Tribunal allows appeal on export services classification, rejects service tax demands totaling Rs.1,05,647 under Finance Act 1994

CESTAT Bangalore ruled in favor of appellant regarding export of services classification under Finance Act 1994. The tribunal found that support services provided to Malaysian recipient constituted export of services as payment was received in foreign currency and service recipient was located in Malaysia per Place of Provision of Service Rules 2012. The tribunal rejected demands under manpower recruitment services, finding insufficient evidence that providing faculty lists constituted recruitment services. Service tax demand of Rs.1,05,647 for immovable property services was also rejected as appellant was already paying applicable service tax. Appeal allowed.

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The primary issue considered by the Tribunal is whether the services provided by the appellant, a charitable education society, to a foreign university under a contractual agreement qualify as 'taxable services' under section 65B(44) read with section 65B(49) of the Finance Act, 1994, or whether such services qualify as 'export of service' under the relevant statutory provisions and rules.

Closely related issues include the applicability of service tax on alleged 'manpower recruitment or supply agency' services and 'renting of immovable property' services provided by the appellant, as well as the imposition of penalties for non-payment of service tax.

Regarding the classification of services as export or taxable domestic services, the Tribunal examined the provisions of Rule 6A of the Service Tax Rules, 1994, which delineates the conditions for a service to be considered an export of service. These conditions include:

• The service provider must be located in the taxable territory (India).
• The recipient of the service must be located outside India.
• The service must not be specified in Section 66D of the Finance Act, 1994 (which lists exempted services).
• The place of provision of service must be outside India.
• Payment for the service must be received in convertible foreign exchange.
• The provider and recipient must not be merely establishments of a distinct person.

The appellant entered into a ten-year agreement with a Malaysian university, which is a government-funded institution established under Malaysian law, to conduct medical education courses for Malaysian students. The appellant provided infrastructure and teaching services in India following the Malaysian university's curriculum, with the degree awarded by the Malaysian university. Student selection was exclusively controlled by the foreign university, and the appellant did not interfere with this process.

The appellant contended that the services rendered fulfilled all conditions under Rule 6A, particularly emphasizing that the recipient of services was the foreign university located outside India, payment was received in convertible foreign exchange, and the place of provision was outside India, as per Rule 3 of the Place of Provision of Service Rules, 2012. The appellant relied on several precedents supporting the principle that the recipient of service is determined by contractual terms and the place of provision is where the recipient is located, not where the service is physically performed.

The adjudicating authority, however, rejected this claim, holding that the services were rendered to an employee of the foreign university located in India (Deputy Dean at the Belagavi center), and thus the place of provision was within India. The authority further held that the appellant provided taxable support services for business or commerce and manpower recruitment or supply services, and rented immovable property, thereby attracting service tax liability.

The Tribunal, after considering the submissions and evidence, found the adjudicating authority's reasoning flawed. It held that the contract clearly identified the foreign university in Malaysia as the service recipient, not its Indian employee or the local teaching center. The Tribunal relied on authoritative rulings, including the decision in the matter of a telecommunications service provider, which clarified that the 'recipient of service' is the party contracting and responsible for payment, not the end-users or employees physically present in India.

The Tribunal also noted that the appellant had furnished invoice copies demonstrating receipt of payment in convertible foreign exchange, thus satisfying the payment condition under Rule 6A. The adjudicating authority's finding that no evidence was provided on this point was held to be unsustainable.

Regarding the 'manpower recruitment or supply agency' service tax demand, the Tribunal observed that the appellant merely provided a list of qualified staff to the foreign university, which independently appointed the staff based on Malaysian regulatory requirements. There was no evidence of consideration received by the appellant for recruitment services, nor was there evidence that the appellant undertook recruitment or supply of manpower as a service. The demand for service tax on this ground was therefore unsustainable.

On the issue of 'renting of immovable property' service tax demand, the appellant admitted to providing such services and paying service tax on the amounts received during the relevant period. The Tribunal found no justification for confirming additional service tax demand or penalties on this count.

On the question of penalty, the Tribunal reiterated the settled legal principle that penalties should not be imposed where the issue involves interpretation of statutory provisions and the appellant acted under a bona fide belief of non-liability. The appellant relied on multiple precedents establishing that when the question is one of interpretation, penalties are not warranted. The Tribunal found the imposition of penalty in this case unsustainable.

In conclusion, the Tribunal held:

• The services provided by the appellant qualify as export of services under Rule 6A of the Service Tax Rules, 1994, and are not taxable under section 65B(44) or related provisions.
• The demand of service tax on 'manpower recruitment or supply agency' services is without basis due to lack of consideration and evidence of such service being provided.
• The service tax demand on 'renting of immovable property' was already discharged by the appellant, rendering the additional demand unsustainable.
• The imposition of penalty is unwarranted given the bona fide nature of the appellant's interpretation and conduct.

Accordingly, the appeal was allowed with consequential relief.

Significant holdings include the Tribunal's affirmation that the contractual recipient of service and place of provision rules govern the classification of export of service, overruling the adjudicating authority's reliance on the physical location of employees or service delivery. The Tribunal stated:

"The recipient of the service is determined by the contract between the parties and by reference to (a) who has the contractual right to receive the services; and (b) who is responsible for the payment for the services provided (i.e., the service recipient)."

Further, the Tribunal emphasized that mere provision of a list of staff does not constitute manpower recruitment or supply service attracting service tax, and that penalties are not to be imposed where the issue involves genuine interpretation of law.

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