TMI Blog2014 (3) TMI 696X X X X Extracts X X X X X X X X Extracts X X X X ..... these services for their business and have made payment for these service in convertible foreign exchange. The Export of Service Rules, 2005 and Taxation of Service (provided from outside India and received in India) Rules, 2006, readwith Section 66A of the Finance Act, 1994 are fully in accordance with the law laid down by the Apex Court in case of All India Federation of Tax Practitioners [2007 (8) TMI 1 - Supreme Court] and Association of Leasing and Financial Service Companies (supra) that service tax is a value added tax, which, in turn, is a destination based consumption tax in the sense that it is not a charge on business but is a charge on the consumer. Therefore what constitutes export of service has to be decided strictly in accordance with the provisions of Export of Service Rules, 2005 and for this purpose, in case of services in relation to business or commerce covered by Rule 3 (1) (iii), the term ‘service recipient’ has to be understood in the sense as explained in para 8.3. The performance of such service in India, would not make them received/consumed in India, if beneficiary user/recipient of said service provided in relation to business or commerce, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reporting the status of manufacture of products by the chosen vendors, analyzing the reports of the samples sent by the vendors, giving recommendation about the product integrity, inspecting export consignments and issuing inspection certificates, screening the vendor s suitability in terms of child labour norms and pollution control norms and recommending the teams to be engaged in logistic work like transportation, clearing and forwarding etc. for export of the purchased products out of India. The department was of the view that the services being rendered by the appellant are Business Auxiliary Service covered by Section 65 (105) (zzb) read with Section 65 (19) of the Finance Act, 1994. However, the Department was of the view that since the service has been rendered in India and is not export of service in terms of Export of Service Rules, 2005, the appellant would be liable to pay service tax in respect of the same. There is no dispute that the appellant for providing the above mentioned services to M/s GAP, U.S.A. received the remuneration from them in convertible foreign exchange. The dispute is only on the point as to whether the services provided by the appellant are export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Service Rules, 2005. The specified service(BAS) was covered under Rule 3(1)(iii). The said sub Rule provided the following conditions for this service in order to constitute as export: From 19.04.06 to 28.02.2007: (i) Recipient should be located outside India (ii) Such service is delivered outside India and used outside India and (iii) Payment for such service provided outside India is received by the service provider in convertible foreign exchange. From 01.03.2007 to 31.05.07: While condition number (i) and (iii), as mentioned above, remained same the condition number (ii) was revised as follows: (ii) Such service is provide from India and used outside India and In other words the difference incorporated w.e.f. 01.03.07 was that the words delivered outside India were deleted from condition number (ii) and replaced with the words provided from India . However the requirement that service should be used outside India coupled with the requirement that the service should be provided outside India remained unchanged. 2. The expression delivered outside India and used outside India were akin to consumption as inferred from the Department s Cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rritory other than where these have been provided. In fact, it is not uncommon for corporate to emphasize the local expertise in the recruitment of various staff deployed for the provision of these services in terms of their proficiency in local knowledge, customs and/or traditions etc. 5. Distinction needs to be and must be drawn amongst the words user beneficiary and buyer/payer of a service. While many a times they are same, they may not be so in all the cases. The benefits in this case would definitely flow to GAP International but that does not mean that service has been used outside India. This will be clear from the following diagram: USER In India Outside India Use In India 1(Taxable) 2(Taxable) Outside India 3(Taxable) 4(Export) It is only in situation 4 (subject to meeting other conditions) that the conditions of export are satisfied. It is inconceivable to imagine how Logistic Support Services can be rendered in India and used elsewhere. Each of these services involves considerable physical execution that can not be provided outside India or used outside. These are not mere advisory services whereby an opinion or a report is sent abroad. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emand on every person who sends remittance from India to a foreign country for enjoying a service in a foreign territory. The business support service is a performance based service and the event of taxation is the physical performance by the service provider. Services, and especially those that are based on performance, cannot be stored as they do not have any shelf life. The provision of service and the consumption of the service are simultaneous. As in the case of coaching service, in the case of business support service too, the service provider performs in India by approaching prospective clients to enter into a business relationship with the foreign entity. The service provident by such performance gets consumed the moment the prospective clients in India are informed of the business relationship that he could possibly have with the foreign entity. This business support service therefore essentially comprises in preparing Indian clients to enter into business relationship with the foreign entity. It is quite analogues to coaching class service where tutors in a class room teach, or prepare through trial test, the students for appearing in a competitive exam, to enable the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the products purchased. Thus, the services being provided by the appellant to their principal are the services in relation to procurement of the goods and there is no dispute that these services are Business Auxiliary Services covered by Section 65 (105) (zzb) readwith Section 65 (19) of the Finance Act, 1994. The only point of dispute is as to whether the services are taxable in India or the same are export of service outside India in terms of Service Rules, 2005 and for this