TaxTMI 
TaxTMI 
2017 (9) TMI 632
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.... ('FA') read with the relevant rules thereunder? The background 2. The question arises in the following background. Verizon India is a company incorporated under the provisions of the Companies Act, 1956 and is registered with the Service Tax Department ('Department') under the category of 'Business Support Services'. Verizon India entered into a Master Supply Agreement with Verizon US for rendering connectivity services for the purpose of data transfer. Verizon US is a company located outside India, inter alia engaged in the provision of telecommunication services for which it enters into contracts with its customers located globally. 3. Since Verizon US does not have the capacity to provide such services in all geographical areas across the globe, it utilises the services of other Verizon entities including Verizon India to provide connectivity to its customers. It is stated that such connectivity is provided in the form of: (a) Local Access: where Verizon India facilitates provision of wire line telecommunication circuit between two Verizon Business designated locations. (b) Bandwidth: where Verizon India provides diverse wire line telecommunication circui....
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....zon India do not qualify as 'export of services' as they are provided within India. Reference was made to Circular No. 90/1/2007-Service Tax dated 3rd January 2007 and Circular No. 141/10/2011-TRU dated 13th May 2011. Present petitions 8. The challenge in three of the present petitions viz., W.P. (C) Nos. 11569, 11572 and 11577 of 2016 is to the above three orders dated 12th September 2016 passed by the Respondent rejecting the Petitioner's refund claims. The fourth petition, Writ Petition (Civil) No. 11575 of 2016 challenges a show cause notice ('SCN') dated 11th November 2016 issued to Verizon India by the Department demanding service tax in the sum of Rs. 2,65,25,46,712 (including education cess and secondary and higher education cess) along with applicable interest and penalty in respect of the amounts received by Verizon India from Verizon US towards export of services. The case of the Department is that telecommunication services rendered by Verizon India during the period April 2011 to September 2014 do not qualify as 'export of services'. 9. While issuing notice on these writ petitions on 7th December 2016, this Court passed interim order as far as Writ Pet....
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....s a general tax that applies, in principle, to all commercial activities Involving production of goods and provision of services. VAT is a consumption tax as It is borne by the consumer. 7. In the light of what is stated above, it is dear that Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country. Service tax is a value added tax". xxx 17. As stated above, the source of the concept of service tax lies in economics. It is an economic concept. It has evolved on account of Service Industry becoming a major contributor to the GDP of an economy, particularly knowledge based economy. With the enactment of Finance Act, 1994, the Central Government derived Its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the Introduction of Article 268A In the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropria....
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....ofessional. However, from the point of view of his client, the chartered accountant/broker is his service provider. The value addition comes in on account of the activity undertaken by the professional like tax planning, advising, consultation etc. It gives value addition to the goods manufactured or produced or sold. Thus, service tax is imposed every time service is rendered to the customer/client. This is clear from the provisions of Section 65 (105) (zm) of the Finance Act, 1994 (as amended). Thus, the taxable event is each exercise/activity undertaken by the service provider and each time service tax gets attracted. The same view is reiterated broadly in the earlier Judgment of this Court in Godfrey Phillips India Ltd. v. State of U.P. (2005 (2) SCC 515 in which a Constitution Bench observed that in the classical sense a tax is composed of two elements: the person, thing or activity on which tax is imposed. Thus, every tax may be levied on an object or on the event of taxation. Service tax is, thus, a tax on activity whereas sales tax is a tax on sale of a thing or goods". (emphasis supplied) Relevant provisions of the Finance Act 1994 14. Under Section 64 (3) of the FA,....
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....radio, optical, visual or other electro-magnetic means or systems. Including the related transfer or assignment of the right to use capacity for such transmission, emission or reception by a person who has been granted a licence under the first proviso to sub-section (1) of section 4 of the Indian Telegraph Act, 1885 (13 of 1885) and includes - (i) voice mail, data services, audio text services, video text services, radio paging; (ii) fixed telephone services including provision of access to and use of the public switched telephone network for the transmission and switching of voice, data and video, inbound and outbound telephone service to and from national and international destinations; (iii) cellular mobile telephone services including provision of access to and use of switched or non-switched networks for the transmission of voice, data and video, inbound and outbound roaming service to and from national and international destinations; (iv) carrier services including provision of wired or wireless facilities to originate, terminate or transit calls, charging for interconnection, settlement or termination of domestic or international calls, c....
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....n with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security." 20. The above definitions are relevant only to the extent of understanding the stand of the Department in relation to the refund claims of Verizon India. It is stated that in the first instance the Department sought to classify the services provided by Verizon India as 'online information and database access or retrieval services'. When Verizon India pointed out that they were not, the Department sought to classify it as 'Supply of tangible goods services.' When Verizon India again protested, the Department took the stand that it was providing 'telecommunication services' and not 'business support services.' 21. The FA underwent several changes with effect from 1st July 2012. The concept of 'negative list of services' was introduced by inserting Section 66D in the FA. The charging provision Section 66 was replaced by Section 66B of the FA which stated that service tax would be levied on the value of the services "other than those specified in the negative list" that have been provided or agreed to be provided in the taxabl....
