CESTAT, MUMBAI BENCH
Life Care Medical Systems
Commissioner of Service Tax, Mumbai-II
ORDER NO. S/772/2012/CSTB/C.I.
APPLICATION NO. ST/STAY-285/2012
APPEAL NO. ST/69/2012
JUNE 21, 2012
P.R. Chandrasekharan, Technical Member
The appeal and the stay application are directed against the Order-in-Original No. 15/ST-II/WLH/2011 dated 21/11/2011 passed by the Commissioner of Service Tax, Mumbai-II. The stay application is taken up for consideration.
2. M/s. Life Care Medical Systems (‘Life Care’ for short), Mumbai are the exclusive distributors of various medical equipments manufactured by M/s. VIASYS International Corporation, Pennsylvania, USA. Intelligence received by the DGCEI, Mumbai unit, indicated that the appellant Life Care was engaged in promoting, marketing and distributing, the various medical equipment manufactured by VIASYS, in India, for which they are receiving commission. The said service of promotion and marketing appeared to be liable to service tax under the category of ‘Business Auxilliary Services’ w.e.f. 01/07/2003 under the provisions of Chapter V of the Finance Act, 1994. It was also noticed that the appellant has not been discharging any service tax on the said service rendered by it to M/s. VIASYS. After going through the various provisions of the agreement entered into by the appellant with VIASYS and also recording the statements of the officials of the appellant, a show cause notice dated 01/09/2008 was issued classifying the service rendered by the appellant M/s. Life Care to M/s. VIASYS as ‘Business Auxilliary Services’ under the provisions of Section 65(19), read with Section 65(105)(zzb) of the Finance Act,1994 and demanding service amount of Rs. 55,21,954/- for the period from 01/07/2003 to 19/11/2003, 18/03/2005 to 02/03/2006, 02/05/2006 to 25/04/2007 and 30/07/2007 to 05/12/2007. Interest on the said amount was also demanded. It was also proposed to impose penalty on the appellant under Sections 76, 77 and 78 of the Finance Act, 1994 and also to deny benefit of exemption Notification No. 13/2003 dated 20/06/2003 and under the Export of Service Rules, 2005. The said notice was adjudicated vide the impugned order and the demand for service tax was confirmed along with interest thereon under the provisions of Sections 73 and 75 of the said Finance Act, 1994 respectively. Penalty of Rs. 20,000/- was imposed under Section 77 and a penalty equivalent to service tax demanded was imposed under Section 78 of the Finance Act, 1994. Hence the appellant are before us.
3. The learned advocate for the appellant makes the following submissions.
3.1 ‘Business Auxilliary Service’ was brought into the service tax net w.e.f. 01/07/2003. As per Notification No. 6/99-ST, dated 09/04/1999 which was in force up to 01/03/2003 no service tax is payable if payment for the service rendered is received in convertible foreign exchange. This Notification was rescinded w.e.f. 01/03/2003. Subsequently, Notification No. 21/2003-ST, dated 20/11/2003 was issued providing for similar exemption which was in force up to 15/03/2005 till it was rescinded by Notification No. 10/2005-ST dated 03/03/2005. W.e.f. 15/03/2005, Export of Service Rules, 2005 was enacted, which provides for definition of ‘export of service’ and exemption from payment of service tax in respect of such exports subject to certain conditions. For the purpose of export of services, they have been categorized into three categories, namely (1) services provided in relation to any immovable property which is situated outside India [Rule 3(1) (i)]; (2) services provided where the place of performance is outside India [Rule 3(1) (ii)]; and (3) services other those specified in category (1) and (2) above, received by a person outside India [Rule 3(1) (iii)].
