2025 (12) TMI 1004 - AT - Service Tax

No service tax under RCM on foreign subsidiary payments; revenue-sharing held non-taxable u/ss 65B(44) and 66B

CESTAT Chennai allowed the appeal substantially, holding that payments made by the appellant to its foreign subsidiaries/licensees did not constitute ... Short-payment of Service Tax - service tax paid under Reverse Charge Mechanism (RCM) on certain payments made to its subsidiary/associate companies located outside the taxable territory during the period from April 2014 to June 2017. Revenue Neutrality - invocation of extended period of limitation. Whether the foreign subsidiaries/Licensees have rendered any “service” to the Appellant within the meaning of Section 65B(44)? - HELD THAT:- The Inter-Company Agreement clearly shows that the Appellant is the sole service provider to the foreign Licensees - The Customization & Implementation (C & I) Agreements are between Licensees and foreign customers; the Appellant is not a contracting party. In the case of M/s. Tech Mahindra Ltd., Milind Kulkarni Versus Commissioner of Central Excise, Pune - I [2016 (9) TMI 191 - CESTAT MUMBAI]., the Tribunal held that 'it cannot be substituted by any other entity. The activity of the head office and branch are thus inextricably enmeshed. Its employees are the employees of the organization itself. There is no independent existence of the overseas branch as a business. The economic survival of the branch is entirely dependent on finances provided by the head office. Its mortality is entirely contingent upon the will and pleasure of the head office. The transfer of funds by gross outflow or by netted inflow is, therefore, nothing but reimbursements and taxing of such reimbursement would amount to taxing of transfer of funds which is not contemplated by Finance Act, 1994 whether before 2012 or after.' Further Section 65B (44) requires:(a) an Activity; (b) by one person for another;(c) for consideration. In the present case, none of the Agreements create an activity performed “for” the Appellant. The Department has not produced a single document evidencing any service obligation owed by the Licensee to the Appellant - the issue decided in favor of appellant. Whether payments constitute “consideration” for a service or mere price-adjustments? - HELD THAT:- When services are performed outside India, even if the payment is made by an Indian entity or the contract involves group companies, the services are not taxable in India. Customization and implementation services have been carried out not in a taxable territory. Even if a part of the service undertaken is performed through a service provider located abroad it is not subjected to tax - There is no question of importing a service if the entire activity is carried out outside India. Therefore, we conclude that the impugned remittances are not any consideration but mere settlement of inter-company commercial arrangements. Revenue sharing arrangements do not involve provision of service by one person to another - issue answered in favour of the Appellant. Whether the alleged activities are taxable in India (Sections 66B, POPS Rules)? - HELD THAT:- he POPS Rules establish a clear hierarchy. Rule 14, in particular, clarifies that if a service falls under both a specific rule (like Rule 4) and a general rule (Rule 3), the more specific rule will apply. We also note that by relying on Rule 3, the Revenue is applying a general rule to a situation that is specifically covered by a different rule. If the service in question is indeed a 'performance-based service' as defined by Rule 4, the service provider can argue that the Revenue's position is incorrect. The argument would be that since Rule 4 specifically addresses their situation, it must be used to determine the place of provision, regardless of what Rule 3 would suggest. This view is also fortified by the decision of Mumbai CESTAT in the case of M/s. Tech Mahindra Ltd., Milind Kulkarni Versus Commissioner of Central Excise, Pune - I that services performed abroad for foreign projects cannot be taxed in India merely because the Indian entity is involved in execution applies squarely to this case - the issue is answered in favour of the Appellant. Whether revenue-neutrality negates the demand? - HELD THAT:- Where credit is fully available, no motive to evade can be inferred, and demands cannot sustain - it is found that the entire exercise is revenue-neutral, further reinforcing that the extended period could not have been invoked - it is also found that M/s. Tech Mahindra Ltd., Milind Kulkarni Versus Commissioner of Central Excise, Pune - I also have applied revenue neutrality to hold that no intention to evade could be inferred in RCM situations - the issue stands answered in favour of the Appellant. On merits the issue of Taxability under RCM is answered in favour of Appellant. Whether extended period and penalties are invocable? - HELD THAT:- The Department has not discharged the burden of establishing suppression, wilful misstatement, or intent to evade. The case turns squarely on interpretation of contractual clauses, the proper characterisation of cost-sharing arrangements, and the application of the Place of Provision of Services Rules, 2012, an area where divergent legal views are not uncommon - the principles apply squarely to the present dispute. The Appellant is a listed public company, its financials are publicly available, and