No dispute can be raised on Export of Services Contractual Relationship Governs Taxability, and Not Location of Beneficiaries in India

The Hon’ble Supreme Court in the case of COMMISSIONER OF SERVICE TAX III MUMBAI Versus M/s VODAFONE INDIA LTD - 2021 (10) TMI 1286 - Supreme Court held that the services provided by the Respondents [Assessees (Taxpayers)] were rightly held to be exported outside India and hence not liable to service tax under the Export of Service Rules, 2005, as the twin conditions of recipient location outside India and receipt of payment in convertible foreign exchange were satisfied.

Facts:

Commissioner of Service Tax-III, Mumbai (“the Appellant”) aggrieved by various orders passed by the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”) filed these Civil Appeals against M/s Vodafone India Limited and others (“the Respondents”).

The CESTAT had ruled in favor of the Respondents, holding that the services provided were exported outside India as per Rule 4 of the Export of Service Rules, 2005. The Respondents had also rightly availed CENVAT credit on inputs and input services used for providing such services.

The period under consideration ranged from 2003 to 2014 during which various amendments were made to the law governing taxability of export of services.

The Respondents rendered services classified mainly under Category II (performance-based services) and Category III (services provided to customers outside India) of Rule 3 of the Export of Service Rules, 2005. It was undisputed that the contractual customers of the Respondents were located outside India and payments were received in convertible foreign exchange.

The CESTAT found as a fact that the services were delivered outside India and used by customers located outside India.

The Revenue (Appellant) contended that if the ultimate beneficiaries of services were located in India, service tax exemption should not apply.

The Respondents (Taxpayers) contended that the levy is contract-based, and since the contractual recipients were located outside India, with payments received in convertible foreign exchange, the services were correctly treated as exports.

The issue of services being intermediary services was also raised but rejected on facts since the Respondents acted on a principal-to-principal basis and not as intermediaries.

Issue:

Whether the services provided by the Respondents qualify as export of services under the Export of Service Rules, despite some beneficiaries being located within India?

Held:

The Hon’ble Supreme Court in COMMISSIONER OF SERVICE TAX III MUMBAI Versus M/s VODAFONE INDIA LTD - 2021 (10) TMI 1286 - Supreme Court held as under:

• Observed that, service tax is a destination-based consumption tax, and export of services outside India is not taxable.
• Noted that, the twin conditions under the Rules for export of services are that the recipient of service is located outside India and payment is received in convertible foreign exchange.
• Noted that, the preparatory activities or incidental use of service within India do not negate export status if the contractual recipient is outside India.
• Observed that, the CESTAT’s findings that services were delivered and used outside India were findings of fact, not perverse and did not require interference.
• Noted that, the contractual relationship is determinative for levy; since the Respondents had no privity of contract with beneficiaries located in India, service tax exemption applies.
• Held that, the services rendered by Respondents fall within Category II and III services under Rule 3 of Export of Service Rules, 2005 and subsequent amended provisions including Rule 6A of Service Tax Rules and Place of Provision of Services Rules, 2012.
• Held that CESTAT rightly allowed CENVAT credit on inputs and input services used for export of services and dismissed the appeals filed by the Revenue and upheld the CESTAT and High Court orders granting exemption on export of services.

Our Comments:

The central legal dispute in the present case revolves around the classification of services under Rule 3 of the Export of Service Rules, 2005—specifically whether services falling under Category (III) (i.e., services provided to a recipient located outside India) could be subjected to the export conditions prescribed for Category (II) (i.e., performance-based services). The Revenue’s approach as to treating services contractually rendered to foreign recipients as non-export merely because their beneficiaries were located in India had effectively conflated the distinct tests applicable under Category (II) and Category (III) of the Rules.

In M/s Paul Merchants Limited & Others Versus CCE, Chandigarh - 2012 (12) TMI 424 - CESTAT, DELHI (LB), the Tribunal in Paul Merchant clarified that for services categorized under Rule 3(1)(iii), the relevant export criteria are (i) that the recipient is located outside India, and (ii) that consideration is received in convertible foreign exchange. It was held to be legally fallacious to assess such services on the basis of the place of performance—an approach only applicable to Rule 3(1)(ii). Importantly, Paul Merchant affirmed that Business Auxiliary Services provided to entities abroad cannot be denied export treatment merely because certain operational components occurred in India.

The Supreme Court's judgment in this case reinforces this position. The Court held that the mere presence of service beneficiaries in India or the conduct of preparatory activities domestically does not alter the legal character of the service as an export, where the contractual recipient is abroad and the payment is received in convertible foreign exchange. By upholding CESTAT’s reasoning, the Court explicitly accepted the principle that for services falling under Category (III), the determining factor is the location of the recipient and not the situs of the end-use or performance.

 (Author can be reached at [email protected])