager or a communication through telegraph or telex or a facsimile communication or a leased circuit;
(ii) in relation to general insurance business;
(iii) in relation to insurance auxiliary service by an insurance agent; and
(iv) in relation to transport of goods by road in a goods carriage, where the consignor or consignee of goods is,-
…………………..
…………………….
(B) any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India.
2. This notification shall come into force on the first day of January, 2005.”
[Notification No. 36/2004-ST., dated 31.12.2004]
b) Service tax liability when on person other than service providers-Amendment to the above Notification No. 36/2004 -ST dated 31.12.2004 reads as under:-
In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 (32 of 1994), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby makes the following further amendments in notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 36/2004-Service Tax, dated the 31st December, 2004 which was published in the Gazette of India, Extraordinary, vide number G.S.R. 849 (E), dated the 31st December, 2004, namely:-
In the said notification,-
(i) in paragraph (A), in sub-paragraph (iv), in item (b), for the words “established by or under”, the words “formed or registered under” shall be substituted;
(ii) for paragraph (B), the following paragraph shall be substituted, namely:-
“any taxable service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service provider does not have any office in India.”.
2. This notification shall come into force on the 16th day of June, 2005.
[Notification No. 24/2005-ST., dated 07.06.2005]
c) Services provided from country other than India – Tax liability- Amendment to Notification No. 36/2004 -ST dated 31.12.2004
In exercise of the powers conferred by sub-section (2) of section 68 of the Finance Act, 1994 (32 of 1994), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby makes the following further amendments in the notification of the Government of India in the Ministry of Finance (Department of Revenue) Notification No. 36/2004 -ST dated 31.12.2004, G.S.R. 849 (E), dated the 31st December, 2004, namely:-
In the said notification, for paragraph (B), the following paragraph shall be substituted, namely:-
“(B) any taxable service provided or to be provided from a country other than India and received in India, under Section 66A of the Finance Act, 1994.”
[Notification No. 9/2006-S.T dated 19.04.2006]
A perusal of the provisions of Section 66A of the Finance Act, 1994, reveal that the service recipient is held accountable for payment of service tax when the services are received from a Foreign Service Provider whose usual place of residence or whose permanent address is located other than in India. Explanation-1 to this Section clearly says that a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country. In this appeal, facts clearly indicate that M/s. CSA International, Canada has its 100% Subsidiary viz. M/s. CSA Private Limited, Bangalore, who is registered with Service Tax R.C. No, AABCC2605FST001.
4.3 In terms of Notification No. 36/2004 -ST dated 31.12.2004 issued under Section 68 (2) of the Finance Act, 1994, payment of service tax in relation to specified services stated originally that any taxable service provided by a person who is a non-resident or is from outside India does not have any office in India. By amendment Notification No. 25/2005-ST dated 07.06.2005, para (B) was substituted as follows:-
“(B) any taxable service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service provider does not have any office in India.”
This was further amended by Notification No. 9/2006-ST dated 19.04.2006, which reads as under:-
“(B) any taxable service provided or to be provided from a country other than India and received in India, under Section 66A of the Finance Act, 1994.”
The main condition that has to be satisfied is the service provider who has established a business from where the service is provided has his permanent address in a country other than India. Such service has to be received by a person who is the service recipient who has his usual place of business or fixed establishment or permanent address in India. It is on record that the service provider in the case of M/s. CSA International, Canada, has got its subsidiary company operating in India from Bangalore. The appellant has argued that they have received the services both from their 100% subsidiary M/s. CSA Private Limited, Bangalore and also Certification from CSA International, Canada. As an evidence they submitted factory inspection reports which are signed by CSA representatives from the CSA subsidiary Company in India. One of the copies of the Factory Inspection Report is extracted below for ready reference.
The above factory Inspection report clearly indicates that the inspection of the appellant’s factory was carried out by CSA representative from their subsidiary office located in India. As per Rule 3 of the Taxation of Services (Provided from outside India and received in India) Rules 2006, Ist proviso reads as under:-
“Provided that where such taxable service is partly performed in India, it shall be treated as performed in India and the value of such taxable service shall be determined under Section 67 of the Act and the rules made thereunder.”
From the above facts, we find that the service of Technical Inspection and Certificate was definitely provided in the country and as such to be treated as service performed in India.
4.4 There are contradictory findings in the Order-in-Original dated 12.02.2013 issued by the lower adjudicating authority. The period of dispute in this appeal is from 01.04.2009 to 31.03.2010. The original adjudicating authority in his order, noted at para- 4 mentioned as given below:-
“4. In this case, since the person who was providing the service is located outside India and does not have any office in India, the liability to pay service tax under the “Technical Inspection & Certification Service” is on “M/s. LEDL” being the recipient of service.”
At the same time, in his findings at para-20 and 21, it was mentioned as under:-
“20. It may be a fact that the service provider (Canadian Establishment) has an establishment in Bangalore as per extract copy of the Ministry of Corporate Affairs provided by them during the personal hearing. But no records were brought forth by “M/s. LEDL” to show that they had received such services from the Bangalore establishment. All the invoices pertaining to the receipt of services had been duty issued by the service provider viz. M/s. CSA International, Canada, whose establishment (Canadian Establishment) is found in Foreign Country.
21. In terms of second proviso to Section 66A (1) (b), which reads as “where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided”. It is observed that M/s. LEDL is liable to pay the service tax for the services received by them in as much as they had no direct connection with Bangalore establishment (i.e. M/s. CSA India Private Ltd., Bangalore) whereas the direct connection with M/s. CSA International, Canada is quite obvious from records.”
The lower appellate authority made contrary observations that the Foreign Service provider did not have any office in India. Whereas in his findings, he has fastened liability to pay service tax on the appellant basing on the fact that the services received by the appellant had no direct connection with the Bangalore establishment and had direct connection only with M/s. CSA International, Canada, which is factually incorrect.
4.5 At the relevant time there was no condition attached for RCM that the Foreign Service Provider should not have an office in India. Whereas, the appellant relies on the Explanation-1 to Section 66A to drive his point that RCM cannot be made applicable to him as M/s. CSA International, Canada is having its 100% Subsidiary Branch Office operating as M/s. CSA Private Ltd., at Bangalore. Whereas, the revenue relies on sub-section-2 of Section 66A, to fasten the tax liability on the appellant which states that where a person is carrying on a business through a permanent establishment in India and through a permanent establishment other than India, such permanent establishment shall be treated as separate persons. However, the records clearly reveal that the inspection service got performed in India though the certificate was issued by M/s. CSA International, Canada. As M/s. CSA International, Canada has got its 100% Subsidiary in Bangalore, invoking the provisions of Section 66A of the Finance Act and fastening the tax liability on the appellant on RCM basis is not legally sustainable and as such, we hold that the appellant succeeds on merits. As such, other issues like invoking extended period and imposition of penalties are not discussed.
5. In view of the above discussions, the impugned order is set aside and the appeal is allowed with consequential relief, if any, as per law.
(Order pronounced in the Open Court on 13.04.2023)
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