3.2 Services specified in Rule 3(1) (iii) may be provided either in relation to business or commerce or other than in relation to business or commerce. If such services are provided in relation to business or commerce, they should be provided to a recipient of services who is located outside India. If such services are provided other than in relation to business or commerce, they should be provided to recipient who is located outside India at the time of receipt of service and such services should be used outside India. It has been clarified in Board’s Circular No. 111/5/2009-ST, dated 24/02/2009 that in respect of services that fall under category (3) [Rule 3(1)(iii)], the relevant factor is the location of service receiver and not the place of performance. In this context the phrase used ‘outside India’ has to be interpreted to mean that the benefit of service should accrue outside India. Thus, for category (3) service, it is possible that the export of service may take place even when all the relevant activities take place in India so long as the benefit of these services accrue outside India. Since the services rendered by the appellant falls under category (3) and the recipient of the service is M/s. VIASYS, who is located outside India, the services rendered by the appellant amounts to export of services as defined in Export of service Rules, 2005 and, therefore, they are not liable to pay any service tax during the impugned period. As regards the demand of service tax for the period from 01/07/2003 to 19/11/2003 it has been clarified in Board’s Circular No. 56/5/2003, dated 25/04/2003 that “Service tax is a destination based consumption tax and it is not applicable on export of services. Export of services would continue to remain tax free even after withdrawal of Notification No. 6/99-ST, dated 09/04/1999.”
3.3 In view of the above, the activities undertaken by the appellant are not liable to service tax and accordingly he pleads for grant of waiver of pre-deposit of the dues adjudged against the appellant during the pendency of the appeal.
3.4 The learned advocate also relies on the judgment of this Tribunal in the case of Em Jay Engineers v. CCE [Order No. A/217/2010/SIB/CHIVE, dated 26-5-2010]; Lenovo (India) (P.) Ltd. v. CCE  21 STT 134 (Bang. – CESTAT) and SGS India (P.) Ltd. v. CST  31 STT 206 in support of his contentions.
3.5 The learned advocate also submits that the demand is barred by limitation of time as extended period has been invoked to demand service tax.
4. The learned Additional Commissioner (AR) appearing for the Revenue, on the other contends that the services relating to promotion/marketing of the medical equipment of the foreign supplier has been done in India and, therefore, it has to be presumed that the services are is used in India. The Export of Service Rules clearly stipulate that the provision of any taxable services ought to be treated as export of services only when the following conditions are satisfied, namely, (a) such services are provided from India and used outside India; and (b) payment for such services is received by the service provider in convertible foreign exchange. Inasmuch as the service has been rendered in India and used for the development of business in India, the condition relating to use outside India is not satisfied and, therefore, the activity of the appellant cannot be considered as ‘export of services’ under the Export of Services Rules, 2005 as amended, and, therefore, he pleads for putting the appellant to terms.
5. We have carefully considered the rival submissions.
6. There is no dispute about the classification of service under “Business Auxiliary Services” in this case. The only issue for consideration is whether the services rendered by the appellant to the foreign service recipient is ‘export of service’ during the impugned periods which is from 01/07/2003 to 19/11/2003 and from 18/03/2005 to 05/12/2007.
7. We have perused the International Distribution Agreement entered into by the appellant with M/s. VIASYS International Corporation, Pennsylvania, USA. As per the said agreement, the appellant was required to render the following services in the states of Gujarat, Madhya Pradesh, Maharashtra, Goa and Chattisgarh in the Republic of India, namely,-
1. to purchase at least the minimum USD amount specified in the said agreement
2. to use its best efforts to promote and sell the products in the territory allocated which shall be in addition to the minimum purchase requirements;
3. to demonstrate the products to the prospective customers and also install such products at the customers’ locations and to provide training to the customers for the proper use of such products;
4. to provide its customers with warranties in a prompt and thorough manner and to respond to warranty requests within 24 hours of its initial receipt.
5. to promptly and completely translate all user and technical manuals as well as such advertising and marketing materials as the foreign manufacturer may from time-to-time provide for use in the country for promotion of the products within the territory.
From the terms and conditions of the agreement, it is evident that the appellant was undertaking promotion and marketing of the goods manufactured by the foreign manufacturer, M/s. VIASYS International Corporation and also installation services, warranty services, advertising services etc. for the foreign principal. These services can be rendered by the appellant only within the territorial jurisdiction assigned which is in India and by the very nature of the services rendered, it is clear that the services were used within the territory of India.
