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2014 (5) TMI 105 - HC - Service TaxExport of service or not - Technical Inspection and Certification Agency Service - Technical Testing and Analysis Agency Service at different places in India in respect of goods imported by their customers located abroad - Consideration received in convertible foreign exchange - Held that - respondent is a testing agency. The contract of service was with the overseas purchaser of goods. Thus the privity of contract of the respondent is with the buyers of the goods who are located or situated outside India. Further the argument was that this is a contract based tax. The contract is of services. There is no contract in this case with the manufacturer of goods in India. Further there is no contract and no privity between the respondent and the exporter of the goods who is stated to be based in India. It is in these circumstances that the exemption notification though required to be strictly construed has rightly been construed in favour of the respondent assessee before us. If one refers to the allegations in the show cause cum demand notice it is apparent that the same refers to the testing charges received by the respondent in convertible foreign currency in respect of services rendered by it in India to its foreign clients. Though the show cause notice refers to the circulars what is apparent from the judgment of the Hon ble Supreme Court in the case of All India Federation of Tax Practitioners Vs. Union of India 2007 (8) TMI 1 - Supreme Court that service tax is a tax on each activity. When it comes to a service tax on professions the services rendered are of advise and hence the Hon ble Supreme Court with regard to the nature of the tax concluded that it is rendered by a Chartered Accountant for example when he advises his client or audits his account. Similarly a cost accountant charges his client for advise as well as doing his work of costing. Tribunal has found that the assessee like the respondent rendered services but they were consumed abroad. The clients of the respondents used the services of the respondent in inspection/test analysis of the goods which the clients located abroad intended to import from India. In other words the clients abroad were desirous of confirming the fact as to whether the goods imported complied with requisite specifications and standards. Thus client of the respondent located abroad engaged the services of the respondent for inspection and testing the goods. The goods were tested by the respondents in India. The goods were available or their samples were drawn for such testing and analysis in India. However the report of such tests and analysis was sent abroad. The clients of the respondent were foreign clients paid the respondent for such services rendered in foreign convertible currency. It is in that sense that the Tribunal holds that the benefit of the services accrued to the foreign clients outside India. This is termed as export of service . In these circumstances the Tribunal takes a view that if services were rendered to such foreign clients located abroad then the act can be termed as export of service . Such an act does not invite a service tax liability. The view taken by the Tribunal therefore cannot be said to be perverse or vitiated by an error of law apparent on the face of the record. If the emphasis is on consumption of service then the order passed by the Tribunal does not raise any substantial question of law - No substantial question of law arises - Decided against Revenue.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in this matter include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Service Tax on services rendered in India to foreign clients and whether such services qualify as export of services exempt from Service Tax Relevant legal framework and precedents: The Finance Act, 1994, particularly Sections 65(48), 65(105), 65(106), 66 and 83, governs the levy of Service Tax. Notification No. 6/99-S.T. exempted certain services where payment was received in convertible foreign exchange. This notification was rescinded by Notification No. 2/2003-S.T. The CBEC issued Circular No. 56/5/2003-S.T. clarifying that Service Tax is a destination based consumption tax and export of services is not taxable. The Hon'ble Supreme Court's decisions in The Bengal Immunity Company Ltd. v. State of Bihar and 20th Century Finance Corporation Ltd. v. State of Maharashtra emphasize that the situs of intangible transactions such as services must be fixed by legislative or judicial rules. The Supreme Court in All India Federation of Tax Practitioners v. Union of India recognized Service Tax as a value-added tax and a destination based consumption tax. Court's interpretation and reasoning: The Court analyzed the nature of services provided by the respondent, which involved testing and certification of goods located in India but for foreign clients. Although the testing was performed in India, the essential part of the service-the delivery of the test report-was to clients abroad. The Court found that the benefit of the service accrued to foreign clients outside India, constituting export of services. The Court relied on the CBEC circular clarifying that export of services is outside the Service Tax net, even during the period when the exemption notification was rescinded. The Tribunal's reliance on prior decisions (e.g., Commissioner of Service Tax, Ahmedabad v. M/s B.A. Research India Ltd. and KSH International Pvt. Ltd. v. Commissioner) was