Kiran Gems Pvt Ltd Vs C.C.E. & S.T. (CESTAT Ahmedabad)
CESTAT Ahmedabad held that when a permanent establishment of the foreign service provider exists in India the recipient of service in India cannot be made liable to pay service tax under reverse charge mechanism.
Facts- The Appellants are engaged in the business of importing rough diamonds and exporting them only after cutting and polishing for which they require diamond processing machines that run on a specific type of software – HASP. All activities including marketing & promotion, being the sole point of interaction, placing order, raising of invoice, advancing of payments, installation, repairs and maintenance and training of employees in furtherance of setting up of these machines for use are conducted by Sarin Technologies India Pvt. Ltd. which is a wholly owned subsidiary company of Sarin, Israel. That Sarin Israel and Galatea Ltd. are foreign companies incorporated under the laws of Israel and the latter is also a wholly owned subsidiary company of Sarin Israel.
The Appellants alleges the impugned order of Commissioner (Appeals), vide which it is held that the Appellants are liable to pay Service Tax under Reverse charge mechanism in terms of Section 68 (2) of the Finance Act, 1994 read with Rule 2(1) (d) of Service Tax Rules, 1994 on the services received from foreign country.
Conclusion- Held that the Appellants had received goods from a foreign country and services in its extension from service provider in India through the said foreign company’s Branch office at that time one of which is located in India thereby sufficiently establishing that they have a permanent establishment hence the Appellants cannot be fastened with the liability of service tax for being a recipient of service under section 68(2) of the Finance Act read with rules 2(1)(d) as a ‘deemed service provider’ in India.
Held that under the purview of Section 66A of the Finance Act,1994 when a permanent establishment of the foreign service provider exists in India the recipient of service in India cannot be made liable to pay service tax under reverse charge mechanism.
FULL TEXT OF THE CESTAT AHMEDABAD ORDER
The common issue involved in all these appeals, hence all the appeals are taken together for disposal.
1. The brief facts of the case are that the Appellants are engaged in the export of cut and polished Diamonds. In the impugned order the Learned Commissioner (Appeals) upheld that the Appellants are liable to pay Service Tax under Reverse charge mechanism in terms of Section 68 (2) of the Finance Act, 1994 read with Rule 2(1) (d) of Service Tax Rules, 1994 on the services received from foreign country.
1.2 The following two issues are involved in the present appeals:-
(i) Whether the Appellants as a recipient of service are liable to pay service tax under reverse charge mechanism when the foreign service provider has supplied services to the Appellants through the service provider’s Indian subsidiary and such subsidiary is therefore treated as having establishment in India under Section 66A (Explanation 1) of the Finance Act 1994.
(ii) Whether the extended period of limitation has been rightly invoked for issuance of show cause notice.
2. Shri J. C. Patel, Shri Hardik Modh and Shri Amit Laddha, Learned Counsels appearing on behalf on the Appellants submits that the Appellants are engaged in the business of importing rough diamonds and exporting them only after cutting and polishing for which they require diamond processing machines that run on a specific type of software – HASP. He further submits that all activities including marketing & promotion, being the sole point of interaction, placing order, raising of invoice, advancing of payments, installation, repairs and maintenance and training of employees in furtherance of setting up of these machines for use are conducted by none other than Sarin Technologies India Pvt. Ltd. which is a wholly owned subsidiary company of Sarin, Israel. That Sarin Israel and Galatea Ltd. are foreign companies incorporated under the laws of Israel and the latter is also a wholly owned subsidiary company of Sarin Israel.
2.2 Without any prejudice to above he submits that Galatea Ltd. has a permanent establishment in India which is evidenced by the fact that they are holding a PAN in India viz AADCG8396D. He further submits that all companies of the said Sarin Group are working under common management and that fixed – assets and all other major consumable required for installation of software and conducting all the core activities are provided by Sarin and Galatea Israel to Sarin India and that he takes the support of the audit report of Sarin India to establish that Sarin Israel is the holding company upon reflection of the terms “where control exists”. He takes the support of the case of Customs and Excise Commissioners vs DFDS 1997 (1) WLR 1037 wherein it was held that subsidiary or auxiliary company is a part of the parent and when an agreement exists between parent company and the subsidiary company, the subsidiary company will have no effective independence from the parent in conduct of the business.
2.3 He further submits that from the legal structure, rendering of different services and audit report of Sarin India it can be established that Sarin Israel has been providing services to the Appellants in India through their permanent establishment functioning under Sarin Technologies India Pvt. Ltd and therefore by applicability of Section 66A of the Finance Act, the Appellants shall be discharged of the demand raised against them for recovery of Service Tax. He has relied upon Circular B1/6/2005 – TRU dated 27.07.2005 in support of the same.
2.4 As regards to the second issue, he submits that the Department was unable to adduce evidence in support of their claim to invoke section 73 that could establish that the Appellants had malafide intentions to evade their duty of paying tax thereby not fulfilling basic conditions required under the said provision before applying it. That a mere omission would not constitute suppression of facts when under given circumstances the Appellants were under bonafide belief that there was no liability to pay Service Tax. He has placed reliance on the following judgments in support of their claim: –
