2025 (7) TMI 562 - AT - Service Tax

Recovery of service tax with interest and penalty - non-payment of service tax - services provided to overseas clients - export of services or not - applicability of Rule 6A of the ST Rules - POPOS Rules - taxable territory - demand on the basis of income tax returns - HELD THAT - The overseas clients used to pay the Appellant in foreign currency which would then be transferred to the Bank account of the Appellant vide Upwork or Freelancer. The transaction history of the Appellant on Freelancer during relevant period also shows that the overseas clients used to pay the Appellant in convertible foreign exchange. It is found that Rule 3 of the POPS Rules that generally as per the default rule i.e. Rule 3 the place of provision of services is the location of service recipient. Rules 4 to 12 provide specific provisions for specified services. As per the general scheme of the POPS Rules if the service gets covered under Rules 4 to 12 the provisions mentioned under Rules 4 to 12 shall apply. In all the other cases where specific rules cannot be applied the default rule (i.e. Rule 3) shall be applicable. Rule 3 further provides that in case the location of service recipient is not available in ordinary course of business place of provision of services shall be the location of service provider. Further even the CBEC Education Guide 2012 Education Guide has made observations with respect to the application of Rule 3 of the POPS Rules. The Education Guide also reiterated the point that if a service is not covered by an exception under one of the latter rules (i.e. Rules 4 to 12) and is consequently covered under the default rule (i.e. Rule 3) then the receiver s location will determine whether the service is leviable to tax in the taxable territory. Further Circular No.209/1/2018-Service Tax dated 04.05.2018 provides that in the case of services pertaining to software development the place of provision of service is the location of the service recipient - the place of provision of services provided by the Appellant is classifiable under Rule 3 of the POPS Rules and hence no other Rule is applicable for determination of the place of provision of services. Thus in the instant facts the place of provision of service shall be the location of the recipient of service which is outside India and accordingly such services shall qualify as export of services and hence not exigible to service tax. Section 66B of the Finance Act is the charging provision which provides that service tax shall be levied on all services provided or agreed to be provided in the taxable territory by one person to another. Adjudicating Authority fails to understand that in demanding service tax the twin conditions i.e. identification of the particular service rendered and the payment received for such services either before during or after providing of such services were to be satisfied. It is found that no specific service has been identified by the Adjudicating Authority while accepting in principle that duty evasion cannot be proved with mathematical precision the same cannot be established by applying a mathematical formula. The Courts and the Tribunal have been consistently holding that service tax cannot be fastened without identifying the specific service provided and consideration received or to be received for the same. It is further found that it is settled law that the SCN is the foundation of the case. The notice to show cause must be clear and unambiguous and the charges in the SCN should not be vague and uncertain. In the present case without even ascertaining the nature of taxable service the demand of service tax has been confirmed merely on the ground that some income is appearing in the income tax return on which service tax has not been paid. Thus the taxable event has been assumed which is contrary to the settled law that burden to prove taxable event lies on the revenue and which has clearly not been discharged in the present case. Since the SCN dated 16.10.2021 as well as the orders dated 17.08.2022 and 06.04.2023 lack the very basis on which service tax can be levied hence the entire proceedings against the Appellant fail and the impugned order is liable to be set aside on this ground alone. The demand cannot be raised only on the basis of income tax returns without properly ascertaining the reason behind the mismatch in the figures reflected in the income tax return and the service tax return. Reliance in this regard is placed on the Tribunal s order in the case of Kush Constructions vs. CGST NACIN ZTI Kanpur 2019 (5) TMI 1248 - CESTAT ALLAHABAD wherein it was held that difference in figures reflected in ST-3 returns and Form 26AS filed under Income Tax Act 1961 cannot be basis for raising service tax demand without examining the reasons for such difference and without examining whether amount as reflected in said Income Tax Return was the consideration for providing any taxable services or the difference was due to any exemption or abatement. The impugned order cannot be sustained and is accordingly set aside - Appeal allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the services provided by the appellant to overseas clients qualify as "export of services" under the Service Tax Rules, 1994 and the Place of Provision of Services Rules, 2012, thereby exempting the appellant from liability to pay service tax.

2. Whether the place of provision of the services rendered by the appellant is outside India, as determined under the Place of Provision of Services Rules, specifically Rule 3 and related provisions.

3. Whether the appellant received payment in convertible foreign exchange, satisfying the condition for export of services under Rule 6A of the Service Tax Rules.

4. Whether the demand of service tax, interest, and penalties imposed on the appellant by the adjudicating authority and upheld by the first appellate authority is justified in law and fact, particularly in light of the appellant's contention of bona fide belief of no service tax liability.

5. Whether the Show Cause Notice (SCN) issued to the appellant was sufficiently clear and specific in identifying the taxable service and the basis for demand, as required by settled principles of law.