8. Prior to 01/07/2003, Notification No.6/99-ST, dated 28/02/1999 exempted services provided to any person in respect of which payment is received in Indian in convertible foreign exchange. The said notification was rescinded and subsequently re-issued vide Notification No. 21/2003-ST, dated 20/11/2003 and this Notification remained in force till 14/03/2005. During the intervening period i.e. from 01/03/2003 to 19/11/2003, the Board clarified vide Circular dated 25/04/2003 that “Service tax is a destination based consumption tax and it is not applicable on export of services. Export of services would continue to remain tax free even after withdrawal of Notification No. 6/99, dated 09/04/1999.” In the light of this clarification issued by the Board, the assessee has a prima facie, case for waiver of pre-deposit of dues adjudged for the period 01/07/2003 to 19/11/2003.
9. With regard to the period from 15/03/2005 onwards, we have to see whether the transaction undertaken by the assessee comes within scope of Export of Service Rules, 2005. During this period, under the Rules provided that a taxable service shall be treated as ‘export of service’ only if such service so ordered is delivered outside India and used in business outside India. In the instant case, the service of promotion of marketing of goods manufactured by the supplier has taken place in India and the said service is for the purpose promoting the business of the foreign manufacturer in India. Therefore, it cannot be said that the service has been delivered outside India and used in business outside India; therefore, the activity does not come within the scope of export of service during the period from 15/03/2005 to 18/04/2006.
9.1 As regards the period from 19/04/2006 to 28/03/2007, the Rules provided that any taxable service shall be treated as ‘export of service’ when the following conditions are satisfied, namely, (a) such service is delivered outside India and used outside India and payment for such service provided outside India is received by the service provider in convertible foreign exchange. In the instant case, though the condition of receipt of payment in convertible foreign exchange is satisfied, the conditions relating to delivery of service outside India and the use of the service outside India are not satisfied because the promotional activity undertaken by the service provider is in India and it can be used only in promoting the business in India. Therefore, the use of service is not outside India. The same position will prevail during the period up to 30/05/2007. Even for the period from 01/06/2007 onwards, the condition relating to service be provided from India and used outside India is not satisfied. Therefore, the demand of service tax for the period 18/03/2005 to 05/12/2007 appears to be prima facie correct in law.
10. The appellant has relied upon a few decisions of this Tribunal. In the case of Em Jay Engineers and Lenovo (India) (P.) Ltd. (cited supra), the issue pertained to liability to service tax on the commission received for procuring orders in India and forwarding the same to their principals abroad. In that context, it was held that procurement of orders and forwarding the same to their principals abroad amount to delivery of service outside India and therefore, satisfies the definition of ‘export of service’ and, hence, no service tax is leviable. As regards SGS India (P.) Ltd. (cited supra) the issue pertained to the period from 01/07/2003 to 19/11/2003 and based on the CBEC Circular cited above, relief was granted. In the instant case also, we have already granted benefit of CBEC circular for the period 01/07/2003 to 19/11/2003. As far as the demand for the period thereafter, there is no delivery of service abroad in the instant case. When the appellant is undertaking the promotional activities by way of demonstration and installation of the foreign manufacturer’s product in India and trains the customers in India for its use, there is no delivery outside India. Similarly when warranty services are undertaken, the usage of the service is in India. So is the case when advertising the product in India is done. Thus the facts involved in the present case before us are substantially different and therefore, the ratio of the above cited judgment can not be adopted.
11. As regards the appellant’s reliance of the Board’s circular issued in 2009, the Board has clarified the matter further vide circular No. 141/10/2011-TRU dated 13-5-2011. The relevant portions of the said circular are extracted herein below:-
“Circular No. 111/05/2009-ST was issued on 24th February, 2009 on the applicability of the provisions of Export of Service Rules, 2005 in certain situations. It had clarified on the expression “used outside India” in Rule 3(2)(a) of the Export of Service Tax Rules, 2005 as prevalent at that time……In the context of the stated circular an issue has been raised, whether for the period prior to 28-2-2010 the requirement that the service should be “used outside India” invariably means the location of the recipient?
