2011 (2) TMI 54 - AT - Service Tax

Export of services - Technical Inspection and Certification Service and Technical Testing and Analysis Service - services rendered by the appellant were consumed abroad where the appellant s clients used the service of inspection/test/analysis to decide whether the goods intended to be imported by them from India conform to the requisite specifications and standards - benefit of the service accrued to the foreign clients outside the Indian territory - services in question were exported Export of service has ever been tax-free as observed by the CBEC Appeal allowed

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

• Whether the services rendered by the appellant, namely "Technical Inspection and Certification Services" and "Technical Testing and Analysis Services" during the period 1-7-2003 to 19-11-2003, were liable to service tax under the Finance Act, 1994.
• Whether these services constituted export of service and thus were exempt from service tax.
• The applicability and retrospective effect of exemption notifications, particularly Notification No. 6/99-S.T. (dated 9-4-1999) and Notification No. 21/2003-S.T. (dated 20-11-2003), and whether these notifications exempted export of services from service tax during the relevant period.
• The interpretation of the phrase "used outside India" and whether the benefit of services accruing outside India qualifies as export of service even when the services are performed in India.
• The relevance and applicability of the Export of Services Rules, 2005, to the period prior to their enactment.
• The binding nature of the Central Board of Excise and Customs (CBEC) circulars clarifying the taxability of export of services.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Technical Inspection and Testing Services Rendered During the Period 1-7-2003 to 19-11-2003

Relevant legal framework and precedents: The Finance Act, 1994 imposed service tax on specified taxable services. The appellant's services were covered under taxable categories during the period. Notification No. 6/99-S.T. exempted certain services paid for in convertible foreign exchange but was rescinded on 1-3-2003. Notification No. 21/2003-S.T. was issued later, on 20-11-2003, granting similar exemption. The Export of Services Rules, 2005, which explicitly exempted export of services, were not in force during the relevant period.

Court's interpretation and reasoning: The Tribunal acknowledged that the services were taxable and performed in India. However, the Tribunal emphasized that the services were rendered to foreign clients who utilized the benefits abroad. The Tribunal relied on the principle that service tax is a destination-based consumption tax, levied only on services consumed within India.

Key evidence and findings: The appellant inspected, tested, and analyzed goods in India and transmitted certificates or reports to foreign clients. The foreign clients used these certificates to decide on importing goods from India. Payment was received in convertible foreign exchange.

Application of law to facts: The Tribunal applied the principle from the Supreme Court's judgment in All India Federation of Tax Practitioners, which held service tax to be a value-added tax levied on consumption within India. Since the benefit of the service accrued outside India, the service was considered exported and thus exempt.

Treatment of competing arguments: The Revenue argued that the service was performed in India and thus taxable, relying on Board Circular No. 111/5/09-S.T. which categorized certain services as performed within India unless performed wholly or partly outside India. The Tribunal rejected this narrow interpretation, emphasizing the benefit accrual test clarified in the same circular and supported by prior Tribunal decisions.

Conclusions: The Tribunal concluded that the services were exported and therefore not liable to service tax during the relevant period.

Issue 2: Whether the Services Rendered Constituted Export of Service

Relevant legal framework and precedents: Export of Services Rules, 2005 define export of service and provide exemption from service tax. Although these Rules were not in force during the relevant period, the CBEC circulars and Supreme Court decisions provided interpretative guidance.

Court's interpretation and reasoning: The Tribunal relied on Circular No. 111/5/09-S.T. which clarified that export of service occurs if the benefit of the service accrues outside India, even if the service is performed in India. The Tribunal also relied on the decisions in B.A. Research India Ltd. and KSH International Pvt. Ltd., where similar services were held to be exported.

Key evidence and findings: The appellant's clients were foreign importers who used the inspection and testing reports abroad to clear imports. The services were complete only upon delivery of reports to foreign clients.

Application of law to facts: Applying the benefit accrual test, the Tribunal found that the services were exported since the foreign clients received and used the benefits outside India.

Treatment of competing arguments: The Revenue contended that since the services were physically performed in India, they could not be export of service. The Tribunal distinguished this by emphasizing the destination-based nature of service tax and the benefit accrual test.

Conclusions: The Tribunal held that the services were exported and exempt from service tax.

Issue 3: Applicability and Retrospective Effect of Exemption Notifications

Relevant legal framework and precedents: Notification No. 6/99-S.T. exempted taxable services paid for in convertible foreign exchange but was rescinded on 1-3-2003. Notification No. 21/2003-S.T. reintroduced similar exemption on 20-11-2003. The Supreme Court judgment in W.P.I.L. Ltd. held that a later notification can be clarificatory and retrospective.

Court's interpretation and reasoning: The Tribunal noted that neither notification specifically referred to export of services. The CBEC clarified that export of services remained tax-free even after rescission of Notification No. 6/99-S.T. The Tribunal held that the exemption notifications did not affect the tax-free status of export of services.

