2024 (12) TMI 1617 - AT - Service Tax

Service tax demand of Rs.132,35,71,266 quashed for foreign branch services; no taxable event in India found

CESTAT, Bangalore AT set aside a service tax demand of Rs.132,35,71,266 imposed on a taxpayer for services rendered by its foreign branch offices, finding ... Levy of service tax - expenses incurred by the branch office of the respondent at USA and Germany in rendering certain services for and on behalf of respondent’s main office in Bangalore - HELD THAT:- More or less similar view has also been held by the Tribunal following the said judgment in the case of Infosys Ltd. [2014 (3) TMI 695 - CESTAT BANGALORE]. Following the judgments rendered in KPIT Technologies Ltd. [2014 (8) TMI 711 - CESTAT MUMBAI] and analysing the findings in the impugned order, it had observed that 'we find that Revenue has not been able to show that ITSS has been received through their branch office in India and in the absence of receipt of service, in our opinion, there is no taxable event and therefore there is no liability on the receiver to pay tax. Therefore the entire demand of Rs. 132,35,71,266/- cannot be sustained and has to be set aside and is set aside.' There are no merit in the appeals filed by the Revenue - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether expenditures incurred by overseas branch offices and reimbursed by the head office in India constitute receipt of 'business support services' by the head office attracting service tax under Section 66A of the Finance Act, 1994. 2. Whether a branch of a corporate entity situated abroad can be treated as a separate service provider vis-à-vis the head office in India for the purpose of import of services under Section 66A. 3. Whether reimbursements of foreign-incurred expenses (salaries, rent, marketing, warehousing, commissions, etc.) to an overseas branch amount to consideration for a taxable service received in India. 4. Whether service transactions that are performed wholly outside India fall within the taxing jurisdiction under Section 66A even if payments are made in convertible foreign exchange by the Indian head office to the foreign branch. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of overseas branch expenditures as 'Business Support Service' received in India Legal framework: Section 66A (import of services) and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 govern levy of service tax where services are provided from outside India and received in India; concept of 'business support service' as taxable service where foreign provider renders services to an Indian recipient. Precedent treatment: The Tribunal has earlier considered identical factual matrices and held that branch activities undertaken abroad for foreign clients and paid for abroad do not translate into services received by the Indian head office for purposes of Section 66A. Those earlier decisions are followed. Interpretation and reasoning: The Court reasons that the overseas branch rendered services to foreign clients and incurred expenses in that performance. Reimbursement by the head office is an intra-organisational monetary transaction, not consideration for services rendered to the head office. The essential elements for import of services - distinct service provider located outside India and a distinct service recipient located in India who receives the service - are absent when the activity is internal to the same corporate entity operating through a branch. The place of performance, provider and recipient are all effectively abroad in respect of the services at issue. Ratio vs. Obiter: Ratio - reimbursements to foreign branches for expenditures incurred in rendering services abroad are not taxable as import of services under Section 66A where the branch performed services for foreign clients and the service was received abroad. Obiter - examples analogising to foreign branches of banks and outbound tourism serve as illustrative support but are not foundational to the holding. Conclusion: Expenditures incurred by overseas branch offices and reimbursed by the Indian head office do not constitute 'business support service' received in India and therefore do not attract service tax under Section 66A on the facts considered. Issue 2 - Treatment of foreign branch as separate person for Section 66A purposes Legal framework: Section 66A uses definitions and concepts that require identification of service provider and service recipient; legal questions arise whether a branch can be treated as a separate person for the purpose of import of services. Precedent treatment: The Tribunal's prior decisions are applied to reject the premise that a branch must be treated as a separate person for determining receipt of service by the head office where internal transactions are concerned. Interpretation and reasoning: Treating the branch as a separate person for levy purposes but not for determining receipt of service leads to logical inconsistency. Where contractual relations, invoicing and performance of services occur abroad between the foreign branch and foreign clients, those transactions are outside the taxable ambit of Section 66A. The purpose of Section 66A is to tax import of services into India, not internal reimbursement flows between head office and its branch. Ratio vs. Obiter: Ratio - a foreign branch should not be artificially treated as a separate service provider vis-à-vis the Indian head office for the purpose of taxing intra-group reimbursements as imported services. Obiter - discussion on consequences of inconsistent dual treatment is explanatory. Conclusion: The overseas branch is not to be treated as a separate taxable service provider vis-à-vis the Indian head office for the purpose of Section 66A where services are rendered and received abroad; hence, no tax liability arises on reimbursements. Issue 3 - Reimbursement versus consideration for taxable service Legal framework: Distinction between reimbursement of expenses and payment of consideration for services is central to determining taxable event under Section 66A; relevant is the character of the payment and the identity of provider and recipient. Precedent treatment: Earlier Tribunal rulings emphasise that reimbursement of expenditure (salaries, rent, maintenance, commission, etc.) incurred by a foreign branch in providing services abroad is not consideration for services provided to the Indian head office. Interpretation and reasoning: The Court examines the purpose and nature of the payments recorded in the books. Lump-sum transfers to overseas branches labelled under various heads, where the underlying activities served foreign market requirements, are payments to enable branch operations rather than payments for services supplied to the Indian office. The taxable event under Section 66A - receipt of service in India for consideration paid to a foreign provider - is not satisfied by mere reimbursement. Ratio vs. Obiter: Ratio - reimbursements for branch expenditures are not taxable as consideration for imported services when the service provider, recipient and performance are all effectively located abroad. Obiter - commentary rejecting the applicability of certain Supreme Court authority on different facts is explanatory of scope. Conclusion: Reimbursements of foreign-incurred expenses to overseas branches do not amount to taxable consideration for services received in India under Section 66A on the facts before the Tribunal. Issue 4 - Jurisdiction to tax services rendered wholly outside India even if payments are remitted from India Legal framework: Territorial nexus for taxation under Section 66A requires that services are provided from outside India but received in India; absent receipt in India, taxing jurisdiction is lacking even if payment originates in India in convertible foreign exchange. Precedent treatment: Consistent Tribunal authority holds that services rendered and received abroad, even where payment flows from India, fall outside Section 66A because the taxable event is import of services into India, not outbound transactions or internal remittances. Interpretation and reasoning: The Court notes that where the service provider, service recipient and place of performance are located outside India, Section 66A does not envisage taxing such transactions merely because the head office in India reimburses the branch. Analogous authority on outbound tourism supports the proposition that services performed abroad cannot be taxed in India notwithstanding payment by an Indian entity. Ratio vs. Obiter: Ratio - services performed and received abroad are beyond the taxing reach of Section 66A even if funded by the Indian head office; obiter - examples and analogies to other factual contexts. Conclusion: There is no jurisdiction to tax services that are performed and received entirely outside India under Section 66A merely because the Indian head office remits funds to the foreign branch; hence no service tax liability arises on such transactions on the facts considered. Final Disposition The Tribunal upholds the adjudicating authority's order dropping the proceedings; Revenue's appeals are rejected and the impugned order is confirmed. Cross-objections in the nature of written submissions are disposed of accordingly.