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M/s Tech Mahindra Ltd., Milind Kulkarni Versus Commissioner of Central Excise, Pune - I

2016 (9) TMI 191 - CESTAT MUMBAI

Import of services - taxability of services rendered by subsidiaries to the parent company – reverse charge mechanism - section 66A of Finance Act, 1994 - are branches and head offices separate entities so as to attract service tax on outflow by head office to branches? - Held that: - The proposition that the intent of section 66A in taxing the activity rendered by an overseas branch to its headquarters in India is limited to the local commercial or business activities of the head office is ther .....

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of the appellant assessee. It cannot be substituted by any other entity. - The activity of the head office and branch are thus inextricably enmeshed. Its employees are the employees of the organization itself. There is no independent existence of the overseas branch as a business. The economic survival of the branch is entirely dependent on finances provided by the head office. Its mortality is entirely contingent upon the will and pleasure of the head office. The transfer of funds by gros .....

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Shri C J Mathew, Member (Technical). Shri V Sridharan, Sr. Advocate with Shri Sandeep Sachdeva and Ms. Niyati Jigyasi, Advocates and Shri Vinay Jain, CA for the Appellants. Shri V.K. Singh, Special Counsel for the Respondent. ORDER: Per: C J Mathew: The appellant-assessee, M/s Tech Mahindra Ltd, is in the business of developing software for overseas customers, particularly mobile operators, and, admittedly, renders information technology service taxable as per section 65 (105) (zzzze) of Finance .....

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A of Finance Act, 1994. 3. The said section specifies that taxable services enumerated in section 65(105) are chargeable to tax when received from outside the country and that liability devolves on the domestic entity as though it had rendered the service to itself. Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 identifies the manner of receipt of services that render it taxable, prescribes the requirement for registration by the recipient under section 69 o .....

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red by the branch. 5. Convinced that the payments made to the branches were in the nature of consideration for taxable services rendered by the branch to the head office and that M/s Tech Mahindra Ltd was liable to tax on reverse charge basis for having been recipient of business auxiliary services rendered by the branches to the head office, proceedings were initiated by Revenue. 6. Business auxiliary service has been rendered taxable with effect from 1st July 2003 by insertion of sub-section ( .....

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r key functionaries. 8. Commissioner of Central Excise, Pune vide order-in-original no. PUN-SVTAX-000-COM-005-14-15 dated 11th February 2015 confirmed the demand and interest besides imposing penalties under section 77 and 78 of Finance Act, 1994 on M/s Tech Mahindra Ltd and on Shri Milind Kulkarni, Shri Viswanath Kini and Shri CP Gurnani. M/s Mahindra Tech Ltd and the individuals on whom penalty was imposed are in appeal before the Tribunal against that order. 9. The primary planks of the confi .....

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he branches and the head office are independent entities by incorrect interpretation of section 66A of Finance Act, 1994; > that the head office is not a permanent establishment and section 66A (2) of Finance Act, 1994, which is intended to tax service rendered by a permanent establishment to another permanent establishment, has been incorrectly invoked; > that tax liability will arise only for services received in India which the adjudicating authority failed to establish; > that, with .....

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diture on services that were rendered outside the country cannot be taxed under section 66A of Finance Act, 1994; > that activities taxed overseas cannot be taxed under Finance Act, 1994; > that services rendered in connection with authorized operations in special economic zones are not includible as consideration for rendering of taxable services; > that the entire demand is revenue neutral as CENVAT credit could be taken and refund claimed; > that there was no scope for invoking se .....

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that of other branches was ₹ 569 crores; with the client in the United Kingdom, M/s British Telecom, having paid VAT in that country and likewise in other countries, tax was not leviable under Finance Act, 1994; > that it was not just revenue-neutral but special case of revenue-neutrality; > that regular information was being furnished to service tax authorities and the books had been subject to service tax audits 11. Learned Special Counsel appearing for respondent-Commissioner dre .....

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ions at this stage in view of our considered findings on the issues raised and held by the lower authority. We also note that the decisions relied upon by both sides are the same and these will be examined at the appropriate stage of our findings. 12. At the core of the dispute are four issues, viz., the status of overseas branches vis-vis the head office and the limitation thereof, the jurisdiction to classify the services under section 65(105) of Finance Act, 1994, the receipt of business auxi .....

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tricted to India. In the scheme of Chapter V of Finance Act, 1994, the incidence of tax on services is to be borne by the recipient of service and levy is enforced on the provider of service. As the tax can be collected only from a service-provider within the jurisdiction, undertakings beyond the territory are beyond the ambit of the statute irrespective of the nature of the structural form or the linkage - organic or contractual. In such a taxing law, an entity that is beyond the jurisdiction o .....

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More so, as tax authorities are bereft of wherewithal to scrutinize the activities of such an entity and there is, indeed, no cause to embark upon such a venture either. Undoubtedly, such entities are subject to tax in the territory in which they operate. We notice that decisions of this Tribunal in Torrent Pharmaceuticals Ltd v Commissioner of Service Tax Ahmedabad [2015 (39) STR 97 (Tri-Ahmd)] and KPIT Cummins Infosystems Ltd v Commissioner of Central Excise, Pune-I [2014 (33) STR 105 (Tri-Mum .....