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....ountry without any intention of their being so moved in specie to some foreign port. 26. In the context of services, when services are provided outside the 'taxable territory' i.e. where the service provider is in India and the recipient of the services is located outside India there would, in normal parlance, be an 'export of services'. In exercise of its powers under Section 94 (2) (f) of the FA, the central government made the ESR. Rule 3 (1) (iii) of the ESR inter alia provided that when business support services [as defined under Section 65 (105) (zzzq)] or 'telecommunication service [as defined in Section 65 (105) (zzzx)] are provided to a recipient located outside India, then it would be treated as 'export of taxable services.' Under Rule 4 of the ESR, "any service which is taxable under clause (105) of Section 65 may be exported without payment of service tax." 27. This position underwent changes from time to time. Between April 19, 2006 to February 28, 2007 the requirement to be fulfilled for treating services rendered as export of services was as under: (a) The service recipient was located outside India; (b) Such service was delivered outs....
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....guards, conditions and limitations, as may be specified, by the Central Government, by notification." 31. For the period prior to 1st July 2012, while there is no dispute that payment for the service rendered by Verizon India has been received by it in convertible foreign exchange there is a dispute as to whether the recipient of the service is located outside India. According to Verizon India, the recipient of the service is Verizon US whereas the Department's case is that the recipient of the service is an Indian entity from whom electronic data is collected or to whom data is transmitted. 32. Even for the period post 1st July 2012, it is not in dispute that Rule 6A (1) (a) of the ST Rules is fulfilled inasmuch as Verizon India, which is the service provider, is located in the taxable territory i.e. India. There is also no difficulty as far as the criteria at Rule 6A (1) (d) of the ST Rules is concerned since 'telecommunication service' is not in the negative list under Section 66D of the FA. Rule 6A (1) (e) of the ST Rules is also fulfilled since payment for the service rendered by Verizon India has been received by it in convertible foreign exchange. There is ....
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....ted by Mr. Venkataraman, learned Senior counsel appearing on its behalf, is based on the major premise underlying service tax viz., it is a destination based consumption tax. According to him the Department's case is based on a misconception of the 'recipient' of the service. According to him there is a distinction between the 'user' of a service and its 'recipient. This had to be determined strictly with reference to the underlying contract between Verizon India and Verizon US. He submits that the Department cannot impute a contract between Verizon India and the customers of Verizon US or their counterparts in India when there is none. 37. Mr Venkataraman points out that the Department has applied the Circular dated 3rd January 2007 which no longer applies. In any event that Circular was concerning telephony services and not electronic data transmission service. Mr Venkataraman clarified that although Verizon India had classified the services provided by it under the category of 'Business Support Services' while the Department had classified it under 'telecommunication services', it made no difference to the refund claims since the same e....
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....ailing the inbound roaming services. The said Circular clarified that a telephone connection did not necessarily mean providing a telephone instrument or providing sim card. Even if a number was allocated temporarily to an inbound roamer and used internally it remained a service of a telephone connection. It was clarified that during the period of roaming, "the Indian Telecom service provides telephone service to an international inbound roamer. This service to an inbound roamer is delivered and consumed in India and, therefore, is not an export of service." 43. The said Circular dated 3rd January 2017 did not deal with telecommunication services involving transfer of electronic data. Then came the Circular No. 96/7/2007-ST dated 23rd August, 2007. This was on the basis of the report of the Committee chaired by Shri T.R. Rustagi, former Commissioner of Customs & Central Excise and Director General (Inspection). On the basis of comments received, the CBEC issued the above circular. Paragraph 6 of the said circular reads thus: "6. This circular supersedes all circulars, clarifications and communications, other than Orders issued under Section 37B of the Central Excise Act, 1944....
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....difference has been lost sight of by the Department. In the present case there is no privity of contract between Verizon India and the customers of Verizon US. Such customers may be the 'users' of the services provided by Verizon India but are not its recipients. 47. Also, for providing such service Verizon India might use the services of a local telecom operator. That does not mean that the services to Verizon US are being rendered in India. All these steps are taken by Verizon India as part of its contract with Verizon US to provide services to Verizon US located outside India. The place of provision of such service to Verizon US remains outside India. This is made explicit by Circular No. 111/5/2009 dated 24th February, 2009, which clarified: "For the services that fall under category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase 'used outside India' is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III service [Rule 3 (1) (iii)], it is possible that export of service may take place even when all the relevant a....
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....e and whose need is satisfied by the provision of the service." The Court further affirms the following passage in the said judgment in Paul Merchants Ltd v. CCE, Chandigarh (supra) which correctly explains the legal position: "It is the person who requested for the service is liable to make payment for the same and whose need is satisfied by the provision of service who has to be treated as recipient of the service, not the person or persons affected by the performance of the service. Thus, when the person on whose instructions the services in question had been provided by the agents/sub-agents in India, who Is liable to make payment for these services and who used the service for his business, is located abroad, the destination of the services in question has to be treated abroad. The destination has to be decided on the basis of the place of consumption, not the place of performance of Service." 52. In Vodafone Essar Cellular Ltd. v. CCE (supra), the CESTAT explained the arrangement lucidly in the following words: "Your customer's customer is not your customer. When a service is rendered to a third party at the behest of your customer, the service recipient is your cust....