reason are not taxable in India. Though the services have been performed in India, these services being Business Auxiliary Services are in respect of the business of the appellant s principal located abroad. The services being provided by the appellant are obviously meant for and are used by M/s GAP, U.S.A. for their business. The services being provided by the appellant are covered by Clause (iii) of Rule 3 (1) of Export Service Rules, 2005, as these services are in relation to business or commerce and in terms of this clause, readwith sub-rule (2) of Rule 3, these services would be treated as exported out of India if the recipient is located outside India and the same have been delivered outside India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 13/05/11. This Circular had been issued in the context that since by Notification No. 6/2010-ST dated 27/2/10, Rule 3 (2) of the Export of Service Rules, 2005 has been amended and clause (a) of Rule 3 (2) regarding use of the service being outside India has been deleted, during the period prior to 27/2/10, the condition of use outside India also needs to be satisfied for availing the benefit of export. On the point of the condition regarding use outside India , an earlier Circular No. 111/5/09 dated 24/2/09 had clarified as under - For the services that fall under category III [Rule 3 (1) (iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase used outside India is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for category III services [Rule 3 (1) (iii)], 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 accrues outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promoti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India, it is taxed in India under reverse charge mechanism of Section 66A of the Finance Act, 1994. Thus the scheme of levy of service tax according to which - (a) when the service provider and service receiver, both, are in India, service tax is charged in India from the service provider; (b) when service provider is in India and service recipient is located abroad, no service tax is charged from the service provider, and (c) when service provider is abroad, not having any establishment or branch in India, and the service recipient is in India, service tax is charged from the service recipient under reverse charge mechanism; is in accordance with the principle laid down by the Apex court that service tax is a destination based tax on consumption. In this regard, service tax is similar to other indirect taxes like central excise and customs duties, as central excise duties or import duties paid on the goods are refunded as drawback or export rebate on export of the goods out of India. Since unlike goods, where a person may purchase and receive some goods, store them and thereafter sell the goods to some other person who may consume those goods to satisfy his need, in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o is the service consumer). 8.2.1 Under Export of Service Rules, 2005 and Taxation of Services (provided from outside India and received in India) Rules, 2006, for the purpose of determining whether a service provided in India has been exported out of India i.e. has been received/consumed outside India or whether a service provided from outside India by an offshore service provider has been received/consumed by a person in India, the services have been divided into three categories - (i) Services in relation to immovable property as specified in these rules, which are treated as exported if the services provided from India are in relation to an immovable property located outside India and payment has been received in foreign exchange and such services when provided from outside India are treated as received in India if the same are in respect of an immovable property located in India ; (ii) performance based services, as specified in these rules, which are treated as exported if the same have been performed outside India, either in full or even partly; and payment has been received in convertible foreign exchange and such services, when provided by an offshore service prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey cannot be treated as service recipient -the service recipient would be B who has paid for the service and whose need has been satisfied by the provision of service. The only situation where in respect of some service provided by A which was ordered and paid for by B, a person C who has benefited from the service, can be treated as service recipient, when B has acted purely as an agent of C. Therefore in respect of services covered by Rule 3 (1) (iii) of the Export of Service Rules, 2005, which are the service in relation to business or commerce, the same provided by a person in India for use in relation to business or commerce would be treated received outside India and hence, exported, if - (i) the services have been provided on the instruction of a person located outside India for use in his business ; (ii) payment for those services has been made by him in convertible foreign exchange and it is he who has used the service to satisfy the need of his business. It would be absolutely wrong to say that the services like advertisement, publicity, marketing etc. provided by a person in India on the instructions of a corporation located outside India for use in its busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as export, if the payment has been received in convertible foreign exchange. The performance of such service in India, would not make them received/consumed in India, if beneficiary user/recipient of said service provided in relation to business or commerce, who has paid for these service and has used the service in his business, is located abroad. The position would be different if the company located abroad who has paid for the service, also has some branch/ project in India and the service provided in India is meant for that branch/project only in that case, the consumption of service would be in India and the service would be taxable in India. But if the recipient company located abroad, has no branch or project or establishment in India and the service covered by Rule 3 (1) (iii) provided in India is meant for use in the business of the company located abroad, it would be export of service. 8.6 In view of the above discussion, the Boards Circular No. 141/10/2011 dated 13/5/11 clarifying that for the period prior to 27/2/10, the condition regarding used outside India also needs to be independently satisfied for availing the benefit of export and that effective use of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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