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ceived in India. The agreements/documents available with the appellant have to be accepted for the purpose of determining place of providing and consumption of service in India That it is to be taken as an indicator arises from the absence of cross-border tax facilitation that extends availment of credit beyond the tax frontiers of the country. For these reasons, it is neither feasible nor necessary to delve into the activities of the overseas entity except where the tax liability of the assesse .....

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jurisdiction over or preclude necessity of examining an overseas activity from the point of view of the recipient of service. Section 66A of the Finance Act, 1994 has been specifically enacted to tax services received by an assessee as though the assessee has provided the service to itself. And in providing the framework for such tax shifting, various organizational forms may have to be disaggregated accordingly, a branch in another country is deemed to be an establishment distinct for the purpo .....

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le services received by a person who has his place of business, fixed establishment, permanent address or usual place of residence in India from a person who has established or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India Revenue has alleged that Explanation 1 in sub-section (2) having designated branches as business establishment overseas and section 66(2) mandating that (2) .....

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gh mechanics of the collection are entrusted to the provider of the service. As a provider who is not within the tax jurisdiction of this country cannot be subject to such entrustment reverse charge is resorted to. Furthermore, akin to the import of goods, equivalence requires that the tax be collected as though it was a domestic transaction with responsibility devolving on the taxable entity in the country. 18. A commercial organization establishes its subordinate formations to further the comm .....

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e benefit of assigned activities of the branch will, undoubtedly, accrue to the appellant. There is no dispute that it is the appellant-assessee who enters into contractual agreements with overseas customers for supply of information technology services which have off-shore components rendered directly to the overseas entity by the appellant-assessee. On-site activity is undertaken by deputing employees working at the site of the customer. These employees are, without doubt, on the rolls of the .....

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66A. Merely because there is a branch and that branch has, in some way, contributed to the activities of the appellant-assessee in discharging its contractual obligations, the definition of business auxiliary service in section 65(19) of Finance Act, 1994 may not apply. That is where the impugned order has erred in not reading section 65(105) along with section 66A and Rules framed for the purpose of charging tax on services received from abroad. Unless both are applied together, the jurisdictio .....

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a; (ii) specified in sub-clauses ****** of clause (105) of section 65 of the Act, be such services as are performed in India: Provided that where such taxable service is partly performed in India, it shall be treated as performed in India and the value of such taxable service shall be determined under section 67 of the Act and the rules made thereunder; (iii) specified in clause (105) of section 65 of the Act, but excluding,- (a) sub-clauses (zzzo) and (zzzv); (b) those specified in clause (i) o .....

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ed that in case the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the provider of service. RULE 4. Place of provision of performance based services. - The place of provision of following services shall be the location where the services are actually performed, namely :- (a) services provided in respect of goods that are required to be made physically available by the recipient of service to the provider of se .....

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thout being put to any use in the taxable territory, other than that which is required for such repair;] (b) services provided to an individual, represented either as the recipient of service or a person acting on behalf of the recipient, which require the physical presence of the receiver or the person acting on behalf of the receiver, with the provider for the provision of the service. RULE 8. Place of provision of services where provider and recipient are located in taxable territory. - Place .....

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base access or retrieval services; (c) Intermediary services; (d) Service consisting of hiring of all means of transport other than,- (i) aircrafts, and (ii) vessels except yachts, upto a period of one month. 21. From the above, it is apparent that mere identification of a service and the legal fiction of separate establishment is not sufficient to tax the activities of the branch. The very existence of a branch presupposes some kind of activity that benefits the primary establishment in India a .....

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ce Act, 1994 does not prescribe promulgation of any Rule for its administration. The two sets of Rules extracted supra are framed under the general provision in section 94 of Finance Act, 1994. Moreover, the Rules draw upon section 93 of Finance Act, 1994 in a manner akin to Export of Service Rules, 2005. It is noticed that the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 also mirrors the Export of Service Rules, 2005. That, however, cannot be taken as int .....

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or use in relation to business or commerce. The provisions of the successor Rules are no different. 23. The catena of judgments cited for both sides, viz., British Airways v Commissioner of Central Excise (Adjn) [2014-TIOL-979-CESTAT-Del], Torrent Pharmaceuticals ltd v Commissioner of Service Tax [2015 (19) STR 97 (Tri-Ahmd)] and Infosys Ltd v Commissioner of Service Tax [2014-TIOL-409-CESTTAT-Bang] does support the proposition that a service is taxable under section 66A of Finance Act, 1994 onl .....

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ined. In doing so, the goals of the appellant as an exporter cannot be far from our mind. 25. Section 66A requires taxing of taxable services rendered by an overseas branch to its head office and the two sets of Rules limit tax demand only to the extent that these services are received in India in relation to business or commerce. A plain reading would make it apparent that the services referred to must be for pursuit of business or commerce in India. The two sets of Rules provide for availment .....

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any monitorial aspect in undertaking such an exercise. An exporter who operates through branches is clearly not the target of the legal fiction of branches being distinct from head office. The proposition that the intent of section 66A in taxing the activity rendered by an overseas branch to its headquarters in India is limited to the local commercial or business activities of the head office is thereby confirmed. Consequently, mere existence as a branch for the overall promotion of the objecti .....

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