2025 (8) TMI 938 - SC - Service Tax

Appeals dismissed upholding services as exports under Rule 3; provider-recipient relationship supports relief, factual findings affirmed

Commissioner Of Service Tax-III, Mumbai Versus M/s. Vodafone India Limited

Commissioner Of Service Tax-III, Mumbai Versus M/s. Vodafone India Limited - 2025 INSC 914 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether services rendered by Indian assessees fall within the definition of 'export of taxable service' under the Export of Service Rules, 2005 (Rule 3) or, post-2012, under Rule 6A of the Service Tax Rules read with the Place of Provision of Services Rules, 2012 (POP), such that service tax is not leviable. 1.2 Whether, for Category (III) services (business-auxiliary and other non-performance-based services), the determining criteria for export are (a) recipient located outside India and (b) payment received in convertible foreign exchange, or whether additional/performance-based conditions (e.g., 'delivered outside India', 'used outside India', or 'provided outside India') remain applicable notwithstanding their omission in amendments. 1.3 Whether services performed in India but contracted with and paid by a foreign recipient (including principal-to-principal arrangements and telecommunication/data connectivity services) can be characterized as exports where beneficiaries or end-users are located in India. 1.4 Whether findings of fact by the Tribunal (CESTAT) that services were exported and entitlement to CENVAT credit were rightly recorded, and whether such factual findings merit interference by this Court. 1.5 Whether decisions such as Paul Merchant (Tri. Del.) and subsequent Tribunal holdings are to be followed, distinguished or displaced when characterising Category (II)/(III) services as exports; and whether an alternate analysis (e.g., treating the provider as intermediary or applying performance-based tests) should apply. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Issue 1 - Legal framework for export of services (Rule 3, Rule 6A, POP) and controlling conditions Legal framework: Export of Service Rules, 2005 (Rule 3) initially contained diverse criteria (category-based scheme): Category I (immovable property), Category II (performance-based), Category III (services to recipient located outside India, with earlier provisos including delivery/use outside India and payment in convertible foreign exchange). Post-27.02.2010 amendments omitted the 'delivered/provided/used outside India' language for the relevant periods, reducing Rule 3(2) effectively to the twin requirements: recipient located outside India and payment received in convertible foreign exchange. From 01.07.2012 onward Rule 6A (Service Tax Rules) and POP govern exports: Rule 6A retains provider in India + recipient outside India + payment in convertible foreign exchange and adds place-of-provision requirement under POP (place = location of recipient), negative list exclusion and non-establishment-of-distinct-person conditions. Precedent Treatment: The Tribunal decisions (e.g., Paul Merchant, Microsoft, Vodafone, others) applied the category-based tests and, in cases where contractual recipient was located outside India and payment in convertible foreign exchange was received, held services to be exports. The Court notes these authorities and treats them as binding for issues of interpretation of Rule 3 and Rule 6A insofar as consistent with statutory text and amendments. Interpretation and reasoning: The Court emphasises textual primacy: after the 27.02.2010 omission, the statutory text of Rule 3 no longer required 'delivered/provided/used outside India' and thus those conditions cannot be read back into the rule. Under POP, place of provision is the location of the recipient as defined. Rule 6A and POP require (i) recipient outside India, (ii) payment in convertible foreign exchange, (iii) place of provision outside India (as per POP), (iv) service not in negative list, and (v) provider/recipient not mere establishments of distinct person. The Court reasons that where these textual conditions are satisfied on the agreed contract and facts, the service qualifies as export. Ratio (binding): The statutory criteria as enacted and amended govern export characterisation; omitted conditions cannot be judicially re-imported; post-2012 POP Rule 3 fixes place as recipient location and must be applied. Obiter: Historical policy discussion (1999-2003 evolution) describing legislative intent of destination-based taxation is explanatory but not a separate holding. Conclusions: The Court accepts that the twin requirements (recipient outside India; payment in convertible foreign exchange) and the POP place-of-provision test control for the relevant periods; exports can be established even where some performance occurs in India so long as statutory conditions are satisfied. 2.2 Issue 2 - Category (III) services: contract recipient v. incidental beneficiaries; role of place of performance Legal framework: Category (III) services under Rule 3(1)(iii) and business-auxiliary services under Section 65(19) are governed by the tests in Rule 3 and, post-2012, by Rule 6A & POP. Business Auxiliary Service definition contemplates services rendered 'to a client' (promotion/marketing/procurement etc.). Precedent Treatment: Paul Merchant (Tri. Del.) and subsequent Tribunal rulings held that the relevant criterion for Category (III) services is the contractual recipient and payment in convertible foreign exchange; performance-based tests applicable to Category (II) services are not to be transposed to Category (III). The Court notes the Tribunals have followed this approach in multiple fact patterns. Interpretation and reasoning: The Court accepts the contractual/recipient-based approach for Category (III) services: service tax is a contract-based levy and privity of contract with the foreign recipient, together with payment in convertible foreign exchange, determines export status. Beneficiaries or end-users located in India do not alter character where there is no contractual relationship with them and the recipient abroad pays for the service. The Court rejects Revenue's contention that mere in-India benefit negates export treatment when the statute's conditions are met. Ratio: For Category (III) services, the place/location of the recipient and receipt of payment in convertible foreign exchange are determinative; performance-based tests for Category (II) are inapplicable to Category (III) unless the statute specifies otherwise. Obiter: Discussion that preparatory/ancillary in-India activities do not defeat export character is illustrative of application. Conclusions: Tribunal findings that services which were contracted to and paid by foreign recipients qualified as export under Rule 3/Rule 6A are upheld where facts show privity, invoices raised on foreign recipient and receipt of convertible foreign exchange. 