2025 (12) TMI 516 - AT - Service Tax

Service tax demand quashed; hotel operator's services held export under Export of Services Rules, 2005, with pure agent exclusions

CESTAT Mumbai held that services rendered by the appellant to its foreign group entities constituted export of services under the Export of Services ... Levy of service tax - export of services or not - services provided by the appellants to their group entity Marriott Hong Kong and other entities located abroad - operating fee received by the appellants from hotel owners under the operation agreement is includable in the value of services provided by the appellants or not - reimbursement expenses received in convertible foreign currency by the appellants from their group entities/companies located abroad - invocation of extended period of limitation. Levy of service tax - export of services or not - services provided by the appellants to their group entity Marriott Hong Kong and other entities located abroad - HELD THAT:- It is a fact on record that the services have been provided by the appellants to their Marriott Hong Kong entity. In terms of the Export of Services Rules, 2005 for the period prior to the amendment of Rule 3(2)(a) w.e.f. 01.03.2010, i.e., prior to 01.03.2010, in order to comply with the Rules of 2005, for treating the service provided to an entity abroad as ‘export of service’, the following twin conditions are required to be satisfied viz., (i) such service shall be provided from India and used outside India; and (ii) payment for such service is received by the service provider in convertible foreign exchange. However, subsequent to the amendment w.e.f. 01.03.2010 by omitting the Rule 3(2)(a) ibid, the only condition for treating the service as export is the receipt of consideration for the services provided in convertible foreign exchange. In the present case, the receipt of foreign exchange from the Marriott Hong Kong/Marriott foreign entities by the appellants are not in dispute, as the same has been duly recorded in their books of accounts and have been declared to the government authorities. On careful perusal of the various agreements entered into between the appellants with the Marriott foreign entities, it transpires that the relationship between the parties is that of the independent contractor-contractee. The content in the agreements clearly provide that no services were provided by the appellants to the end customers/hotel owners, on behalf of the overseas entity. Thus, under such circumstances, it cannot be said that the appellants have acted as an intermediary in the dealings between the overseas entities and their customers in India - On careful examination of the nature of arrangements between the appellants and the foreign entities vis-à-vis the statutory provisions, it is abundantly clear that the services provided by the appellants to the overseas entities qualify as ‘export’ in terms of Rule 3 of the Export of Service Rules, 2005. This is for the reason that in respect of the services provided by the appellants to their overseas entities, such output services have enabled those overseas entities to gain from those services in establishing quality and standards of services as established by Marriott Brand. Thus, under such circumstances, it cannot be said that the appellants have acted as an intermediary in the dealings between the overseas entities and their customers in India. Ministry of Finance, Central Board of Excise & Customs (CBEC) in clarifying the expression ‘used outside India’ in Rule 3(2)(a) of Export of Service Rules, 2005 had stated that the accrual of benefit and their use outside India should be looked into for determining whether the services qualify as export even when they are performed from India. Further, it is not in doubt that the foreign inward remittances for such services have been received by the appellants and have also been duly accounted in the books of accounts maintained by them - On plain reading of the CBIC circular, particularly the clarification at paragraph 4 establish that accrual of benefit from the services provided by the appellants and their use for the benefit of foreign entity would qualify for export. It is found that in the case of Arcelor Mittal Stainless (I) P. Ltd. [2023 (8) TMI 107 - CESTAT MUMBAI-LB], the Larger Bench had examined the identical issues under dispute, in a greater detail and have answered all the questions raised on the doubt whether such services would qualify for ‘export’ or not, in the context of the liability for payment of service tax. The dispute in respect of similar issue relating to status of overseas office vis-à-vis branches/head office and the jurisdiction to classify the services under Section 65(105) of Finance Act, 1994, the receipt of ‘business auxiliary service’ by the assessee appellant from its branches and the inclusion of reimbursable expenses for computation of gross receipts under Section 67 of Finance Act have been dealt in detail by this Tribunal in the case of Tech Mahindra Ltd., Milind Kulkarni Vs. Commissioner of Central Excise, Pune [2016 (9) TMI 191 - CESTAT MUMBAI]. In the aforesaid case, the Tribunal has held that transfer of funds is nothing but reimbursements and taxing of such reimbursement would amount to taxing of transfer of funds which is not contemplated by Finance Act, 1994 and therefore set aside