Service tax on Development of new product

[Vijay Chitte]

Dear Experts,

We are doing development of new product in India, & our client is located at foreign country, foreign party does not providing any materials for development of product, we are also provide testing service for that new product development.

My Question is : 1) Service tax will be applicable or not? under which POP rule will be applicable?
2) This activities fall under which category of service?
3) If possible, provide any case laws for this query.

[DR.MARIAPPAN GOVINDARAJAN]

You are going to manufacture a new product. Materials are also to be procured by you. The testing services are done by yourself. Then where is the question for service tax. Whether you are going to render any service to anybody in this process?

[Vijay Chitte]

We are not manufacturing a new product, First, we are only develop a new product for our foreign client, If he satisfy our new product development then, he will give contract for manufacturing of this new product but this will be separate contract.

It can be say, technology of new product development for our foreign client.

[YAGAY andSUN]

if your foreign client is not paying for it separately, then, no service tax would be applicable. However, the development cost so incurred by you would be amortized on the goods manufactured by you on behalf of your foreign client and excise duty would be paid accordingly.

[Ganeshan Kalyani]

If there are two separate agreement between both the party then yes service tax is applicable on the development of the product service. The relevant extract of the provision is given below.

Place of provision generally.-

03. The place of provision of a service shall be the location of the recipient of service:

Provided that in case the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the provider of service.

Thanks.

[Ganeshan Kalyani]

Dear all,

I apologise. In first sentence of my previous reply, please read as ''service tax is not applicable. ''

Thanks.

AI Summary

Place of provision determines service tax applicability; separate paid development services to a foreign recipient may be treated at recipient location. Service tax applicability turns on contractual/payment structure and the place of provision: if development/testing is a separately charged service to a foreign recipient, service tax may be relevant; if no separate payment is received, respondents say service tax would not apply and costs may be amortised into manufactured goods. The place of provision is generally the recipient's location, or the provider's location if the recipient's location is not ascertainable.