Key evidence and findings: The CBEC Circular No. 66/2005-S.T. clarified that export of services continued to be tax-free despite withdrawal of Notification No. 6/99-S.T.

Application of law to facts: The Tribunal held that the appellant could not be held liable for service tax on the ground that exemption notifications were withdrawn or reintroduced, since export of services was always exempt as per CBEC clarifications and the nature of service tax.

Treatment of competing arguments: The Revenue argued that no exemption notification was in force during the relevant period and that the Export of Services Rules, 2005, which explicitly exempted export of services, were not yet promulgated. The Tribunal rejected this, relying on CBEC circulars and the principle of destination-based taxation.

Conclusions: The Tribunal concluded that the appellant was not liable to service tax on the basis of exemption notifications or their withdrawal.

Issue 4: Interpretation of "Used Outside India" and Benefit Accrual Test

Relevant legal framework and precedents: Circular No. 111/5/09-S.T. clarified that "used outside India" means the benefit of the service should accrue outside India. Tribunal decisions in KSH International Pvt. Ltd. and B.A. Research India Ltd. applied this test.

Court's interpretation and reasoning: The Tribunal accepted the benefit accrual test as the correct interpretation, allowing export of service status even if the service is performed wholly in India, provided the benefit accrues outside India.

Key evidence and findings: The appellant's foreign clients used the inspection and testing reports abroad, satisfying the benefit accrual test.

Application of law to facts: The Tribunal applied this test and held the services to be exported.

Treatment of competing arguments: The Revenue's narrow interpretation focusing on place of performance was rejected in favor of the benefit accrual approach.

Conclusions: The services qualified as export of service under the benefit accrual test.

Issue 5: Relevance of Export of Services Rules, 2005 to the Period Prior to Their Enactment

Relevant legal framework and precedents: The Export of Services Rules, 2005, explicitly exempt export of services from service tax. However, these Rules came into effect after the period in dispute.

Court's interpretation and reasoning: The Tribunal held that while the Rules were not in force during the relevant period, the principles underlying them were consistent with CBEC circulars and Supreme Court judgments, which recognized export of services as tax-free.

Key evidence and findings: The CBEC circulars and judicial pronouncements supported the tax-free status of export of services even before the Rules.

Application of law to facts: The Tribunal applied these principles retrospectively in favor of the appellant.

Treatment of competing arguments: The Revenue argued that exemption could not be claimed before the Rules came into force. The Tribunal rejected this, relying on CBEC clarifications and the destination-based nature of service tax.

Conclusions: The Tribunal held that export of services was exempt even prior to the Export of Services Rules, 2005.

Issue 6: Binding Nature of CBEC Circulars

Relevant legal framework and precedents: CBEC circulars are binding on the Revenue and provide authoritative clarifications on tax matters.

Court's interpretation and reasoning: The Tribunal gave due weight to CBEC Circular No. 66/2005-S.T. and Circular No. 111/5/09-S.T., which clarified that export of services is tax-free and explained the benefit accrual test.

Key evidence and findings: The circulars dispelled apprehensions regarding taxability of export of services after withdrawal of exemption notifications.

Application of law to facts: The Tribunal held that the Revenue was bound by these circulars and could not demand service tax on exported services during the relevant period.

Treatment of competing arguments: The Revenue's arguments based on absence of exemption notifications were overruled in light of binding circulars.

Conclusions: The Tribunal held that the CBEC circulars affirming tax exemption for export of services were binding and decisive.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is noncommercial 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 phrase 'used outside India' is to be interpreted to mean that the benefit should accrue outside India. Thus, it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefit of these services accrued outside India."

"Export of services would continue to remain tax free even after withdrawal of Notification No. 6/99-S.T., dated 9-4-1999."

"The services rendered by the appellant were consumed abroad where the appellant's clients used the service of inspection/test/analysis to decide whether the goods intended to be imported by them from India conformed to the requisite specifications and standards. In other words, the benefit of the service accrued to the foreign clients outside the Indian territory."

"By no stretch of imagination can it be said that there was no export of service. The services, in question, were exported. Export of service has ever been tax-free as observed by the CBEC."

Core principles established include:

• Service tax is a destination-based consumption tax levied only on services consumed within India.
• Export of services is determined by the benefit accrual test, i.e., if the benefit of the service accrues outside India, the service qualifies as export of service, even if performed in India.
• Export of services has been tax-free, as clarified by CBEC circulars, notwithstanding the issuance, withdrawal, or reintroduction of exemption notifications.
• CBEC circulars clarifying the taxability of export of services are binding on the Revenue.
• Exemption under the Export of Services Rules, 2005, while explicit, codified existing principles and do not preclude retrospective application of the tax-free status of export of services.

Final determinations:

• The appellant's services during the period 1-7-2003 to 19-11-2003 constituted export of services.
• Such export of services was exempt from service tax despite the absence of explicit exemption notifications during the period.
• The demand for service tax, interest, and penalties on the appellant was set aside.