2024 (8) TMI 1212 - AT - Service Tax

Appellant's services classified as Business Auxiliary Services, not Technical Inspection Services, qualifying as export services under Rule 3(1)(ii)

M/s. UL India Pvt. Ltd. Versus Commissioner of Central Excise, Bangalore-II Commissionerate, Bangalore

CESTAT Bangalore held that appellant's services were correctly classified as Business Auxiliary Services rather than Technical Inspection and ... Classification of services - Technical Inspection and Certification Services or Business Auxiliary Services - export of services under ‘Export of Service Rules, 2005’ or not - suppression of facts - invocation of extended period of limitation - penalty. Whether the services rendered by the appellant fall ‘Technical Inspection and Certification Services’ or as ‘Business Auxiliary Services’? - HELD THAT:- Admittedly, the services rendered by the appellant are undertaken on behalf of the parent company and therefore, rightly classifiable under Business Auxiliary Service as claimed by the appellant. Moreover, Technical Inspection and Certification Service is complete only when the certificate is issued and in the instant case, admittedly, the certificate is issued by the parent company. Therefore, the question of classifying the same under ‘Technical Inspection and Certification Service’ is ruled out. Whether irrespective of classification these services can be considered as export of services under ‘Export of Service Rules, 2005’? - HELD THAT:- As per Export of Service Rules, 2005 under Rule 3 (1)(ii) proviso, it clearly reads as ‘Provided that where such taxable service is partly performed outside India, it shall be treated as performed outside India;’ therefore, in the instant case, a service is partly performed outside India and it has to be treated as performed outside India. Hence, as rightly claimed by the appellant, the services are to be treated as Export of Service. Similarly, in the case of COMMISSIONER OF SERVICE TAX, MUMBAI-III VERSUS M/S. SGS INDIA PVT. LTD. [2014 (5) TMI 105 - BOMBAY HIGH COURT] the Hon’ble High Court observed 'the Tribunal takes a view that if services were rendered to such foreign clients located abroad, then, the act can be termed as ‘export of service’. Such an act does not invite a Service Tax liability.' Whether facts were misrepresented/suppressed so as to invoke extended period and impose penalty under various Sections of the Finance Act, 1994? - HELD THAT:- It is a fact that the appellant has been filing Service Tax returns regularly and has paid Service Tax on various services rendered within India; therefore, there being no mis-representation of facts, the said services being partly undertaken in India and partly abroad, the question of paying tax on export of services did not arise. Therefore, when there is no liability itself, the question of suppression of facts does not arise. The impugned order is set aside and the appeal is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the services performed by the appellant in India constitute 'Technical Inspection and Certification Services' or instead qualify as 'Business Auxiliary Services' (or alternatively as other service categories such as Consulting Engineer Service) under the Finance Act framework. 2. Whether, irrespective of classification, those services qualify as export of services under the Export of Services Rules (2005) - specifically whether services partly performed in India but completed by delivery/use abroad fall within the rule treating partly performed services as performed outside India. 3. Whether extended period of limitation and penalties can be invoked on the ground of alleged misrepresentation/suppression where the appellant filed returns and asserted export character of the services. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Classification - Technical Inspection and Certification Service v. Business Auxiliary Service Legal framework: The definition of 'Technical Inspection and Certification Services' covers inspection/examination of goods, processes, materials or immovable property to determine conformity with specified standards, and the taxable service provision identifies services provided by a technical inspection and certification agency in relation to such inspection and certification. 'Business Auxiliary Service' includes, inter alia, provision of service on behalf of clients and services incidental or auxiliary to those activities. Precedent treatment: The Tribunal and courts have treated classification disputes by focusing on the substance and legal character of the transaction - whether the appellant is the true service-provider and recipient relationship exists between the appellant and the foreign principal, and whether certification is an essential element of the taxed service. Interpretation and reasoning: The Tribunal examined the contractual scope (corporate services agreement) and factual flow: the appellant performs inspections at Indian premises, prepares reports, and receives consideration from the parent foreign entity; the parent issues the ultimate certificate based on the appellant's report. The service performed in India (inspection, testing and preparing the report) is an identifiable service rendered by the appellant to the parent entity. However, the Tribunal emphasized that 'Technical Inspection and Certification Service' is complete only upon issuance of certificate and the appellant does not issue certificates; the certificate is issued by the parent company abroad. The appellant's contention that it acted merely as a backend processor on behalf of the parent and, therefore, the activity falls within 'Business Auxiliary Service' was accepted on the ground that the services were performed on behalf of the parent and the critical element of certification remained with