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2025 (6) TMI 1598 - AT - Service TaxTaxability - reverse charge mechanism - commission paid by Indian companies to foreign agents for services rendered entirely outside India - contention of the Revenue is that the said services rendered by the overseas agents are received and utilized in India whereas the contention of the appellant is that the services are rendered and received abroad - Revenue neutrality - time limitation - penalty - HELD THAT - It is found that both the authorities below while passing the Orders-in-Original and Orders-in-Appeal have recorded clear findings that the services have been rendered and received at the same time and entirely outside India. The said findings have not been questioned by the Revenue by filing any appeal against the orders of both the authorities. It is found that once there are clear cut findings of fact that the services have been rendered entirely outside India the same cannot be taxed in India by invoking the Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules 2006 because the said rule in its opening portion contemplates receiving of services in India which is clearly absent in the present case. On going through the provisions of Section 66A Rule 2(1)(d)(iv) and Section 68(2) it is found that the Reverse Charge Mechanism was introduced w.e.f. 18.04.2006 but in the present case the said provision is not applicable because it is a clear cut finding that the impugned services have been performed/rendered entirely outside India and the same cannot be taxed in India under the provisions of Reverse Charge Mechanism. It that even is also found that the deeming provisions as contemplated under Rule 3(ii) not applicable in the present case in view of the clear cut findings that services were received entirely outside India. Hon ble Delhi High Court in the case of Orient Crafts Ltd 2006 (9) TMI 2 - DELHI HIGH COURT has clearly held that no service tax at all can be levied on services rendered and received outside India. By following the ratio of the said decision and also considering the CBEC s Circular dated 19.04.2006 the appellant is not liable to service tax under reverse charge basis; therefore to this extent we set aside the demand. Revenue neutrality - HELD THAT - It is found that in the appellant s own case revenue neutrality is applicable qua the same assessee on account of reverse charge basis and not towards any other party. It is also found that demand of service tax being on reverse charge basis is without dispute fully CENVATABLE in view of Rule 3(1)(ixa) of CENVAT Credit Rules 2004 inserted on 08.04.2011 with retrospective effect from 18.04.2006 which clearly provides that the service tax leviable under Section 66A of the Finance Act is CENVATABLE. Time Limitation - penalty - HELD THAT - Once the service tax leviable under Section 66A is CENVATABLE then the question of intent to evade the tax does not arise and extended period of limitation cannot be invoked as held by the Hon ble Supreme Court in the case of Nirlon Limited vs. Commr of CE Mumbai 2015 (5) TMI 101 - SUPREME COURT - it cannot be said that the department was not having any knowledge rather the department had complete knowledge as early as September 2006 and therefore the question of suppression in the facts and circumstances of the present case does not arise. Further in the case of Nizam Sugar Factory 2006 (4) TMI 127 - SUPREME COURT the Hon ble Apex Court has clearly held that extended period of limitation cannot be invoked for the subsequent show cause notice. The demand for extended period as well as penalty set aside. Conclusion - i) The service tax demand on commission paid to foreign agents for services rendered and received outside India is set aside as unsustainable on merits. ii) The demand and penalties raised beyond the limitation period are set aside. iii) The Reverse Charge Mechanism provisions do not apply to services not received in India. iv) The CENVAT credit is available on service tax paid under Section 66A ensuring revenue neutrality. The impugned orders are not sustainable on merits as well as on limitation - Appeal allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these appeals are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Commission Paid to Foreign Agents for Services Rendered Outside India Legal Framework and Precedents: Section 66A of the Finance Act, 1994, as amended w.e.f. 18.04.2006, imposes service tax on services provided by a person outside India and received by a person in India, treating the recipient as the provider for tax purposes (Reverse Charge Mechanism). Rule 3 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, further clarifies the scope of services taxable under this provision. The Hon'ble Delhi High Court in Orient Crafts Ltd vs. UOI (2006) held that no service tax can be levied on services rendered and received outside India. CBEC Circular dated 19.04.2006 reiterates that only services received in India are taxable under Section 66A. Court's Interpretation and Reasoning: The Tribunal noted that all authorities below, including the adjudicating authority and Commissioner (Appeals), had recorded clear findings that the services were both rendered and received entirely outside India. The Revenue did not challenge these findings. The Tribunal held that Rule 3(iii) of the 2006 Rules requires services to be received in India to be taxable, which was absent here. Thus, the services rendered and received abroad cannot be brought under the tax net in India. Key Evidence and