2023 (11) TMI 561 - AT - Service Tax

Tribunal Overturns Service Tax Demands, Confirms Marketing Services as Export, Exempting Appellant from Intermediary Liability.

The Tribunal ruled in favor of the appellant, setting aside the service tax demands and penalties imposed by the Service Tax Department. It determined ... Export of service - intermediary services - place of provision of services - Rule 6A of the Service Tax Rules, 1994 - HELD THAT:- The agreement dated 01.10.2011 entered into between the appellant and its parent company located abroad. The said agreement has provided that the appellant should cater to the requirements such as making customer relations, customer visits, developing relationship with customers, obtaining market intelligence about products, identify potential opportunities for new business etc. for and on behalf of the parent company. On reading of the clauses in the agreement, it transpires that the appellant’s scope of work is confined to promoting the parent company in India by way of providing marketing, administrative, technical support services. It is an admitted fact on record that the appellant has not facilitated or assisted the parent company in connection with supply of goods or services. Further, there was no contractual obligation on part of the appellant to ensure the participation of the appellant to provide services or goods between the overseas parent company and any other defined party /customer. Therefore, in the absence of necessary pre-requisites of facilitating actual supply of goods or services between two or more identifiable persons, the transaction made by the appellant should not qualify as an intermediary service, rather, the services rendered by the appellant qualify as business and marketing support service. In the present case, none of the ingredients, itemized in the definition of intermediary service are fulfilled by appellant, inasmuch as it is not a facilitator between the parent company and its customers located in India with regard to either supply of goods or provision of service. The conditions prescribed under sub-rule (1) of Rule 6A of the Service Tax Rules, 1994 have been duly fulfilled by the appellant inasmuch as the service recipient was located outside India, the payment towards provision of service has been received in convertible foreign exchange. Thus, the place of provision of service in this case would be governed by Rule 3 of Place of Provision of Services Rules, 2012. In absence of any documentary evidence that the appellant had acted as an intermediary between the overseas entity and its Indian customer and that the location of the service receiver is in Germany, the transaction in our considered view, should appropriately be considered as the export of service. There are no merits in the impugned order, insofar as it has upheld confirmation of the adjudged demands on the appellants - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the services rendered by a wholly owned Indian subsidiary to its foreign parent qualify as 'intermediary' services under the Place of Provision of Services Rules, 2012 and related definitions, thereby attracting service tax liability in India. 2. Whether, in the absence of facilitation of supply of goods or services between identifiable third parties, the services rendered by the subsidiary constitute export of service under Rule 3 of the Place of Provision of Services Rules, 2012 and sub-rule (1) of Rule 6A of the Service Tax Rules, 1994. 3. Whether the adjudicating authority's demand, interest and penalties premised on characterising the services as intermediary services are sustainable where agreement and contemporaneous records do not establish intermediary functions. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation as 'intermediary' service Legal framework: The definition and scope of 'intermediary' for service tax purposes as explained in the Place of Provision of Services Rules, 2012 and related clarifications (including the CBEC circular referenced) require (a) presence of three parties to the contract, (b) existence of two distinct supplies (main supply and ancillary supply), and (c) that the service provider acts in the character of an agent, broker or similar person facilitating supply. Precedent Treatment: The Court relied on the statutory definition and the departmental clarification (CBEC circular) when analysing whether intermediary ingredients are satisfied; no prior appellate decisions were explicitly followed, distinguished or overruled in the reasoning provided. Interpretation and reasoning: The agreement between the parties confined the subsidiary's scope to promoting the foreign parent in India through marketing, customer relations, customer visits, market intelligence and identifying opportunities. There was no contractual obligation to facilitate or ensure any supply of goods or services between the parent and identifiable customers, nor evidence that the subsidiary acted as an agent/broker facilitating transactions. The Court emphasised that mere promotion, marketing and support activities do not amount to intermediary services absent facilitation of an actual supply between two other identifiable persons. Ratio vs. Obiter: Ratio - where the contractual terms and factual matrix show only promotional/marketing support without facilitation of supply between third parties, such services do not meet the statutory definition of 'intermediary' and cannot be taxed as such. Obiter - reliance on the CBEC circular as a clarificatory aid; no novel departure from established law was stated. Conclusion: The services do not qualify as intermediary services because the essential ingredients of the statutory definition (three-party contract, facilitation of supply, agent/broker character) were not satisfied. Issue 2: Whether the services qualify as export of service under Rule 3 and Rule 6A(1) Legal framework: Rule 6A(1) of the Service Tax Rules, 1994 sets out conditions for export of services (service recipient located outside India, payment received in convertible foreign exchange, etc.); Rule 3 of the Place of Provision of Services Rules, 2012 governs determination of place of provision of services. Precedent Treatment: The Court applied the statutory rules to the facts; no direct appellate precedents were invoked to distinguish or overrule. Interpretation and reasoning: The documentary agreement and admitted facts established that the service recipient (the foreign parent) was located outside India and payment was received in convertible foreign exchange. In absence of any documentary evidence that the subsidiary acted as an intermediary between the overseas entity and Indian customers or that the service receiver was located in India, the place of provision is governed by Rule 3 and the conditions of Rule 6A(1) are fulfilled. Thus, the transaction properly falls within export of service, not taxable in India as an intermediary service. Ratio vs. Obiter: Ratio - where contractual terms and documentary evidence show service recipient outside India and remittance in convertible foreign exchange, and no intermediary facts are established, the service is export of service under Rule 6A(1) and Rule 3. Obiter - interpretative reliance on absence of documentary evidence as determinative in this factual matrix. Conclusion: The services constitute export of service under the applicable rules because the recipient was located outside India and consideration was received in convertible foreign exchange; therefore, the place of provision is outside India under Rule 3. Issue 3: Sustainability of adjudicated demand, interest and penalties Legal framework: Service tax demand, interest and penalties arise where taxable service has been rendered and statutory conditions for taxability are met; penalties under Sections 77 and 78 of the Finance Act, 1994 require a sustainable confirmation of tax liability. Precedent Treatment: The Court evaluated the impugned departmental adjudication against the contractual and factual record rather than invoking specific precedents. Interpretation and reasoning: Since the Court concluded the services were not intermediary services and instead qualified as export of service under the applicable rules, the foundational premise for the adjudicated demand (taxability as intermediary) failed. Consequently, interest and penalties premised on that demand could not be sustained. The Court observed that the adjudicating authority had not established the necessary prerequisites of intermediary characterization on the record. Ratio vs. Obiter: Ratio - administrative demands, interest and penalties predicated on an incorrect legal characterisation of services must be set aside when contemporaneous contractual documents and statutory tests demonstrate non-taxability. Obiter - none additional. Conclusion: The confirmed demands, interest and penalties are not sustainable and are set aside because the services were not intermediary services but export of service as per Rule 3 and Rule 6A(1). Cross-References and Consolidated Conclusion Where the contractual terms and contemporaneous documentary evidence demonstrate that a subsidiary provided marketing and business support exclusively to its foreign parent without facilitating supply between identifiable third parties, the statutory definition of 'intermediary' is not satisfied (Issue 1), and where the recipient is located outside India with payment in convertible foreign exchange the transaction qualifies as export of service under Rule 3/Rule 6A(1) (Issue 2); accordingly, departmental demands and associated penalties based on intermediary characterisation are unsustainable (Issue 3).