the parent. Ratio vs. Obiter: Ratio - where the local entity performs inspection but certification is issued by the foreign principal, the local activity may be classified as Business Auxiliary Service rather than a standalone Technical Inspection and Certification Service that culminates in certification by the local provider. Obiter - observations about alternative classifications (e.g., Consulting Engineer Service) are ancillary and not essential to the decision. Conclusions: The Tribunal found the services to be rightly classifiable as Business Auxiliary Service because the appellant performed the work on behalf of the parent company and did not issue the certificate; hence classification under Technical Inspection and Certification Service was ruled out. Issue 2: Export of Services - applicability where services are partly performed in India and partly completed/used abroad Legal framework: Export of services under the Export of Services Rules requires (i) provision to a recipient located outside India, and (ii) conditions that the service be delivered outside India and used outside India and payment be received in convertible foreign exchange. Rule provision includes that where a taxable service is partly performed outside India, it shall be treated as performed outside India. Precedent treatment: Prior tribunal and high court decisions (as applied by the Tribunal) have held that for certain categories (including testing/analysis/inspection), performance is not complete until the report is delivered to the client; delivery of the report abroad and use by the foreign recipient can render the service partly performed outside India, satisfying export conditions. Those authorities have been applied where the local testing/reporting was directed to foreign clients and payment was in foreign exchange. Interpretation and reasoning: The Tribunal applied the rule that partly performed services are to be treated as performed outside India. Factually, inspection/testing was carried out in India, reports were sent to the foreign parent, and certification was issued abroad; consideration was received from the foreign parent. The Tribunal accepted that the service was partly performed in India and partly completed (delivery/certification) abroad and thus falls within the 'partly performed outside India' proviso. The Tribunal relied on the functional approach that the essential value of the service accrues on delivery/use of the report by the foreign recipient; since the report was delivered abroad and used there, the export conditions (delivery and use outside India, payment in convertible foreign exchange) were satisfied. Ratio vs. Obiter: Ratio - services partly performed in India but completed by delivery/use abroad qualify as export of services under the Rules where the essential element (delivery/use) occurs outside India and payment is in convertible foreign exchange; the proviso treating partly performed services as performed outside India is determinative. Obiter - comparative observations about services that are wholly performed in India and where no delivery/use outside occurs (which would not qualify) are explanatory. Conclusions: The Tribunal concluded that the services in question are export of services, because they were partly performed in India but effectively completed and used by the foreign recipient abroad, and consideration was received from the foreign principal in foreign exchange; accordingly the services were to be treated as performed outside India under the Rules. Issue 3: Invocation of extended limitation period and penalties for alleged misrepresentation/suppression Legal framework: Extended period and penalties may be invoked where there is deliberate misrepresentation or suppression of facts resulting in avoidance of tax; ordinary disputes of classification or interpretation where returns were filed typically do not amount to suppression that warrants extended limitation. Precedent treatment: Authorities applied by the Tribunal distinguish between deliberate concealment/suppression and bona fide disputes of law/fact; where the taxpayer filed returns and there is no evidence of intentional concealment, extended limitation/penalty is generally not attracted. Interpretation and reasoning: The Tribunal noted that the appellant had filed service tax returns and there was no material showing settled misrepresentation or concealment; the dispute was essentially one of classification and legal interpretation of export rules. Because the Tribunal found there was no liability to pay service tax on the exported services (being treated as export), there was no basis to hold suppression or invoke extended limitation and penalties. Ratio vs. Obiter: Ratio - absent clear evidence of deliberate misrepresentation or suppression, invocation of extended period of limitation and imposition of penalties is not justified where the dispute is one of classification or interpretation and returns have been filed. Obiter - comments about fact patterns that would justify extended limitation are illustrative. Conclusions: The Tribunal concluded that extended limitation and penalties could not be sustained because there was no suppression; the appellant had filed returns and the impugned tax liability (in light of export characterization) did not arise. Cross-references and overall disposition 1. On classification and exportability the Tribunal linked Issue 1 and Issue 2: classification as Business Auxiliary Service did not prevent export treatment where the service was performed on behalf of a foreign recipient and the essential act of completion/delivery and use occurred abroad. 2. Given the conclusions on exportability and absence of suppression, the Tribunal set aside the impugned order, allowed the appeal and granted consequential relief as per law.