Findings: The foreign agents procured purchase orders outside India, dispatched goods to foreign customers, and received payments abroad. The Indian appellant paid commission to these agents for services rendered outside India. The findings of fact by the authorities below that services were rendered and received abroad were undisputed and unchallenged by Revenue. Application of Law to Facts: Since the services were neither performed nor received in India, the Reverse Charge Mechanism under Section 66A and Rule 3(iii) cannot be invoked. The Tribunal relied on statutory provisions and judicial precedent to conclude that taxing such services would exceed territorial jurisdiction. Treatment of Competing Arguments: The Revenue argued that the services were received and utilized in India and hence taxable. The Tribunal rejected this, relying on factual findings and legal provisions requiring receipt of service in India. The appellant's reliance on Orient Crafts Ltd and CBEC Circular was accepted, while Revenue's reliance on earlier decisions was distinguished on facts and temporal applicability. Conclusion: Services rendered and received entirely outside India are not taxable under Section 66A or related rules. The demand of service tax on commission paid to foreign agents for such services is unsustainable and set aside. Issue 2: Applicability and Interpretation of Rule 3(iii) of Taxation of Services Rules, 2006 Legal Framework: Rule 3(iii) applies to services provided from outside India and received in India. The sub-rule does not contain deeming provisions akin to sub-rule (ii) which treats certain partly performed services as performed in India. Court's Reasoning: The Tribunal emphasized that Rule 3(iii) requires receipt of service in India, which was absent. Unlike sub-rule (ii), sub-rule (iii) lacks any deeming fiction to tax services performed entirely outside India. Therefore, the services in question cannot be taxed under this rule. Application to Facts: The foreign agents' services were rendered and received outside India, thus Rule 3(iii) cannot be invoked to bring them within Indian tax jurisdiction. Conclusion: Rule 3(iii) does not support taxation of services not received in India; hence, the demand under this provision is invalid. Issue 3: Limitation for Raising Demand and Penalties Legal Framework and Precedents: The limitation period for service tax demands is prescribed under the Finance Act and allied rules. The Hon'ble Supreme Court in Nizam Sugar Factory vs. Collector of CE, A.P., held that extended limitation cannot be invoked for subsequent show cause notices if there is no suppression. The Nirlon Ltd decision reinforced that CENVAT credit availability negates intent to evade tax, barring extended limitation. Court's Reasoning: The Tribunal found that the department was aware of the appellant's activities since 2006 and had earlier sought to tax the same services under a different category but dropped the proceedings. The present demands are for the same services under a different head, thus the department had full knowledge and no suppression or intent to evade tax was established. Application to Facts: The show cause notices were issued beyond the normal limitation period and related to failure to disclose, not suppression. The Tribunal set aside demands and penalties raised beyond limitation. Conclusion: The demands and penalties raised beyond the limitation period are barred and set aside. Issue 4: Revenue Neutrality and CENVAT Credit Availability on Reverse Charge Service Tax Legal Framework: Rule 3(1)(ixa) of the CENVAT Credit Rules, 2004 (inserted retrospectively from 18.04.2006) allows CENVAT credit for service tax paid under Section 66A. The Trade Notice dated 11.09.2008 clarifies this position. Court's Reasoning and Findings: The Tribunal held that the demand of service tax on reverse charge basis is fully CENVATABLE, ensuring revenue neutrality to the appellant. The appellant itself is both the service recipient and the person liable to pay tax, so no revenue loss occurs. Conclusion: The reverse charge service tax demand, if valid, is fully creditable; therefore, the revenue neutrality principle applies. Issue 5: Binding Nature of Findings of Fact that Services Were Rendered and Received Outside India Court's Reasoning: The Tribunal noted that the Revenue did not challenge the factual findings by the adjudicating authority and Commissioner (Appeals) that services were rendered and received outside India. These findings are binding and conclusive for the purpose of taxability under the Finance Act and rules. Conclusion: Undisputed findings that services were rendered and received abroad preclude taxation under Indian service tax law. 3. SIGNIFICANT HOLDINGS "It cannot be said that services are received abroad though they are certainly performed outside India." "Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 contemplates receiving of services in India, which is clearly absent in the present case." "No service tax at all can be levied on services rendered and received outside India." "Where services are admittedly and unquestionably performed/rendered outside India, they cannot be lawfully treated to have been performed in India and therefore, they are outside the tax fold." "Extended period of limitation cannot be invoked for the subsequent show cause notice in absence of suppression or intent to evade tax." "Demand of service tax being on reverse charge basis is without dispute fully CENVATABLE." Final determinations:
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