Exported secondary services merging with overseas supply were held outside service tax under the departmental circular.

Secondary consultant engineering services rendered to a provider of export services were treated as merging with the exported service and, under the departmental circular dated 25.04.2003, were not liable to service tax when ultimately consumed in exports outside India. The circular maintained taxability only where such secondary services were used for services provided in India. On the stated facts, the applicant was entitled to the circular's benefit, and recovery of the service tax demand, interest and penalties was stayed pending appeal.

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Issues: Whether the secondary services provided by the applicant to the primary service provider, and ultimately used in the export of services outside India, were liable to service tax, and whether the applicant was entitled to the benefit of the departmental circular.

Analysis: The applicants rendered consultant engineering services to a service provider who exported engineering and designing services to recipients outside India. The circular dated 25.04.2003 clarified that secondary services which ultimately get consumed or merged with exported services are not liable to service tax, though tax would be leviable where such services are consumed for providing services in India. On the facts, the service rendered by the applicant was found to merge with the exported service.

Conclusion: The applicant was entitled to the benefit of the circular and, prima facie, the service tax demand, interest and penalties were waived with stay of recovery during pendency of the appeal.

Ratio Decidendi: Secondary services that merge with services exported outside India are not liable to service tax under the clarified departmental circular.

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