all relevant figures stand recorded in audited accounts. The Department has culled out the figures from the Audited accounts/balance sheet. There is no evidence of clandestine activity, falsification of records, or intentional suppression. The Department relies only on audit-based reinterpretation of transactions, a situation which the Supreme Court has repeatedly held cannot constitute suppression. Further, the demand itself is revenue-neutral, since any tax if payable would be fully available as CENVAT credit to the Appellant. The Larger Bench decision in Jay Yuhshin Ltd. [2000 (7) TMI 105 - CEGAT, COURT NO. I, NEW DELHI-LB] have held that where credit is fully available and the situation is revenue-neutral, there is no motive to evade tax, and extended limitation cannot be invoked - the invocation of the proviso to Section 73(1) fails on both factual and legal grounds. As we hold that the extended period is not attracted, and the consequential penalties under Sections 77 and 78 also fail as a natural corollary - the demand of Rs ₹36,77,40,000/-fails on merits as well as limitation. Whether the demand of Rs.1,16,11,766/- for December 2016 is sustainable in view of the admitted clerical error and full tax payment? - HELD THAT:- Certain factual gaps remain and it is clearly essential that proper verification is done as to payment of the applicable tax of Rs.1,16,11,766 on the Invoice No. ISR 0001615 dated 31.12.2016 raised by the assessee on ‘M/s. SEEC Asia’ towards maintenance fee for the quarter ending Q1 & Q2 for Rs.7,74,11,790/- which was not reportedly included in ST-3 returns filed. The appellant is not disputing the liability for service tax payment of above Rs.1,16,11,766 and he is repeatedly affirming that the payment has been made but due to clerical mistake, the above invoice along with tax was not reflected in the ST-3 returns filed though booked in their ledger account of SEEC Asia by the Assessee - the demand of Rs.1,16,11,766 is not sustainable if the tax paid is confirmed by such verification by the Adjudicating Authority. So, the issue is remanded for carrying out such verification with a notice to the Appellant. The findings of the Original Adjudicating Authority cannot be sustained and the impugned Order-in-Original No. 48/2022 CH.N.GST dated 28.03.2022 confirming the demand of Service Tax under the alleged category of “import of services,” for Rs.36,77,40,000/- together with interest under Section 75 and penalties under Sections 77 and 78 of the Finance Act, 1994, is hereby set aside but, regarding confirmation of demand of service tax of Rs.1,16,11,766/- allegedly short paid towards service provided to M/s. SEEC Asia during the month of December 2006 is required to be verified by the Adjudicating Authority. The appeal is partly allowed and partly remanded. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the foreign subsidiaries/licensees rendered any 'service' to the appellant within the meaning of Section 65B(44) of the Finance Act, 1994. 1.2 Whether the payments/remittances made to the foreign subsidiaries/licensees constituted 'consideration' for an imported service or were merely downward price-adjustments/inter-company cost settlements. 1.3 Whether the alleged activities were taxable in India in terms of Sections 64, 66B of the Finance Act, 1994 read with the Place of Provision of Services Rules, 2012. 1.4 Whether the situation being revenue-neutral negated or diluted the demand and the allegation of intent to evade. 1.5 Whether invocation of the extended period under the proviso to Section 73(1) and imposition of penalties under Sections 77 and 78 of the Finance Act, 1994 were legally justified. 1.6 Whether the demand of Rs.1,16,11,766/- for December 2016, arising from discrepancy between ST-3 return and books of account, was sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether any 'service' was rendered by the foreign subsidiaries/licensees to the appellant (Section 65B(44)) Legal framework (as discussed): The Tribunal considered the statutory definition of 'service' in Section 65B(44), requiring (a) an activity; (b) by one person for another; (c) for consideration. The Tribunal also relied on precedent holding that internal transactions within a group or between head office and branch may, in appropriate cases, amount to mere reimbursements, not taxable services. Interpretation and reasoning: 2.1 On examination of the Inter-Company Agreement, the Tribunal found that the appellant was contractually the sole service provider of software and implementation services to the foreign licensees; the licensees were not contractually obligated to render any service to the appellant. 2.2 Clause 2.2 of the Inter-Company Agreement provided that 90% of the implementation fee was payable to the appellant; if part of the work was done by the licensee, the corresponding cost was netted off from the appellant's entitlement. The Tribunal held that this mechanism reflected adjustment of the appellant's share of implementation fee, not a positive obligation on licensees to provide services to the appellant. 2.3 The Customization & Implementation Agreements were between the licensees and foreign end-customers; the appellant was not a contracting party, and no document was produced showing any service obligation owed by the licensees 'for' the appellant. 