2024 (9) TMI 1689 - AT - Service Tax

Scope and interpretation of Section 66A of the Finance Act 1994 - branch office for the purpose of section 66A was distinct entity from the head office - Reverse charge mechanism. Whether the tribunal has rightly in case of British Airways 2014 (6) TMI 626 - CESTAT NEW DELHI (LB) held that the payments made by the Head Office against the service received by the branch office located in India will make the Head Office the recipient of service for the purpose of Section 66A of the Finance Act 1994? - HELD THAT - The two conflicting decisions of the Tribunal are in British Airways and Cathay Pacific Airways. In British Airways the Tribunal held the India branch office of the International Airline cannot be held to be the recipient of services provided by CRS companies and liable to pay service tax on reverse charge basis under section 66A of the Finance Act. - However in Cathay Pacific Airways 2019 (10) TMI 890 - CESTAT MUMBAI the division bench held that independent identity of branch office or head office is not the criteria for determination of liability to service tax in terms of section 66A of the Finance Act. The relevant criteria for determination of liability to pay service tax would be the place of business of recipient of service in cases where the provider of service is located outside India. For OIDAR services rendered by a service provider from outside India to be subject to service tax in India under section 66A of the Finance Act it is necessary that the service should be received by the service recipient located in India - the India branch office of the International Airline cannot be considered as a service recipient under section 66A of the Finance Act. It is the head office that would be the recipient of services provided by the CRS/GDS companies located outside India. The second proviso to section 66A(1) of the Finance Act states that location of establishment of service provider most directly concerned with provision of service has to be seen. It is silent about relevant establishment of the service recipient. It needs to be noted that paragraph 26.5 of CBEC Circular dated 27.07.2005 provides that the establishment most directly concerned with receipt of service has to be seen even when Explanation to section 65(105) of the Finance Act is silent about it. Therefore for purposes of section 66A of the Finance Act also the establishment most concerned with the receipt of service alone will be relevant. Where the service recipient has more than one establishment the establishment most directly concerned with the receipt of service has to be seen. Reverse charge mechanism - HELD THAT - The entire basis for reference to the larger bench by the division bench is the judgment of the Supreme Court in Formula One 2017 (4) TMI 1109 - SUPREME COURT in reference to the provisions of the Income Tax Act 1961. The division bench of the Tribunal basis the decision of the Supreme Court Formula One concluded that the branch office of Cathay Pacific located in India is the place of business of Cathay Pacific Airlines in India and so the services received by the branch office in India from the CRS companies for facilitating the booking of tickets through travel agents in India are services received in India. The reference order therefore proceeds to hold that the branch office of the International Airline in India would be liable to pay service tax in terms of section 66A of the Finance Act under reverse charge as the criteria for determining applicability of service tax under section 66A of the Finance Act is the place of business in India. The appellant does not dispute that it has a place of business in India. What the appellant disputes is that the place of business in India is not the recipient of service. The branch office in India is not the recipient of OIDAR services provided by CRS companies. It is the head office which is contractually entitled to receive the services rendered by the CRS/GDS companies and it is the head office which is contractually obligated to make payment for the services rendered by the CRS/GDS companies. Conclusion - i) For the purpose of levy of service tax under reverse charge under section 66A of the Finance Act the services should have been received in India by the recipient from the service provider who does not have any permanent establishment in India. The appellant in the present case is not the recipient of service and it is the head office located in Hong Kong that is the recipient of service. As the appellant has not received any service it cannot be held liable to pay service tax in respect of the services rendered by the foreign CRS/GDS companies to the head office located outside India. ii) In the present case the Commissioner has recorded a finding of fact that the branch office and the head office are two separate persons. This issue would therefore not arise for consideration. In any case it has been found as fact that the branch office and the head office are two separate persons. iii) The issue that arose for consideration in British Airways was whether the branch office was the recipient of service or not. The issue therefore that has been referred is beyond the dispute decided in British Airways. In any view of the matter the branch office has not received any service from foreign CRS/GDS companies and it is the head office alone which has received the services and made payment. The appellant which is the branch office cannot be held liable to pay service tax under reverse charge under section 66A of the Finance Act. The papers may now be placed before the division bench for deciding the appeal on merits.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment primarily revolves around three core issues:

(a) The interpretation and scope of Section 66A of the Finance Act, 1994.