approved, which held that services rendered in India but consumed abroad are export of services and exempt from Service Tax. Key evidence and findings: The respondent received payment in convertible foreign exchange in India from foreign clients for services rendered. The testing and certification were performed in India, but the reports were sent abroad. The contractual relationship was with foreign clients, not with the Indian exporters of goods. The show cause notice alleged that services were performed in India and thus taxable, but the Tribunal found the services were effectively exported. Application of law to facts: The Court applied the principle that Service Tax is leviable only on services consumed within India. Since the service was consumed by clients abroad, it qualified as export of services. The absence of a statutory provision fixing the place of provision of services was supplemented by administrative clarifications and judicial precedents recognizing the destination based nature of Service Tax. Treatment of competing arguments: The appellant contended that during the interregnum period (1st July to 19th November 2003) when the exemption notification was rescinded, the services were taxable and the Tribunal erred in allowing exemption. The Court rejected this argument, holding that the CBEC circular and the principle of destination based consumption tax meant that export of services was not taxable even during this period. The appellant's contention that the services were performed in India and thus taxable was not accepted because the consumption was abroad. Conclusions: Services rendered by the respondent were export of services exempt from Service Tax, and the Tribunal rightly set aside the demand and penalty. Issue 2: Interpretation of the place of provision of services and its impact on Service Tax liability Relevant legal framework and precedents: Sections 64 and 66 of the Finance Act, 1994, and judicial pronouncements including The Bengal Immunity Company Ltd. and 20th Century Finance Corporation Ltd. emphasize the need to fix the situs of intangible transactions such as services. The Supreme Court decision in Popatlal Shah v. State of Madras clarified the competence of legislature to tax transactions with sufficient territorial nexus. Court's interpretation and reasoning: The Court acknowledged that the place of provision of services is crucial to levy Service Tax. Since there was no statutory provision fixing the place of provision of services at the relevant time, the Court accepted the administrative guidelines and circulars clarifying that Service Tax is a destination based consumption tax. The service is taxable only if consumed in India. The Court held that the services rendered by the respondent were consumed abroad, thus not taxable. Key evidence and findings: The contractual relationship was with foreign clients; the reports were sent abroad; and payments were received in convertible foreign exchange in India. The services were completed upon delivery of reports to foreign clients. Application of law to facts: The Court applied the principle that the situs of service consumption determines taxability. Since consumption was outside India, Service Tax did not apply. Treatment of competing arguments: The appellant argued that since testing was performed in India, the service was rendered in India and taxable. The Court rejected this, emphasizing consumption over mere performance location. Conclusions: The place of provision and consumption of services being outside India exempts the service from Service Tax. Issue 3: Validity of the demand and penalty imposed by the Commissioner and the Tribunal's order setting them aside Relevant legal framework and precedents: Section 35G of the Central Excise Act, 1944, and Section 83 of the Finance Act, 1994 govern appeals against orders of adjudicating authorities. The CBEC circulars and Supreme Court decisions on Service Tax as a destination based tax are relevant. Court's interpretation and reasoning: The Tribunal found that the services were exported and thus not taxable. The demand and penalty imposed by the Commissioner were therefore unjustified. The Court found no error in the Tribunal's order and held that the demand was also barred by limitation as it related to a period more than two years prior to the show cause notice. Key evidence and findings: The show cause notice dated 6th January, 2006 demanded Service Tax for the period 1st July, 2003 to 19th November, 2003. The Tribunal held the demand barred by limitation and found no suppression of facts or mala fide intention by the respondent. Application of law to facts: The Court upheld the Tribunal's findings that the demand and penalty were not sustainable. Treatment of competing arguments: The appellant argued that the demand was valid and the Tribunal erred in setting it aside. The Court rejected this, finding the Tribunal's reasoning sound. Conclusions: The demand and penalty were rightly set aside by the Tribunal. 3. SIGNIFICANT HOLDINGS The Court held:
The Court affirmed the principle that Service Tax is a tax on consumption and not merely on the provision of services, emphasizing the destination based nature of the tax to avoid double taxation and to align with international practice. Consequently, the Court dismissed the Appeal, affirming the Tribunal's decision that the respondent's services constituted export of services exempt from Service Tax and that the demand and penalty were unsustainable.
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