2013 (12) TMI 792 - AT - Service Tax

Tribunal remands service tax jurisdiction appeal, disposes of stay application.

The Tribunal allowed the appellant's appeal, remanding the case for reconsideration on the jurisdiction to demand service tax on activities conducted ... Demand of service tax - Service rendered abroad - Application of Section 66A - Held that:- appellant has provided services through their branches abroad to customers located abroad. Therefore, it is not a case of the appellant receiving the services but it is a question of rendering services abroad. Further, the appellant has not made any payments for the receipt of any services whereas on the other hand, the appellant has received proceeds of the service rendered abroad by their branches, after deduction of expenditure incurred for rendering of services abroad - service has been rendered to the clients abroad and, therefore, the consumption of the service is not in India but abroad. Therefore, the question of subjecting the said activity to service tax in India does not appear to be sustainable in law. Appellant has received the service from abroad from their branches, since the service have been consumed by the clients abroad, it would amount to export of service under Rule 3 of the Export Service Rules, 2005 in which case also there would not be any service tax liability. In the case of permanent establishment of the appellant situated abroad, the service has been provided by foreign service providers abroad and the service has also been consumed abroad - matter has to go back to the original adjudicating authority for consideration afresh - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether services performed by an Indian company's overseas branches for customers located abroad constitute services 'received in India' so as to attract service tax under Section 66A (reverse charge) of the Finance Act, 1994. 2. Whether remittances of surplus income from overseas branches to the Indian head office (or receipt of proceeds in convertible foreign exchange) amount to payment for services by the Indian entity triggering reverse charge liability under Section 66A. 3. Whether services rendered and taxed under foreign/local laws (GST/VAT or equivalent) preclude imposition of service tax in India on the same transactions (double taxation / territoriality / destination principle). 4. Whether activities and reimbursements related to personnel or permanent establishments located abroad (including expenditures remitted from India) are taxable in India under reverse charge, or are outside the Indian taxing jurisdiction because consumption and performance occur abroad. 5. Whether the adjudicating authority failed to consider determinative legal issues and evidence (including proof of foreign tax payment), necessitating remand for fresh consideration. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Section 66A to services rendered abroad by overseas branches Legal framework: Section 66A applies where services are 'received in India by a person located in India,' enabling levy on the recipient under reverse charge. Export of services rules and territoriality principles apply to determine place of supply/consumption. Precedent treatment: Tribunal decisions cited by the appellant (including prior Tribunal holdings) have held that services provided outside India and consumed outside India do not attract service tax under reverse charge; those decisions were followed by the Court. Interpretation and reasoning: The Court held that Section 66A is triggered only when services are received in India by a person located in India. Where branches located abroad render services to foreign customers, the transaction is one of rendering services abroad, not receipt in India. The factual position showed branches billed overseas customers and only remitted net surplus to the Indian head office; the Indian entity did not receive services from the branches. Thus the statutory predicate for reverse charge (receipt of service in India) is absent. Ratio vs. Obiter: Ratio - Section 66A does not apply where services are rendered abroad by overseas branches to foreign customers and are not received in India by the Indian entity. Obiter - none material beyond this explanatory reasoning. Conclusion: Section 66A prima facie not attracted to services performed by overseas branches for foreign clients; service tax demand thereunder unsustainable on that basis. Issue 2 - Remittances/proceeds and reverse charge: whether receipt of proceeds in foreign exchange or remittance of surplus triggers liability Legal framework: Reverse charge under Section 66A focuses on receipt of services in India and payment for such services by a person located in India; mere receipt of funds/proceeds does not equate to receipt of a service. Precedent treatment: Tribunal authority supports that inward remittances of proceeds for services performed abroad do not convert the transaction into receipt of services in India. Interpretation and reasoning: The Court observed that branches raised bills on overseas customers and remitted net surplus to the head