2.3 Issue 3 - Telecommunication/data connectivity and Category (II)/(III) services: principal-to-principal supply v. intermediary characterization Legal framework: Telecommunication services (Section 65(109a)) and their export are governed by Rule 3/Rule 6A and POP; POP provides definitions including 'intermediary' and prescribes place of provision rules (Rule 3 POP). Precedent Treatment: Tribunal holdings (e.g., Verizon, Vodafone, Microsoft) treated principal-to-principal connectivity/roaming/data services as exports where contract, invoicing and payment were with foreign recipient. The Tribunal rejected intermediary classification where service provider performed on its own account and not merely arranged provision between parties. Interpretation and reasoning: The Court accepts the Tribunal's analysis that a principal-to-principal contractual relationship with a foreign recipient, invoicing and receipt of convertible foreign exchange, and absence of intermediary characteristics (i.e., not merely arranging/facilitating) establish export. The POP definition of intermediary is applied strictly; mere facilitation or impact on Indian end-users does not convert the provider into an intermediary if it supplies the main service on its account to the overseas recipient. Ratio: Telecommunication/data connectivity services contracted to and paid by foreign recipients are exports where POP place-of-provision and Rule 6A conditions are met; intermediary characterization requires factual foundation and is not to be lightly inferred. Obiter: Administrative circulars and guides cited as supportive but not determinative beyond statutory text. Conclusions: Tribunal findings treating such telecommunication/data services as exports are affirmed where contractual and payment conditions are satisfied and no intermediary role exists. 2.4 Issue 4 - Principal-to-principal distributors, reimbursements and characterization of receipts (Canon and similar fact patterns) Legal framework: Business auxiliary service definition, plus fact-sensitive distinction between reimbursement/commission and principal trading operations; characterization affects taxability under the Rules. Precedent Treatment: Canon decision considered by the parties; Tribunal in several matters concluded that where the Indian entity is a principal-to-principal distributor (purchasing and reselling on its own account) receipts from foreign principal reimbursing marketing expenses or sales proceeds are not BAS receipts; CESTAT applied Paul Merchant and related decisions to distinguish agency receipts from principal receipts. Interpretation and reasoning: The Court recognises that where the assessee acts as principal and not as commission agent or service provider, the activities may not fall within the BAS definition. Whether a transaction is BAS or a principal sale/reimbursement is a factual determination depending on contract terms and commercial reality. The Tribunal's factual findings on these points are not found to be perverse. Ratio: Characterisation of receipts as BAS or principal receipts depends on contract and factual matrix; Tribunal determinations on this factual issue are binding absent perversity. Obiter: Comparative reference to Canon illustrates limits of BAS application; not displacing Tribunal findings in other fact patterns. Conclusions: Where Tribunal found principal-to-principal status or absence of BAS services on facts, the Court upholds those conclusions. 2.5 Issue 5 - Scope for appellate interference in Tribunal's factual findings and treatment of precedent (Paul Merchant etc.) Legal framework: Appellate review of Tribunal orders in tax matters is limited to questions of law and perversity in factual findings; Tribunal's application of legal tests to facts engages appellate jurisdiction only if erroneous in law or perverse. Precedent Treatment: Multiple Tribunal rulings applied Paul Merchant and similar decisions consistently to hold exports where statutory conditions met. Revenue urged re-interpretation; Court examined statutory amendments and Tribunal reasoning. Interpretation and reasoning: The Court finds that CESTAT's determinations were primarily factual (existence of contract with foreign recipient, invoicing, receipt in convertible foreign exchange, nature of services as principal supply v. intermediary) and not perverse. Tribunal correctly applied statutory tests; the Court declines to re-weigh evidence. Paul Merchant's reasoning on category distinction is treated as correctly applying Rule 3 and is followed for the appeals before the Court. Ratio: Absent perversity or misapplication of law, appellate interference with Tribunal's factual findings is unwarranted; the Tribunal's legal interpretations consonant with statutory amendments are affirmed. Obiter: Remarks on historical policy and legislative amendments are explanatory of statutory evolution. Conclusions: Tribunal findings are upheld; appeals dismissed. 3. CONCLUDING RESULT (COURT'S CONCLUSION) 3.1 The Court holds that for the periods under consideration the statutory tests in Rule 3 (as amended), and thereafter under Rule 6A and POP, control the characterisation of exported services. Where the recipient is located outside India, payment is received in convertible foreign exchange and the place of provision under POP is outside India, services qualify as export notwithstanding ancillary performance in India or beneficial effect on Indian end-users. 3.2 The Court finds no perversity in the Tribunal's factual findings that the services in the assorted matters were exported and that CENVAT credits/refunds were properly allowed; the Tribunal's application of Paul Merchant and subsequent authorities is upheld. The appeals by Revenue are dismissed.