the demand of tax as having been made without authority of law. Whether the operating fee received by the appellants from hotel owners under the “operation agreement’ is includable in the value of services provided by the appellants and whether these are liable for levy of service tax or otherwise? - HELD THAT:- It is a fact on record that the Director of Finance and General Manager were in full time employment with the hotel owners and not that of the appellants. Even if these salaries are considered as includible in the value of consideration under the operating agreement, it would be in the nature of costs incurred as a pure agent. As per Rule 5(2) of the Service Tax (Determination of Value) Rules, any expenses incurred as a pure agent is to be excluded from the value of service. Therefore, there is no merit for inclusion of the remuneration paid to the employees of hotel owners, in the value of taxable services provided by the appellants. Further, in terms of definition under Section 65B(44) of the Act of 1994, the term ‘service’ inter alia, shall not include “(b) a provision of service by an employee to the employer in the course of or in relation to his employment”. Thus, such inclusion of remuneration paid to employees of hotel owners, in the value of services provided by the appellants to their foreign entity, on the ground of under valuation, does not stand the legal scrutiny and therefore it is liable to set aside. Whether the reimbursement expenses received in convertible foreign currency by the appellants from their group entities/companies located abroad is liable for levy of service tax or otherwise? - HELD THAT:- The Tribunal in the case of Haldiram Marketing Pvt. Ltd. Vs. Commissioner, CGST, GST Delhi East Commissionerate [2023 (2) TMI 783 - CESTAT NEW DELHI] have held that sharing of expenditure by associated enterprises cannot be held to be treated as service rendered by one to another. The Hon’ble Supreme Court in the case of Commissioner of Service Tax-III, Mumbai Vs. Vodafone India Limited [2025 (8) TMI 938 - SUPREME COURT] have held the mere fact that the beneficiary of the service is located in India would not be a determinant factor for the levy of service tax under the Rules as the service is, in fact, provided to a recipient located outside India. The adjudged demands along with interest and imposition of penalty on the appellants, in impugned order is not legally sustainable and thus is liable to be set aside - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether services provided by the appellants to group entities located outside India, under intercompany commercial/shared services arrangements, constituted 'export of services' and were, therefore, not liable to service tax during the relevant period. (2) Whether remuneration/salaries of key personnel employed by hotel owners could be included in the taxable value of services rendered by the appellants under the operating agreements. (3) Whether reimbursements/cost allocations between the appellants and overseas group entities (both amounts received from, and amounts paid to, such entities) were liable to service tax. (4) Consequentially, whether the extended period of limitation was invocable and whether penalties on the company and its officers were sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Taxability of services rendered to overseas group entities - whether 'export of services' Legal framework discussed (a) Export of Services Rules, 2005, in particular Rule 3(1) & 3(2) (pre and post 01.03.2010), including the twin conditions of: (i) service provided from India and used outside India; and (ii) receipt of consideration in convertible foreign exchange, and the omission of Rule 3(2)(a) with effect from 01.03.2010. (b) Place of Provision of Services Rules, 2012 and Rule 7 thereof, as relied upon in the impugned order. (c) Section 65(19) and Section 65(105)(zzb) of the Finance Act, 1994 defining and taxing 'Business Auxiliary Service'. (d) CBEC Circular No. 111/05/2009-ST dated 24.02.2009 and Circular No. 141/10/2011-TRU dated 13.05.2011, on the interpretation of 'used outside India' and 'accrual of benefit' under the Export of Services Rules, 2005. (e) Section 66A of the Finance Act, 1994 and related Rules, as interpreted in prior Tribunal decisions (including Tech Mahindra Ltd.). Interpretation and reasoning (i) The Tribunal examined multiple agreements: operating agreements and shared services agreements with hotel owners in India; and intercompany commercial services agreement with the overseas group entity. It found that the impugned dispute is confined to services rendered under the intercompany commercial services agreement and related shared services to overseas entities, not to services rendered directly to hotel owners, on which service tax had already been discharged. (ii) Under the intercompany commercial services agreement, the appellants provided business development, marketing/advertisement and hotel/lodging support services to the overseas group entity for the Asia-Pacific region, for consideration of cost plus 10% markup, received in convertible foreign exchange. The contractual relationship was found to be that of independent contractor and contractee between the appellants and the overseas entity, with no services being provided by the appellants to hotel owners on behalf of the foreign entity, and no