2025 (12) TMI 715 - AT - Service Tax

No reverse charge service tax on diamond machine software loading when foreign provider has Indian PE, Section 66A

CESTAT Ahmedabad allowed the appeal, holding that service tax under reverse charge mechanism was not payable by the Indian recipient for services relating ... Applicability of reverse charge mechanism - foreign company has an Indian subsidiary which provides services of loading of software etc in the diamond cutting machine and the payments are made directly to the company outside India - time limitation - HELD THAT:- This Court has gone through the decision of the Division Bench in KIRAN GEMS PVT LTD [2024 (3) TMI 344 - CESTAT AHMEDABAD] which dealt with the same issue in relation to same company i.e. M/s. Sarin India and M/s. Sarin Israel and it was held that 'under the purview of Section 66A of the Finance Act, 1994 when a permanent establishment of the foreign service provider exists in India the recipient of service in India cannot be made liable to pay service as under reverse charge mechanism.' As the matter is not more res integra and stands decided on merits as well as on limitation in favour of the party by the Division Bench of this Tribunal. Therefore following the decision and the ratio in that case, appeal on merits and limitation is decided in favour of the party. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the demand of service tax under reverse charge mechanism on payments made to foreign suppliers for information technology software service is sustainable when the foreign supplier has an Indian subsidiary claimed to be its permanent establishment in India. 1.2 Whether, in the circumstances of the case and having regard to the interpretational nature of the dispute and conduct of the assessee, the extended period of limitation for demand of service tax is invocable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Liability under reverse charge mechanism for information technology software service where foreign supplier has Indian subsidiary / permanent establishment Legal framework (as discussed) 2.1 The Tribunal considered the applicability of section 66A and section 68(2) of the Finance Act, 1994 read with rule 2(1)(d) of the Service Tax Rules and rule 3(iii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, in the context of 'information technology software service' under section 65(105)(zzzze). Interpretation and reasoning 2.2 The factual position, as noticed from the impugned order, was that the appellant placed orders directly on foreign companies, invoices were issued directly to the appellant, software and licences/right to use/end-use agreements were supplied directly by the foreign companies, and payments were remitted in convertible foreign currency to those foreign entities. The Indian subsidiary was only engaged for installation and related pre-sale and post-sale support in India. 2.3 The lower authority had held that since the foreign service providers had no permanent / business establishment in India, the appellant, as recipient, was liable under reverse charge for import of service. 2.4 The Tribunal examined and followed a prior Division Bench decision concerning the same foreign supplier and its Indian subsidiary, in which it was held that it was erroneous for the department to allege that the Indian subsidiary was not a permanent establishment of the foreign principal. It was observed there that the foreign entity had its head office abroad and the Indian entity operated as an agency carrying out business in India as a branch/arm of the foreign company, thereby constituting a permanent establishment in India. 2.5 In that earlier decision, it was held that where a permanent establishment of the foreign service provider exists in India, liability under section 66A on the Indian recipient as a deemed service provider under reverse charge cannot be fastened, since the services are considered as provided from the permanent establishment in India and not from outside India. 2.6 The Tribunal held that the present matter was squarely covered by the said Division Bench ruling on identical facts and involving the same foreign supplier and Indian subsidiary. Accordingly, the conclusion in that decision that section 66A could not be invoked against the recipient when the foreign service provider has a permanent establishment in India was applied to the present case. Conclusions 2.7 The Tribunal held that, in view of the existence of a permanent establishment of the foreign service provider in India, service tax under reverse charge mechanism under section 66A could not be demanded from the appellant as recipient of service. The demand on merits was therefore unsustainable. Issue 2: Invocability of the extended period of limitation for demand of service tax Legal framework (as discussed) 2.8 The Tribunal considered the applicability of the extended period of limitation and allegations of wilful suppression in the context of demands raised under the Finance Act, 1994. Interpretation and reasoning 2.9 The Tribunal relied on the earlier Division Bench decision, which had examined statements of authorised signatories recorded during investigation. Those statements were found to be exculpatory, with no indication of intention to evade service tax. 2.10 In that decision, it was held that the issue was one of interpretation of the provisions relating to liability under section 66A and that the assessee's understanding-that no service tax was payable by it because the foreign suppliers were providing service through their Indian arm having a fixed establishment in India-constituted a bona fide interpretation based on a strict reading of law. 2.11 On that basis, the Division Bench had held that there was no wilful suppression of facts, the extended period could not be invoked, and demands beyond the normal limitation period could not be sustained. 2.12 Observing that the present case involved the same legal issue, the same supplier structure, and that the matter was fully covered by the earlier ruling both on merits and on limitation, the Tribunal applied the same reasoning to the present appellant. Conclusions 2.13 The Tribunal held that there was no wilful suppression or mala fide intention on the part of the appellant, that the dispute was purely interpretational, and therefore the extended period of limitation was not invokable. Demands beyond the normal period were unsustainable. 2.14 As the issue stood concluded in favour of the assessee on merits as well as on limitation by the binding Division Bench decision, the impugned order was set aside and the appeal was allowed with consequential relief.