2026 (2) TMI 282 - AT - Service Tax

Cross-border payments to joint ventures for business support services ruled not taxable under Finance Act; Revenue appeal dismissed.

Payments to an overseas joint venture for business support or IT-related services do not attract service tax under the Finance Act on the present facts; ... Taxability of payments to overseas joint venture as Business Support Services / Information Technology Software Services - place of provision of services and location of recipient under the Place of Provision of Services Rules - treatment of overseas establishments/branches/JV as distinct persons for levy of service tax - non-liability to service tax on the import services - reimbursements/sharing of expenses versus consideration for taxable service - temporal scope of expansion of operational or administrative assistance into taxable net (effective date) - HELD THAT:- The words 'operational and administrative assistance' have wide connotation and can include certain services already taxed under any other head of more specific description. The correct classification will continue to be governed by Section 65A. During the introduction of change in the Budget for the year 2011-12, the Tax Research Unit of the Ministry of Finance vide D.O.F No.334/3/2011/TRU dated 28.02.2011 has explained the scope of explanation of existing services by amendment or addition of a new aspect of a certain service to the existing oneThe words 'operational and administrative assistance' have wide connotation and can include certain services already taxed under any other head of more specific description. The correct classification will continue to be governed by Section 65A. During the introduction of change in the Budget for the year 2011-12, the Tax Research Unit of the Ministry of Finance vide D.O.F No.334/3/2011/TRU dated 28.02.2011 has explained the scope of explanation of existing services by amendment or addition of a new aspect of a certain service to the existing one. The Government had clearly stated that the scope of taxable services under Section 65 (105) (zzzq) ibid is being expanded and the scope of services to be covered w.e.f. 01.05.2011 are explained as those services which are in the nature of support activities for the ongoing business support functions. These services are distinct from operational assistance for marketing which was covered earlier under the scope of taxable services, for the limited purpose of understanding and for coming to a conclusion about the date of effect of bringing into tax net the scope of comprehensive services of 'operational or administrative assistance', such expansion of services were brought under the tax net only with effect from 01.05.2011 and not earlier, as contended by the Revenue; the Appeal filed by Revenue for charge of service tax on the disputed activity, prior to 01.05.2011 therefore does not have the support of law. We find that the dispute in respect of similar issue relating to status of overseas office vis-à-vis branches/head office and the limitation thereof, 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 a coordinate Bench 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. In view of the categorical decision of the Tribunal, the issue under dispute in the present case is no more open to debate, and a different view cannot be taken by this Tribunal. A more or less similar issue was the subject matter of an Appeal before a coordinate Bench of the Tribunal in the case of Steel Authority of India Limited Vs. Commissioner of Service Tax, New Delhi in Final Order [2020 (4) TMI 346 - CESTAT NEW DELHI] and the Bench has held that charging section is Section 66 of the Finance Act, 1994 and not Section 66A ibid. The provision of Section 66A is only to determine whether the provision of service is in India or out of India. Therefore, it was held unless that charge of service tax is proved under Section 66 ibid, there cannot be levy of service tax only on the basis of Section 66A ibid. Thus, we are of the considered view that payment of consultancy charges paid by the Respondent-Assessee to JV situated in abroad (Saudi Arabia), in the present set of facts cannot be subjected to levy of Service Tax under the Finance Act, 1994. It would, therefore, not be necessary to examine the contentions of the Respondent/Assessee that the extended period of limitation could not have been invoked in the present case. We do not see any justifiable reasons to interfere with the well reasoned order of the Commissioner and hence, we dismiss the Appeal filed by the Revenue. Issues: Whether consultancy charges/debit notes raised by a joint venture/associated entity located in a non-taxable territory on the Indian assessee constitute taxable services chargeable to service tax (including liability under reverse charge) for the periods before and after 01.07.2012.Analysis: The issue was examined with reference to the definitions and charging provisions under the Finance Act (notably Section 65(105)(zzzq), Section 65B(44), Section 66A, Section 66B and Section 66C), the Place of Provision of Services Rules, 2012 (Rule 3), earlier service tax rules and relevant notifications (including Notification No.25/2012 and Notification No.30/2012), and applicable explanations treating establishments in taxable and non-taxable territories as distinct persons. The scope of 'Business Support Service' and 'operational or administrative assistance' was considered in light of the government explanation expanding the category with effect from 01.05.2011. Precedents addressing taxation of services between head office and overseas establishments, reimbursement versus consideration, and sharing of expenses (including Tech Mahindra Ltd.; Infosys Ltd.; Intercontinental Consultants and Technocrats Pvt. Ltd.; Steel Authority of India Ltd.; Haldiram Marketing Pvt. Ltd. and the Supreme Court dismissal of departmental challenge) were applied to the facts. The factual characterisation of the debit notes as reimbursements/adjustments for local expenditures incurred by the JV, the location and consumption of the services in the non-taxable territory, and the absence of an effective provider-receiver relationship in India were material to the assessment of taxability. Prior-to-01.05.2011 temporal limits on the expanded scope of Business Support Service and the operation of place-of-provision rules post-01.07.2012 were also considered.Conclusion: The consultancy charges/debit notes in the stated facts do not constitute taxable services subject to service tax (including reverse charge) and the departmental appeal seeking to re-impose those demands is dismissed; the decision is accordingly in favour of the assessee.