2. In the stated circular it was interalia clarified that the words “used outside India” should be interpreted to mean that “the benefit of the service should accrue outside India”. It is well known that services, being largely intangibles, are capable of being paid from one place and actually used at another place. Such arrangements commonly exist where the services are procured centrally e.g. audit, advertisement, consultancy, business auxiliary services. For example, it is possible to obtain a consultancy report from a service provider in India which may be used either at the location of the customer or in any other place outside India. In a situation where the consultancy, though paid by a client located outside India, is actually used in respect of a project or an activity in India, the service can not be said to be used outside India.
3. It may be noted that the words “Accrual of benefit” are not restricted to mere impact on the bottom-line of the person who pays for the service. If that were the intention it would render the requirement of services being used outside India during period prior to 28-2-2010 infructuous. These words should be given a harmonious interpretation keeping in view that during the period upto 27-2-2010 the explicit condition was provided in the rule that the service should be used outside India. In other words these words may be interpreted in the context where the effective use and enjoyment of the service has been obtained. The effective use and enjoyment of the service will of course depend on the nature of the service. For example effective use of advertising services shall be the place where the advertising material is disseminated to the audience though actually the benefit may finally accrue to the buyer who is located at another place.This however, should not apply to services which are merely performed from India and where the accrual of benefit and their use outside India are not in conflict with each other. . . In order to establish that the services have not been used outside India, the facts available should interalia clearly indicate that only the payment has been received from abroad and the services have been used in India “
The above clarification makes it very clear that to be considered as “used outside India”, the effective use and enjoyment should be outside India. In the case of promotion/marketing of goods/services in India, which promotes the business in India of the client (who is located outside India), can it be said that the effective use and enjoyment is outside India. In our considered view, such an interpretation would be totally irrational and illogical.
12. The hon’ble apex court in the case of All India Federation of Tax Practitioners v. Union of India  10 STT 166 (SC) considered the nature of levy of service tax and elucidated the concept as follows:-
“6. At this stage, we may refer to the concept of “Value Added Tax (VAT), which is a general tax that applies, in principle, to all commercial activities involving production of goods and provision of services. VAT is a consumption tax as it is borne by the consumer.
7. In the light of what is stated above, it is clear that Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would logically, be leviable only on services provided within the country. Service tax is a value added tax.
8. As stated above, service tax is VAT. Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of services. Therefore, for our understanding broadly “services” fall into two categories, namely, property based services and performance based services. Property based services cover service providers such as architects, interior designers, real estate agents, construction services, mandapwalas, etc. Performance based service are services provided by service providers like stock brokers, practicing chartered accountants, practicing cost accountants, security agencies, tour operators, event managers, travel agents etc.’
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11. At this stage, we may state that the above discussion shows that what was the economic concept, that there is no distinction between consumption of goods and consumption of services is translated into a legal principle of taxation by the aforesaid Finance Acts of 1994 and 1998.”
The above elucidation of the economic concept of service tax by the hon’ble apex court makes it abundantly clear that to make the service activity leviable to tax, the services should be rendered in India. In the instant case, the service rendered is promotion/marketing of the goods of the client in India by rendering various services such as demonstration, installation, after sales warranty and advertising services for which the appellant received a consideration. These activities are rendered in India and their effective use and enjoyment are in India and therefore, the benefit of the services rendered also accrue in India and hence leviable to service tax.
13. The Export of Service Rules owes it origin to General Agreement on Trade and Tariff. In the 8th round of the GATT (Uruguay Round), negotiations were carried out in the area of services which led to the General Agreement on Trade in Services (GATS) to which India is a signatory. This Agreement recognized four modes of delivery of services in the case of exports. These are –
1. Cross Border – The service itself crosses the border
2. Consumption Abroad – The consumer travels across the border
3. Commercial Presence – Establishment of an office or industry
4. Movement of Natural Persons – The service supplier travels across the border.
The principles can be diagrammatically represented as follows:-
Thus only when the user and the use of the service are located outside India, the transaction amounts to export and not otherwise. In the case under consideration, the user is outside India but the use of the service is in India – situation 2 of the above table. In this situation, the transaction does not amount to export and hence taxable in India.