role as 'intermediary'. (iii) The Tribunal held that, for the period prior to 01.03.2010, both conditions of Rule 3(2) of the Export of Services Rules, 2005 were satisfied: services were provided from India and used outside India; and payment was received in convertible foreign exchange. It relied on CBEC Circular No. 141/10/2011-TRU clarifying that 'used outside India' must be interpreted with reference to 'accrual of benefit' and 'effective use and enjoyment' of the service, and that the mere fact that activity is performed in India does not preclude export, so long as the benefit accrues outside India. (iv) For the period from 01.03.2010 onwards, after omission of Rule 3(2)(a), the only essential condition was receipt of payment in convertible foreign exchange, which was undisputed. Accordingly, the Tribunal held that the services rendered to the overseas entity constituted export of service. (v) The Tribunal rejected the Commissioner's reasoning that the 'greatest proportion' of the benefit accrued to hotel owners in India and that the services were 'incidental and ancillary' to running hotels in India. Relying on the Larger Bench decision in Arcelor Mittal Stainless (I) Pvt. Ltd., it held that, under the Export of Services Rules, the determinative factor is the location of the service recipient and receipt of consideration in convertible foreign exchange, not the location of end-customers or beneficiaries. (vi) Applying Arcelor Mittal Stainless (I) Pvt. Ltd., the Tribunal affirmed that where an Indian entity provides Business Auxiliary Services to a foreign entity for promotion of the foreign entity's business in India or elsewhere, with consideration received in foreign exchange, such services are 'export of service' under Rule 3 of the Export of Services Rules, 2005, and reliance on income-tax based deeming provisions (as in GVK Industries) is misplaced. (vii) The Tribunal further relied on judgments of the jurisdictional High Court (including decisions in SGS India and Maersk India) to reiterate that service tax is a destination-based consumption tax, leviable only on services provided within India, and that services rendered to foreign clients, with benefit accruing abroad, constitute export of services. (viii) The Tribunal also noted the recent Supreme Court ruling (Vodafone India) affirming that, in determining export of services, the decisive factors are: (a) to whom the service is contractually provided and where that recipient is located; and (b) from whom payment in convertible foreign exchange is received; and that the mere fact that some beneficiaries or preparatory activities are located in India does not convert an exported service into a taxable domestic service. (ix) On classification, the Tribunal examined the definition of 'Business Auxiliary Service' under Section 65(19) and held that, for BAS, there must be a service provider, a service receiver, and a 'client' whose production, marketing or customer care is being augmented. In the intercompany arrangement, the appellants were service provider and the foreign entity was service receiver; there was no separate 'client' in the sense of Section 65(19). Hence, the services did not fall under BAS in the manner assumed by the Commissioner. Conclusions (a) Services rendered by the appellants to overseas group entities under the intercompany commercial services agreement and related arrangements qualify as 'export of services' under Rule 3 of the Export of Services Rules, 2005 for the entire disputed period. (b) The determining criteria were satisfied: the contractual recipient was located outside India; consideration was received in convertible foreign exchange; and the benefit/effective use of the services accrued to the foreign entities. (c) The services could not be treated as taxable 'Business Auxiliary Service' in India to the extent sought in the impugned order; demand of service tax on such receipts is unsustainable. Issue (2): Inclusion of remuneration/salaries of hotel employees in taxable value under operating agreements Legal framework discussed (a) Section 65B(44) of the Finance Act, 1994 defining 'service' and expressly excluding 'a provision of service by an employee to the employer in the course of or in relation to his employment'. (b) Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006 regarding exclusion of amounts incurred as a 'pure agent' from taxable value. Interpretation and reasoning (i) Under the operating agreements, the appellants were required to identify, recruit, hire and supervise senior hotel employees, but the Director of Finance and General Manager were in full-time employment with the hotel owners, not the appellants. (ii) The Commissioner had added remuneration/salaries of such key staff to the taxable value of services provided by the appellants, on the basis that these were part of the 'service cost' linked to operating fees. (iii) The Tribunal held that services rendered by employees to their employer are excluded from the statutory definition of 'service' under Section 65B(44), and thus such salaries cannot be treated as consideration for taxable service rendered by the appellants. (iv) Even assuming any connection with the appellants' activities, such remuneration, if at all routed through the appellants, would be in the nature of expenses incurred as a 'pure agent' on behalf of hotel owners. In terms