2012 (12) TMI 424 - AT - Service Tax

Money Transfer Services to Foreign Principal Qualify as Export of Services Under Export of Service Rules 2005

CESTAT Delhi (LB) held that money transfer services provided by agents and sub-agents to a foreign principal constitute export of services under Export of ... Business Auxiliary Service - Export of Services Rules, 2005 - Rule 3(1)(iii) - Place of consumption / recipient principle - Export of services - payment in convertible foreign exchange - Service classification - Banking and Financial Services versus Business Auxiliary Service - Sub-agent services as exportBusiness Auxiliary Service - Service classification - Banking and Financial Services versus Business Auxiliary Service - Classification of the money transfer and related promotional activities performed by agents and sub agents - HELD THAT: - The Tribunal held that the activities of the agents and sub agents - delivering remittances in India on behalf of the foreign principal and undertaking market promotion/advertising in India in relation to that business - are properly classifiable as Business Auxiliary Service under the relevant definition in section 65(19)/65(105)(zzb) for the period in dispute. The majority noted that the agency function of providing services on behalf of Western Union and the promotional activities fall squarely within the Business Auxiliary Service description; while banking and financial classification applied by statute from a later date to some entities (e.g. NBFCs), that lateral classification did not displace the appropriate characterization of these intermediaries' activities under the Business Auxiliary Service entry for the disputed period. [Paras 68, 71, 76]The services are Business Auxiliary Services for the period in question.Export of Services Rules, 2005 - Rule 3(1)(iii) - Place of consumption / recipient principle - Export of services - payment in convertible foreign exchange - Whether the services provided by agents and sub agents were exported and thus not liable to service tax - HELD THAT: - Applying the Export of Services Rules, 2005 (and the recipient/place of consumption criterion embodied therein), the Tribunal concluded that the taxable service is to be treated as exported when it is provided in relation to business or commerce to a recipient located outside India and payment is received in convertible foreign exchange. The majority found that Western Union, the foreign principal which contracted, paid and used the services in its money transfer business, is the recipient/consumer of the services; consequently the services were received and used outside India and qualify as exports under Rule 3(1)(iii). The Tribunal rejected the contention that the physical performance in India or the fact that the remittance terminates in India defeats export treatment, holding that destination of consumption (the person who requests and pays for the service) governs the test under the Rules. [Paras 71, 72, 76]The services provided by agents and sub agents were exported under Rule 3(1)(iii) and hence not liable to service tax.Sub-agent services as export - Export of Services Rules, 2005 - Rule 3(1)(iii) - Whether services rendered by sub agents are exports - HELD THAT: - On the contractual matrix and operational facts (tripartite structure, WU as third party beneficiary, prior approval and prescribed terms by WU, reimbursement/commission flow from WU to agent in convertible foreign exchange and thence to sub agent), the Tribunal held that sub agents in substance provide services to Western Union and that those services are exported. The majority relied on the agency relationships and the manner of payment and concluded that export treatment applies equally to sub agents. [Paras 72, 76]Services provided by sub agents are exports and hence not taxable.Reimbursement for advertising and promotion - export treatment - Business Auxiliary Service - Taxability of reimbursements for advertising and promotional expenses received from Western Union - HELD THAT: - The Tribunal treated the reimbursements as payments for services rendered to Western Union in relation to its business and, applying the same export analysis, held that such reimbursements are for exported services. Consequently, promotion/advertising reimbursements provided to the foreign principal and paid in convertible foreign exchange fall within the export treatment under Rule 3(1)(iii) and are not subject to service tax. [Paras 22, 74, 76]Reimbursements for advertising and promotion are treated as export of services and not taxable.Time bar / limitation - Export of Services Rules, 2005 - Rule 3(1)(iii) - Effect of limitation/extended period once export is established - HELD THAT: - Having held that the services were exported and therefore not taxable, the Tribunal observed that the question of extended limitation loses relevance in respect of the confirmed demands. The majority expressly did not decide remand for limitation in those cases where export was upheld; accordingly, time bar issues were not sustained against appellants whose services were held to be exported. [Paras 75, 76]Time bar/extended period contention became immaterial once export was established; demands were not sustained.Final Conclusion: The Tribunal, by majority, held that the activities of agents and sub agents in delivering remittances and undertaking related promotion on behalf of Western Union are Business Auxiliary Services and, because Western Union is the recipient/consumer and payment was in convertible foreign exchange, those services (including reimbursements for advertising) were exported under Rule 3(1)(iii) of the Export of Services Rules, 2005; accordingly the confirmed service tax demands for the period 01-07-2003 to 30-06-2007 against M/s Paul Merchants Ltd. and the sub agents were set aside. Issues Involved:1. Classification of services provided by agents and sub-agents.2. Determination of whether the services provided are exported.3. Applicability of service tax on reimbursements for promotional activities.4. Time-bar for raising demands.5. Eligibility for small-scale exemption.6. Inclusion of amounts paid to sub-agents in the value of taxable services.7. Extension of cum-tax benefit.8. Taxability of gains from foreign exchange fluctuations.Detailed Analysis:1. Classification of Services Provided by Agents and Sub-Agents:The services provided by the agents and sub-agents of Western Union (WU) were classified as 'Business Auxiliary Services' under Section 65(105)(zzb) read with Section 65(19) of the Finance Act, 1994. The agents and sub-agents were involved in delivering money to the intended beneficiaries in India on behalf of WU and promoting WU's money transfer services. Even after 1.6.2005, when services related to money transfer were included under 'Banking and Financial Services,' the Tribunal held that the services provided by the agents and sub-agents remained classifiable as 'Business Auxiliary Services' due to their agency nature.2. Determination of Whether the Services Provided are Exported:The Tribunal determined that the services provided by the agents and sub-agents were indeed exported. The recipient of the services was WU, located abroad, which used these services for its money transfer business. The services were provided in relation to WU's business located outside India, and the payment for these services was received in convertible foreign currency. Therefore, the services met the criteria for export under Rule 3(1)(iii) read with Rule 3(2) of the Export of Service Rules, 2005.3. Applicability of Service Tax on Reimbursements for Promotional Activities:Reimbursements received by the agents for promotional activities were not taxable. These activities were considered services provided to WU, which were exported. Therefore, no service tax was applicable on these reimbursements.4. Time-Bar for Raising Demands:The question of time-bar became irrelevant once it was decided that the services provided were exported and not liable for service tax. However, it was noted that the demands were not time-barred due to the suppression of facts by the appellants.5. Eligibility for Small-Scale Exemption:The eligibility for small-scale exemption under Notification No. 6/2005-ST was not addressed as it became irrelevant after determining that the services provided were exported and not taxable.6. Inclusion of Amounts Paid to Sub-Agents in the Value of Taxable Services:The question of whether amounts paid to sub-agents should be included in the value of taxable services provided by the agents became irrelevant after determining that the services were exported and not taxable.7. Extension of Cum-Tax Benefit:The question of extending cum-tax benefit also became irrelevant as the services were determined to be exported and not liable for service tax.8. Taxability of Gains from Foreign Exchange Fluctuations:Gains from foreign exchange fluctuations were not considered part of the assessable value for service tax purposes. These gains were subject to the risk of losses and were not directly related to the provision of services.Conclusion:The Tribunal concluded that the services provided by the agents and sub-agents of WU were classifiable as 'Business Auxiliary Services' and were exported services. Therefore, these services were not liable for service tax. The appeals were allowed in favor of the appellants, and the demands raised by the Revenue were set aside.