14. In the case of Microsoft Corporation (India) (P.) Ltd. v. CST  22 STT 201 (New Delhi – CESTAT) this Tribunal held that when a service is provided in India and the same is consumed without reverting back to the foreign principals for consumption abroad, the ultimate outcome of service is exhausted in India and there is no export of services inasmuch as the benefit of service terminated in India without travelling abroad. In such a situation, merely because the service recipient is situated abroad, it cannot be said that services has been used outside India. This order was passed in the context of ‘business auxiliary service’ which is also the issue before us. This decision of the Tribunal was upheld by the hon’ble High Court of Delhi in the same case Microsoft Corporation (India) (P.) Ltd. v. CST  23 STT 400 (Delhi). Even though the above judgments were was passed in the context of a stay application, since we are also considering the stay application at present, the ratio can be applied.
15. The appellants have contended that the demands are barred by limitation of time in as much as the show cause notices have been issued by invoking the extended period of time. It is their contention that they have not suppressed any facts from the department and have claimed the benefit of bonafide belief and have relied on a few judgments in support of this contention. In the case of Interscape v. CCE 2006 (198) ELT 275 (Trib. – Mum.), it was held that “bonafide belief is not blind belief and a belief can be said to be bonafide only when it is formed after all the reasonable considerations are taken into account”. The agreement itself contains a clause relating to “Responsibility for Taxes and Duties” which reads as follows:-
“All taxes, now or hereafter with respect to the transaction contemplated hereunder (including value added taxes, sales and use taxes, customs and excise taxes or duties and other similar taxes or duties, but excluding income taxes or other taxes imposed upon Manufacturer and measured by the gross or net income of Manufacturer shall be the responsibility of Distributor, and if paid, or required to be paid by Manufacturer, the amount thereof shall be added to and become part of the amounts payable by Distributor hereunder.”
The above clause in the agreement itself should have alerted the appellant about their tax liability and they should have taken appropriate steps to ascertain their liability either from the department or from experts on the subject. Further it is on record that the appellant is registered with the Service Tax Department for other services such as maintenance and repair and installation during the relevant period. Therefore, it can not be said that they were ignorant of the provisions of law relating to service tax. The appellant failed to obtain service tax registration under business auxiliary service, failed to pay service tax and also failed to file statutory returns for the said services. They did not disclose to the department about the existence of the agreement with VIASYS and receipt of consideration towards the service rendered. These acts of the appellant clearly constitute suppression of facts on their part, thereby attracting the invocation of extended period of time for demand of service tax.
16. The appellant has not brought on record any evidence as to any financial hardship nor made nay plea to the said effect in their submissions before us. The Hon’ble High Court of Andhra Pradesh in the case of SQL Star International Ltd. v. Commissioner of Customs [2012 (276) ELT 465 (AP)] held that prima facie case, balance of convenience and irreparable loss of revenue has to be considered while considering application for stay. Stay cannot be granted merely on prima facie case being shown and balance of convenience must be clearly in favour of making of interim order, and there should not be the slightest likelihood of prejudice to interest of public revenue. In the present case, apart from the fact that no prima facie case has been shown, the balance of convenience lies clearly in favour of revenue. This Tribunal, being creature of statute, cannot ignore the statutory guidance while exercising the powers of interim stay.
17. Therefore, we are prima facie of the view that the appellant has not made out a case for complete waiver of the pre-deposit of the dues adjudged. The demand for the period from 18-3-2005 to 5-12-2007 works out to slightly more than Rs. 50 lakhs. Accordingly, we direct the appellant to make a pre-deposit of Rs. 25 lakhs (Rupees Twenty Five lakhs only) within a period of eight weeks and report compliance on 10-9-2012. On such compliance, pre-deposit of balance amount of dues adjudged shall stand waived and recovery thereof stayed during the pendency of the appeal.