of Rule 5(2) of the Valuation Rules, costs incurred as a pure agent are excluded from the taxable value of service. Conclusions (a) Remuneration/salaries paid to employees of hotel owners cannot be included in the taxable value of services rendered by the appellants under the operating agreements. (b) The demand based on inclusion of such remuneration/salaries is contrary to Section 65B(44) and Rule 5(2) of the Valuation Rules and is liable to be set aside. Issue (3): Taxability of reimbursements and cost allocations with overseas entities Legal framework discussed (a) Section 66 and 66A of the Finance Act, 1994 on charging of service tax and tax on services received from abroad. (b) Section 67 of the Finance Act, 1994 on valuation of taxable services. (c) Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 and the corresponding framework for determining import of services and reverse charge. (d) Tribunal decisions, including Tech Mahindra Ltd. and Haldiram Marketing Pvt. Ltd., and a Supreme Court decision affirming that mere sharing of expenditure/cost allocation between associated enterprises does not amount to provision of taxable services. Interpretation and reasoning (i) The Tribunal noted that, in respect of several technical, licensing, marketing and technology agreements with foreign group entities, the appellants were not parties; hotel owners were direct recipients and had themselves discharged service tax on reverse charge, which was not in dispute. (ii) With respect to reimbursements/cost allocations received from or paid to overseas group entities, the Tribunal observed that many such flows represented allocation of common costs or reimbursements of expenses rather than consideration for any independent taxable service rendered inter se. (iii) Relying on Tech Mahindra Ltd., the Tribunal reiterated that, although for purposes of Section 66A a foreign branch or overseas establishment may be treated as a distinct entity, the core test under Section 66A and the relevant Rules is whether a taxable service is actually 'received in India' for business or commerce in India. Transfers of funds within an integrated corporate structure for export-related activities, or mere reimbursements between head office and overseas establishments, cannot be taxed absent a distinct taxable service consumed in India. (iv) Tech Mahindra further held that taxing reimbursements or internal fund transfers would amount to taxing mere transfer of funds, which is not contemplated by the Finance Act, 1994, and that Section 66A is not an independent charging provision but only a machinery to determine when service is deemed provided from outside India to an Indian recipient. (v) The Tribunal also relied on Haldiram Marketing and the Supreme Court's affirmation that sharing of expenditure among associated enterprises, or splitting rent/other common costs, is a cost-sharing arrangement and not, per se, a taxable service between them. (vi) Applying these principles, the Tribunal held that the reimbursements/cost allocations at issue between the appellants and their overseas group entities could not, by themselves, be treated as taxable consideration for services, especially when the underlying substantive services were either: (a) export of services to foreign entities; or (b) services for which tax was already discharged by hotel owners on reverse charge basis; or (c) mere cost-sharing without an independent service element. Conclusions (a) Reimbursement of charges in foreign currency and internal cost allocations between the appellants and foreign group entities do not constitute consideration for taxable services in the circumstances of this case. (b) The impugned demands premised on treating such reimbursements/cost sharing as taxable services are without authority of law and are unsustainable. Issue (4): Extended period of limitation and penalties (including on officers) Legal framework discussed (a) Section 73(1) of the Finance Act, 1994 regarding extended period of limitation for recovery on grounds of suppression, willful misstatement, etc. (b) Section 78 and Section 78A of the Finance Act, 1994 for imposition of penalties on the assessee and on directors/officials for specified contraventions. Interpretation and reasoning (i) The Tribunal emphasised that the core demands themselves were not legally sustainable, as the impugned activities either constituted export of services, or were non-taxable reimbursements/cost sharing, or involved exclusionary elements such as employees' remuneration. (ii) Following Tech Mahindra and related precedents, it held that where the foundational levy is itself without authority of law, consequential interest and penalties cannot survive. (iii) Given that the appellants maintained proper books, recorded foreign exchange receipts, and there was no valid taxable service made out on merits, there was no basis for alleging suppression or willful misstatement warranting invocation of the extended period or imposition of penalties, including under Section 78A on individual officers. Conclusions (a) As the underlying service tax demands fail on merits, the invocation of the extended period under Section 73(1) and the imposition of penalties under Sections 78, 77 and 78A are unsustainable. (b) All demands of tax, interest and penalties in the impugned order are set aside, and the appeals are allowed.