Issue-wise Detailed Analysis:

Issue 1 & 2: Qualification of services as export of services and place of provision

The legal framework governing export of services is primarily contained in Rule 6A of the Service Tax Rules, 1994 and Rule 3 of the Place of Provision of Services Rules, 2012 (POPS Rules). Rule 6A sets out six cumulative conditions for a service to qualify as export of services, including that the provider is located in India, the recipient is outside India, the service is not in the negative list, the place of provision is outside India, payment has been received in convertible foreign exchange, and the provider and recipient are independent entities.

Rule 3 of the POPS Rules establishes the general rule that the place of provision of service is the location of the recipient, except in cases where the recipient's location is not available in the ordinary course of business, in which case the place of provision is the location of the provider.

The Court examined the facts and found that the appellant is located in India and the recipients of the services are overseas clients, satisfying the territorial criteria. The services rendered-software development, app development, web designing, and graphic designing-are not included in the negative list under Section 66D of the Finance Act, 1994. The appellant received payments through online freelancing platforms in convertible foreign exchange, which was credited to their Indian bank account in Indian Rupees, consistent with established precedent that payment received in Indian Rupees after remittance from foreign convertible currency accounts satisfies the foreign exchange payment requirement.

The Court relied on the Tribunal's earlier decision which held that the receipt of payment in Indian Rupees from a foreign convertible currency account is sufficient to satisfy the payment condition under Rule 6A. The Court further noted that Rule 3 of the POPS Rules applies as the general rule for place of provision, and no specific exception under Rules 4 to 12 was applicable to the appellant's services.

The CBEC Education Guide, 2012 and Circular No. 209/1/2018-Service Tax dated 04.05.2018 were also cited to reinforce that the place of provision for software development services is the location of the service recipient. Hence, the place of provision is outside India.

On the basis of these findings, the Court concluded that the services provided by the appellant qualify as export of services, which are not exigible to service tax under Section 66B of the Finance Act, as service tax is a destination-based tax leviable only on services provided within the taxable territory of India.

Issue 3: Receipt of payment in convertible foreign exchange

The appellant demonstrated through transaction histories on Freelancer and bank statements that payments were received in convertible foreign exchange from overseas clients. The Court observed that while the Indian bank account credited the amounts in Indian Rupees, the essential criterion is the remittance of convertible foreign exchange by the service recipient, which was satisfied. This interpretation aligns with the Tribunal's precedent and the legislative intent behind Rule 6A.

Issue 4: Legitimacy of service tax demand, interest, and penalties

The adjudicating authority confirmed the demand of service tax on the appellant's declared income under the Income Tax Act, along with interest and penalties for failure to register, pay service tax electronically, and file returns. The first appellate authority upheld this demand.

The Court found that the adjudicating authority failed to identify the specific taxable service rendered by the appellant, relying solely on the income declared in the income tax returns to impose service tax liability. The Court emphasized settled legal principles that service tax liability cannot be fastened without identifying the particular service and the consideration received for it. The burden to prove the taxable event lies on the revenue, which was not discharged in this case.

The Court further observed that the demand was based on a mismatch between income tax returns and service tax returns without examining the reasons for the discrepancy or whether the amounts reflected were consideration for taxable services. The Tribunal's prior ruling in a similar matter was cited, which held that differences in figures between income tax and service tax returns cannot form the sole basis for demand without proper inquiry.

Issue 5: Validity and specificity of the Show Cause Notice

The Court reiterated the principle that the SCN forms the foundation of the case and must be clear, specific, and unambiguous regarding the charges. Reliance was placed on Supreme Court decisions which held that vague or unintelligible SCNs deny the noticee proper opportunity to defend and are liable to be quashed.

In the present case, the SCN did not specify the exact taxable service or the basis for the service tax demand, rendering the notice defective. The Court held that such lack of clarity and failure to identify the taxable service vitiated the entire proceedings.

Conclusions on Issues:

On the facts and legal framework, the Court concluded that the appellant's services qualify as export of services, with place of provision outside India, exempting them from service tax liability. The payment condition under Rule 6A was satisfied. The demand of service tax, interest, and penalties was not sustainable due to failure to identify the taxable service and defective SCN. The appellant's appeal was allowed and the impugned orders set aside.

Significant Holdings:

"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."

"The main rule or the default rule provides that a service shall be deemed to be provided where the receiver is located... if the receiver is located outside the taxable territory, no service tax will be payable on the said service."

"The show cause notice is the foundation on which the department has to build up its case. If the allegations in the show cause notice are not specific and are on the contrary vague, lack details and/or unintelligible that is sufficient to hold that the noticee was not given proper opportunity to meet the allegations indicated in the show cause notice."

"Service tax cannot be fastened without identifying the specific service provided and consideration received or to be received for the same."

"Difference in figures reflected in ST-3 returns and Form 26AS filed under Income Tax Act, 1961 cannot be basis for raising service tax demand without examining the reasons for such difference and without examining whether amount as reflected in said Income Tax Return was the consideration for providing any taxable services or the difference was due to any exemption or abatement."

The Court's final determination was that the appellant's services constituted export of services, not liable to service tax, and the demand and penalties imposed were set aside for lack of legal and factual basis, and defective SCN.