2.4 Applying the definition in Section 65B(44), the Tribunal held that there was no identifiable 'activity by one person for another' vis-à-vis the appellant; consequently, the foundational element of a taxable service - a service rendered to the appellant - was missing. Conclusion: The foreign subsidiaries/licensees were not providing any taxable 'service' to the appellant within the meaning of Section 65B(44). Issue 1 was decided in favour of the appellant. Issue 2 - Whether payments to foreign licensees constituted 'consideration' for imported services or mere price-adjustments/cost-sharing Legal framework (as discussed): The Tribunal considered that 'consideration' under the Finance Act, 1994 entails a quid pro quo payment for a service, and that mere reimbursements, downward price adjustments, or internal cost-sharing without such quid pro quo do not amount to consideration for service. Interpretation and reasoning: 3.1 The Revenue relied on debit notes/invoices showing 'Employee Benefit Expenses' and 'Software Development Expenses' raised by foreign entities to allege that these were charges for manpower and software services supplied to the appellant. 3.2 The Tribunal read these debit notes in the context of the Inter-Company Agreement and held that they only quantified the licensees' costs for the portion of implementation work undertaken by them, which led to a reduction in the appellant's 90% entitlement under Clause 2.2. This was a commercial revenue-sharing/price-adjustment, not a payment in return for a distinct service provided to the appellant. 3.3 The Tribunal held that there was no quid pro quo between any service allegedly rendered by the licensees to the appellant and the impugned payments; rather, the payments represented internal settlement of commercial arrangements and sharing of project revenue/costs among group entities. 3.4 Relying on precedents, the Tribunal noted that internal cost-sharing or downward price adjustments within multinational groups, where entities jointly execute projects, do not automatically constitute 'consideration-based services' for tax purposes, particularly when the payment is in substance reimbursement of costs and not a charge for profit-earning services supplied to another entity. 3.5 The Tribunal further observed that, even otherwise, where implementation services are actually performed outside India, mere inter-company payment routing through an Indian entity does not transform such external performance into a taxable import of service in India. Conclusion: The remittances to foreign licensees did not constitute 'consideration' for any service provided to the appellant but were merely commercial price-adjustments and cost settlements under a revenue-sharing arrangement. Issue 2 was decided in favour of the appellant. Issue 3 - Taxability in India under Sections 64, 66B and the Place of Provision of Services Rules, 2012 Legal framework (as discussed): The Tribunal applied Section 66B, which taxes services provided in the taxable territory, and the Place of Provision of Services Rules, 2012. Specifically, it considered Rule 4 (performance-based services) and Rule 3 (general rule), along with Rule 14 which provides that specific rules override the general rule. Interpretation and reasoning: 4.1 Assuming arguendo that some service existed, the Tribunal found that all implementation/customization work undertaken by foreign licensees was performed at foreign customer sites abroad. 4.2 The Tribunal held that such implementation/customization is a 'performance-based service' squarely covered by Rule 4 of the POPS Rules, whereby the place of provision is where the service is actually performed. Since performance was outside India, the place of provision was outside the taxable territory. 4.3 It rejected the Revenue's reliance on Rule 3 as misconceived, holding that Rule 4 is the specific rule applicable to performance-based services and, by virtue of Rule 14 and principles of statutory interpretation, overrides the general Rule 3. 4.4 Relying on precedent, the Tribunal reiterated that services performed abroad for foreign projects cannot be subjected to tax merely because an Indian group entity is involved in the contractual or financial chain; if the performance and consumption are outside India, Section 66B is not attracted. Conclusion: Even on the assumption that any service existed, the place of provision was outside India and, therefore, the activities were not taxable under Section 66B. Issue 3 was decided in favour of the appellant. Issue 4 - Effect of revenue-neutrality on the demand and on inference of intent to evade Legal framework (as discussed): The Tribunal examined the doctrine of revenue-neutrality, particularly where any tax payable on input services is fully available as CENVAT credit, and considered case law holding that absence of net revenue gain undermines the inference of an intention to evade duty and affects the sustainability of extended period demands. Interpretation and reasoning: 5.1 It was undisputed that, if any service tax were payable under reverse charge, the appellant, being an output service provider, would be entitled to full and immediate CENVAT credit of such tax. 5.2 The Tribunal, relying on multiple decisions, held that where the entire exercise is revenue-neutral, there is ordinarily no incentive or motive to evade tax. Such neutrality is relevant both to the question of whether extended limitation can be invoked and to the sustainability of demands which, in substance, yield no net revenue. 