(b) Whether the tribunal correctly decided in the case of British Airways that a branch office is a distinct entity from the head office for the purpose of Section 66A.

(c) Whether the tribunal was correct in determining that payments made by the head office for services received by the branch office in India make the head office the recipient of service under Section 66A.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Interpretation and Scope of Section 66A of the Finance Act, 1994

Relevant Legal Framework and Precedents: Section 66A of the Finance Act, 1994, introduced the concept of reverse charge mechanism for services received from outside India. The section outlines conditions under which a service is considered taxable when received by a recipient in India from a provider outside India.

Court's Interpretation and Reasoning: The court analyzed the provisions of Section 66A, emphasizing that the recipient of the service must be in India, and the service provider must be outside India without a permanent establishment in India.

Key Evidence and Findings: The court examined the contractual agreements between the head office of the airline and CRS/GDS companies, noting that the contracts and payments were handled by the head office outside India.

Application of Law to Facts: The court applied Section 66A to determine that the head office, not the branch office, was the recipient of services, as the contractual obligations and payments were managed by the head office.

Treatment of Competing Arguments: The court considered the department's argument that the branch office was the recipient due to the services being utilized in India but found this unpersuasive given the contractual and payment structure.

Conclusions: The court concluded that the branch office in India was not the recipient of services under Section 66A, and therefore, not liable to pay service tax under the reverse charge mechanism.

Issue (b): Distinct Entity Status of Branch Office

Relevant Legal Framework and Precedents: Section 66A(2) treats a branch and head office as separate entities for service tax purposes.

Court's Interpretation and Reasoning: The court emphasized the legal distinction between a branch office and a head office, as outlined in Section 66A(2).

Key Evidence and Findings: The court found that the branch office did not engage directly with CRS/GDS companies and had no contractual obligations with them.

Application of Law to Facts: The court applied the legal framework to conclude that the branch office and head office are separate entities, and the branch office was not the service recipient.

Treatment of Competing Arguments: The department's argument that the branch office was the recipient was rejected based on the legal distinction between the entities.

Conclusions: The court upheld the distinction between the branch and head office, affirming that the branch office was not liable for service tax.

Issue (c): Payment and Service Recipient Determination

Relevant Legal Framework and Precedents: The determination of the service recipient is crucial for applying the reverse charge mechanism under Section 66A.

Court's Interpretation and Reasoning: The court focused on the contractual obligations and payment flows to determine the actual recipient of services.

Key Evidence and Findings: The court noted that all payments and contractual obligations were handled by the head office.

Application of Law to Facts: The court applied the law to conclude that the head office was the recipient of services, as it fulfilled the contractual and payment responsibilities.

Treatment of Competing Arguments: The department's assertion that the branch office was the recipient due to service utilization in India was dismissed.

Conclusions: The court concluded that the head office, not the branch office, was the recipient of services, and thus, the branch office was not liable for service tax.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The India branch office of the International Airline cannot be considered as a service recipient under section 66A of the Finance Act. It is the head office that would be the recipient of services provided by the CRS/GDS companies located outside India."

Core Principles Established: The judgment reinforced the principle that for service tax liability under Section 66A, the recipient of services must be clearly identified based on contractual obligations and payment responsibilities.

Final Determinations on Each Issue:

(A) The branch office in India is not the recipient of services under Section 66A, and therefore, not liable to pay service tax under the reverse charge mechanism.

(B) The branch and head office are distinct entities for service tax purposes, with the head office being the service recipient.

(C) Payments made by the head office confirm it as the recipient of services, absolving the branch office from service tax liability.