2025 (12) TMI 712 - AT - Service Tax

Commission on high seas and indenting services held export u/r 3; no intermediary, service tax demand quashed

CESTAT Mumbai allowed the appeal, holding that the appellant's activities relating to commission on high seas sales and indenting commission did not ... Levy of service tax - services provided by the appellants and the receipt of commission earned by them for such services in the form of commission on ‘high seas sales’ and indenting commission charges - HELD THAT:- There is no evidence of an arrangement between the appellants and the foreign entities wherein the appellants are empowered to make any obligation on behalf of the overseas entity or to bind overseas entity to any contractual obligation. Further, the appellants do not have any authority to negotiate or conclude pricing decisions, to sign any contracts, or to make any commitments on behalf of the overseas entity; that the relationship between the parties as per the agreement is that of the independent contractor-contractee. The content in the agreement clearly provide that no services were provided by the appellants to the end customers on behalf of the overseas entity. Thus, under such circumstances, it cannot be said that the appellant has acted as an intermediary in the dealings between the overseas entities and their customers in India. On careful examination of the nature of arrangement 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 on the basis of the clarification issued by the Central Government. The 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. Plain reading of the CBIC circular F.No. 280/26/2011-CX8A (Pt), 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, in the present case and there does not involve service of BAS. Further, it is also found that in a number of cases, this Tribunal has held that when the contractual arrangement do not provide for empowering the appellant to act as intermediary, the service liability cannot be fastened on the appellants as a service provider. The adjudged demands along with interest and imposition of penalty on the appellants, partly confirmed in the impugned order is not legally sustainable and thus is liable to be set aside - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether commission received for facilitating import and sale of goods in India for foreign suppliers, including on high seas sale basis, constitutes taxable 'Business Auxiliary Service' during the relevant period. 1.2 Whether such commission-based services provided to foreign entities qualify as 'export of service' under the Export of Service Rules, 2005, having regard to the CBEC circulars and judicial precedents. 1.3 Whether, in the light of the above, the confirmation of service tax demand along with interest and penalties under Sections 76, 77 and 78 of the Finance Act, 1994 is legally sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Nature of services, characterization as BAS, and eligibility as export of service Legal framework (as discussed) 2.1 The services were alleged to be taxable under 'Business Auxiliary Service' in terms of Section 65(105)(zzb) of the Finance Act, 1994. 2.2 The classification and taxability were examined with reference to Rule 3 of the Export of Service Rules, 2005 and CBEC Circular No. 141/10/2011-TRU dated 13.05.2011 clarifying the expression 'used outside India' and 'accrual of benefit' under Rule 3(2)(a) as it stood prior to 28.02.2010. 2.3 The Court also considered CBEC Circular No. 111/05/2009-ST (referred to in cited precedents) and multiple judicial decisions holding that services of Indian agents to foreign principals, where benefits accrue abroad, constitute export of service and are not liable to service tax. Interpretation and reasoning 2.4 The Court found that the appellant acted as an indenting agent for foreign entities, facilitating sale of imported goods in India (including high seas sales), receiving commission/indenting commission from such foreign entities. 2.5 On examination of agreements and records, the Court held that: (a) The appellant had no authority to bind the foreign entities contractually, negotiate or conclude prices, sign contracts, or make commitments on their behalf. (b) The relationship was that of independent contractor and contractee, not that of an intermediary empowered to represent or bind the foreign principal vis-à-vis Indian customers. (c) No services were provided by the appellant to the end customers on behalf of the foreign entities. 2.6 In these circumstances, the Court concluded that the appellant could not be treated as an intermediary for levy of service tax under BAS in relation to the foreign suppliers' customers in India. 2.7 Applying CBEC Circular No. 141/10/2011-TRU, the Court held that the determinative test is where the 'accrual of benefit' and effective 'use and enjoyment' of the services take place. The benefit of the services, namely, promotion and facilitation of sale of goods, accrued to the foreign entities outside India, even though activities were performed in India. 2.8 The Court noted that: (a) Foreign inward remittances for such services were received and duly accounted for. (b) The services were rendered on instructions of foreign principals, who were liable to pay for the services and for whose business needs the services were performed. (c) Therefore, the location of the service recipient (foreign entities) and the place where benefits accrue (outside India) determine the export character of the service. 2.9 Relying on Tribunal and High Court decisions (including those dealing with agents procuring orders or marketing goods for foreign suppliers, where consideration is received from abroad), the Court endorsed the principle that, for 'Business Auxiliary Service' falling under Category III of the Export of Service Rules, the person to whom the benefit of service accrues and the location of such person decide whether the service is an export. 2.10 The Court accepted the ratio that: (a) 'Your customer's customer is not your customer'; the service recipient is the foreign principal who contracts, pays, and whose business need is satisfied, not the Indian buyers affected by the performance of the service. (b) Where the foreign principal derives the benefit of services rendered from India, the services qualify as export of service and are not taxable in India. 2.11 On this reasoning, the Court held that the services in question satisfied the conditions of export under Rule 3 of the Export of Service Rules, 2005, as interpreted by CBEC circulars and binding precedents, and therefore did not attract service tax as BAS in India, for the entire disputed period. Conclusions on Issues 1 & 2 2.12 The commission/indenting commission earned for facilitating import and sale of goods in India for foreign entities, including high seas sale commission, constituted services rendered to foreign recipients, the benefit of which accrued outside India. 2.13 Such services qualified as 'export of service' under the Export of Service Rules, 2005; no taxable 'Business Auxiliary Service' liability could be fastened on the appellant in India for the disputed period. 2.14 The partial confirmation of demand by treating the services as taxable BAS prior to 22.05.2007 (based on pre-amendment wording of the Export of Service Rules) was inconsistent with CBEC's own interpretation and the judicial position, and hence unsustainable. Issue 3: Validity of demand, interest and penalties Interpretation and reasoning 3.1 Having held that the services were export of services and not liable to service tax in India, the Court found that there was no legal basis for demand of service tax under Section 73(1) of the Finance Act, 1994. 3.2 Consequently, the foundations for recovery of interest and imposition of penalties under Sections 76, 77 and 78 of the Finance Act, 1994 also failed. 3.3 The Court observed that the impugned appellate order, to the extent it upheld the adjudged demands, ignored binding CBEC clarifications and settled judicial precedents and therefore did not withstand legal scrutiny. Conclusions on Issue 3 3.4 The service tax demands, along with interest and penalties, as partially upheld in the impugned order, were held to be not legally sustainable. 3.5 The impugned order was set aside in toto, and the appeal was allowed in favour of the assessee with consequential relief.