5.3 The Tribunal also noted that in analogous reverse charge scenarios, revenue-neutrality has been recognized as a factor negativing mala fides or intent to evade. Conclusion: The situation was revenue-neutral since any tax, if paid, would be fully available as credit to the appellant. This reinforced the conclusion that the demand could not be sustained on grounds of evasion or suppression and, in any case, undermined the justification for extended limitation. Issue 4 was decided in favour of the appellant. Issue 5 - Validity of invoking extended period under proviso to Section 73(1) and penalties under Sections 77 and 78 Legal framework (as discussed): The Tribunal considered the proviso to Section 73(1) (extended period for suppression, wilful misstatement, fraud, etc.) and penalties under Sections 77 and 78, along with Supreme Court decisions clarifying that mere non-payment or wrong interpretation of law does not amount to suppression or wilful misstatement. Interpretation and reasoning: 6.1 The Tribunal characterised the dispute as essentially interpretational, turning on (i) proper construction of inter-company and C&I agreements; (ii) correct characterisation of inter-company cost/revenue-sharing versus taxable services; and (iii) application of the POPS Rules to cross-border implementation activities. 6.2 It found that the appellant is a listed company which regularly filed ST-3 returns and audited financial statements, and that the figures relied on by the Department were culled from these publicly available and routinely filed documents. Hence, the material facts were not concealed; the Department could have raised the issue earlier through due diligence. 6.3 There was no evidence of falsification of records, fabrication of documents, clandestine transactions or any positive act indicating deliberate suppression or fraud. The Department's case rested on a different legal characterisation of disclosed transactions, not on discovery of hidden facts. 6.4 The Tribunal also took into account the revenue-neutral nature of the alleged liability, which, in its view, further weakened any inference of intention to evade tax. 6.5 Applying the principles laid down by the Supreme Court, the Tribunal held that: - Mere omission or failure to declare, absent deliberate intent, does not constitute 'suppression' for invoking the extended period. - 'Suppression of facts' and 'wilful misstatement' require a conscious, deliberate act of withholding material information with intent to evade; mere wrong interpretation or bona fide dispute on classification or taxability does not suffice. 6.6 Given the interpretational nature of the controversy, availability of records to the Department, lack of evidence of deliberate concealment, and revenue-neutrality, the Tribunal concluded that the ingredients of the proviso to Section 73(1) were not satisfied. Conclusion: Invocation of extended period and imposition of penalties under Sections 77 and 78 were held to be unsustainable. Issue 5 was decided in favour of the appellant. Consequently, the demand of Rs.36,77,40,000/- along with interest and penalties was set aside on both merits and limitation. Issue 6 - Sustainability of demand of Rs.1,16,11,766/- for December 2016 arising from discrepancy in ST-3 return Legal framework (as discussed): The Tribunal proceeded on the general principle that liability must be determined on the basis of actual tax payable and paid, and that a mere reporting error in a return does not by itself establish short-payment if the underlying remittance is complete and verifiable. Interpretation and reasoning: 7.1 The appellant admitted a clerical/typographical error in the ST-3 return for December 2016, whereby the tax liability was shown as Rs.24.26 crore instead of Rs.25.61 crore, but consistently asserted that the entire tax, including Rs.1,16,11,766/- on a specific invoice to a foreign customer, had in fact been paid and duly recorded in the books of account. 7.2 A detailed reconciliation (Annexure 11) was produced to show that service tax on Invoice No. ISR 0001615 dated 31.12.2016 (maintenance fee to a foreign customer) had been fully discharged, though the invoice and tax were not correctly captured in the ST-3 return. 7.3 The Tribunal noted that no revised return was filed but held that mere failure to revise the return does not, by itself, prove short-payment if the tax remittance is otherwise established from primary records. 7.4 The Tribunal found that there were factual gaps: while the appellant repeatedly affirmed payment of the tax, the Department did not provide a clear rebuttal on the computation of liability, taxable turnover, or on the specific invoice. Proper verification of the appellant's reconciliation and records was, therefore, required. 7.5 The Tribunal held that if, upon verification, it is confirmed that service tax of Rs.1,16,11,766/- has indeed been paid on the said invoice and reflected in the books, then the demand cannot survive, as the discrepancy would be confined to reporting, not payment. Conclusion: The demand of Rs.1,16,11,766/- for December 2016 was held to be unsustainable if, on verification, full tax payment is found to have been made. The matter on this limited issue was remanded to the Adjudicating Authority for factual verification and reconciliation after giving notice to the appellant. Issue 6 was thus partly allowed by way of remand.