2017 (10) TMI 1496 - HC - Service Tax

Court affirms Tribunal decision on foreign currency commission as export of service under 2005 Rules

The court upheld the Tribunal's decision in favor of the assessee, ruling that the commission received in foreign currency, although routed through Indian ... Export of services - Export of Service Rules, 2005 - payment received in convertible foreign exchange - export of taxable service - services delivered outside India and used outside India - strict construction of exemptionExport of services - payment received in convertible foreign exchange - Export of Service Rules, 2005 - export of taxable service - Whether the Tribunal was correct in treating the services as export of service though payment was not literally received by the assessee in convertible foreign exchange in terms of Rule 3(2)(b) of the Export of Service Rules, 2005. - HELD THAT: - The Court accepted the Tribunal's construction of Rule 3(2) of the Export of Service Rules, 2005, holding that the object of the Rules is to ensure earning of convertible foreign exchange. The Tribunal found, and this Court agreed, that under the contract and payment mechanism the equivalent convertible foreign exchange was made available in the transaction chain (foreign remittance to the foreign seller and corresponding adjustment with the Indian purchaser), and therefore the condition in Rule 3(2)(b) must be understood in the context of the scheme to promote foreign exchange inflow. The Court rejected the Department's narrow interpretation that strict literal receipt of convertible foreign exchange by the service provider within India was the only compliance; instead it accepted the Tribunal's view that, on the facts and contractual mechanism, the requirement was satisfied. The Court relied on the principle that machinery provisions should be interpreted to effectuate legislative intent and upheld the Tribunal's factual and legal conclusion that the assessee was entitled to treatment as export of service. [Paras 15, 16, 17, 18, 19]Tribunal's conclusion accepted; services held to qualify as export of service notwithstanding that payment was not literally received in convertible foreign exchange by the assessee; appeals dismissed.Final Conclusion: The High Court upheld the Tribunal's interpretation of Rule 3 of the Export of Service Rules, 2005, holding that on the contractual and factual matrix the condition of receipt of payment in convertible foreign exchange was satisfied and accordingly decided the issues in favour of the assessee and dismissed the appeals. Issues Involved:1. Whether the Tribunal was correct in law in deciding the issue in favor of the assessee regarding export of services when the payment was not received in convertible foreign currency, contravening Rule 3(1)(b) of the Export of Service Rules, 2005.Issue-wise Detailed Analysis:1. Common Question of Law and Facts:The appeals involved a common question of law and facts, hence they were decided by a common judgment. The appellant challenged the Tribunal's decision which allowed the assessee's appeal.2. Substantial Question of Law:The court framed the substantial question of law regarding whether the Tribunal was correct in law in deciding the issue in favor of the assessee concerning export of services even when the payment was not received in convertible foreign currency, contravening Rule 3(1)(b) of the Export of Service Rules, 2005.3. Facts of the Case:The assessee was appointed as a distributor by a foreign company to promote sales in India and received a commission on imports into India. The commission could be paid either directly by the Indian buyer in Indian rupees or by the foreign seller in foreign currency. The court noted that the commission received by the assessee in foreign currency was practically paid by the Indian buyer, either directly or through the foreign seller, indicating that the service cycle started and ended in India.4. Tribunal's Interpretation:The Tribunal observed that the commission was effectively paid by the Indian buyer, and the foreign currency remitted out of India was rotating back to India. Thus, such a service could not qualify as the export of service for exemption from service tax.5. Appellant's Argument:The appellant contended that Rule 3 should govern the field, emphasizing that payment for the service must be received in convertible foreign exchange. The appellant relied on the Supreme Court's decision in Saraswati Sugar Mills, which stated that exemption notifications should be construed strictly, and the conditions for taking benefit under the notification must be strictly interpreted.6. Respondent's Argument:The respondent relied on the Mumbai Tribunal's decision in Pam Pharma & Allied Machinery Company Pvt. Ltd. vs. CST Mumbai, which held that marketing services provided to a foreign counterpart, even if the payment was received in Indian currency, qualified as export of service. The respondent argued that the appellant complied with the Export of Service Rules, 2005, and was entitled to a refund claim.7. Court's Analysis:The court noted that the very object of the Export of Service Rules, 2005, was to ensure that services performed outside India and payment for such services were received in convertible foreign exchange. The Tribunal had observed that the assessee's commission was effectively paid in foreign exchange, although routed through Indian Railways in Indian rupees.8. Court's Conclusion:The court agreed with the Tribunal's interpretation, stating that a narrow interpretation by the department would prevent Indian citizens from benefiting from foreign exchange. The court concluded that the department's interpretation could not be accepted, and the Tribunal's interpretation was correct.9. Judgment:The issues were answered in favor of the assessee and against the department. The appeals were dismissed.