office; the head office did not make payments to branches for services nor receive services from them. Thus remittances or receipt of proceeds in convertible foreign exchange cannot be treated as payments for receipt of services triggering reverse charge. The absence of any payment by the Indian entity to foreign providers negates applicability of reverse charge. Ratio vs. Obiter: Ratio - Receipt of proceeds/remittance to India, without receipt of any service in India or payment by the Indian entity for services, does not give rise to reverse charge liability under Section 66A. Conclusion: No reverse charge liability arises solely from receipt of proceeds or remittance of surplus from overseas branches to the Indian head office. Issue 3 - Effect of foreign taxation and territoriality (double taxation and destination principle) Legal framework: Service tax is a destination-based consumption tax; taxability arises where consumption of service takes place. Where services are performed and consumed outside India and subjected to local tax, Indian tax claim may be precluded by territoriality and avoidance of double taxation principles. Precedent treatment: Tribunal rulings (cited) treat services performed abroad and taxed abroad as outside Indian service tax jurisdiction; those precedents were relied upon and followed by the Court. Interpretation and reasoning: The Court emphasized that if services were rendered and consumed abroad and taxed under local laws (GST/VAT or equivalents), the same transactions should not be taxable in India - 'there cannot be two taxing jurisdictions for the same transactions.' The destination/consumption principle means taxability in India would not arise where consumption occurs abroad. The appellant was given liberty to adduce evidence of foreign tax discharge for fresh adjudication. Ratio vs. Obiter: Ratio - Services rendered and consumed abroad, and subjected to local taxation, are not liable to service tax in India; evidence of foreign tax payment is relevant and must be considered. Obiter - reference to policy (no two jurisdictions) is explanatory. Conclusion: Services performed and consumed abroad and taxed locally are prima facie outside the scope of Indian service tax; adjudicatory authority must verify evidence of foreign tax discharge before levying Indian service tax. Issue 4 - Taxability of services/permanent establishment activities and reimbursements for expenditures remitted from India Legal framework: Reverse charge liability on reimbursements or payments is contingent on the nature/place of service performance and place of consumption; activities occurring in foreign territory are generally outside Indian service tax reach. Precedent treatment: Tribunal decisions dealing with reimbursements for employees deputed abroad and activities in foreign territory held no Indian service tax liability; the Court followed that approach. Interpretation and reasoning: The factual matrix included personnel located at clients' sites abroad and various expenditures met by remittances from India. The Court noted these activities took place in the foreign territory and were consumed there; accordingly, they do not attract service tax in India under reverse charge. The adjudicating authority had not considered these territoriality facts adequately. Ratio vs. Obiter: Ratio - Expenditures and services relating to personnel/permanent establishments abroad, incurred for activities consumed abroad, do not give rise to reverse charge service tax in India. Obiter - none significant. Conclusion: Reimbursements and expenditures related to permanent establishments/personnel abroad are not, on the present facts, taxable in India; factual proof and fresh consideration are required. Issue 5 - Need for remand due to failure of original adjudication to consider material issues and evidence Legal framework: Adjudication must address jurisdictional/territorial questions and consider evidence of foreign tax discharge and place of consumption; failure to do so warrants remand for fresh consideration. Precedent treatment: Tribunal practice supports remand where adjudicating authority has not addressed determinative issues of law/fact. Interpretation and reasoning: The Court found that the adjudicating authority did not consider core issues: whether services were rendered/consumed in India, whether payments were made by the Indian entity, and whether foreign tax liability had been discharged. Given these unaddressed points and the appellant's undertaking to produce evidence of foreign tax paid, the Court remanded the matter for fresh adjudication on these issues. Ratio vs. Obiter: Ratio - Remand is required where the adjudicating authority fails to examine jurisdictional/territorial questions and material evidence relevant to service tax liability. Obiter - none beyond procedural direction. Conclusion: The matter is remanded to the original adjudicating authority for fresh consideration of jurisdictional issues, territoriality, proof of foreign tax payment, and related contentions; all issues are kept open and the appeal is allowed to the extent of remand.