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2016 (9) TMI 191 - CESTAT MUMBAI

2016 (9) TMI 191 - CESTAT MUMBAI - 2016 (44) S.T.R. 71 (Tri. - 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 .....

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redibility in the eyes of its overseas clients lies in the name and style 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 upo .....

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-WZB/STB - Dated:- 15-3-2016 - Shri M V Ravindran, Member (Judicial) And 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 informat .....

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x liability under the reverse charge mechanism prescribed in section 66A 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, prescr .....

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nches and transmitted to the head office after netting the expenses incurred 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 rend .....

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r section 77 and 78 on M/s Tech Mahindra Ltd, its Chairman and a few other 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 b .....

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unsel argues > that the adjudicating authority erred in holding that the 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 In .....

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of Finance Act, 1994; > that salaries, sub-contracting costs and expenditure 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 .....

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diture for the branch in the United Kingdom was ₹ 3282 crores while 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 aud .....

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no purpose will be served by further elaboration of the two rival submissions 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 .....

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n of service, an indirect, destination-based tax, is constitutionally restricted 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 contr .....

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t of classification of services in section 65(105) of Finance Act, 1994. 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 .....

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er service is provided and consumed outside India or has been consumed/received 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 activi .....

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ertaken by the overseas entity. 15. However, that does not foreclose the 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 i .....

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to cross this hurdle. 16. Section 66A of Finance Ac, 1994 taxes all taxable 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 branche .....

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indirect tax; its incidence is borne by the recipient of the service though 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 commercia .....

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see has established branches for furthering its commercial objectives. The 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 .....

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branch of the service provider would not be within the scope of section 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 service .....

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d or to be provided in relation to an immovable property situated in India; (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 .....

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n of a service shall be the location of the recipient of service : Provided 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 ma .....

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ily imported into India for repairs and are exported after the repairs without 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 servic .....

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ng financial company, to account holders; (b) Online information and database 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 .....

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eas activities should, therefore, have a reason. 22. Section 66A of Finance 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 .....

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that such services have to be received by a recipient located in India for 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 proposi .....

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ence, the legislative intent of this legal fiction may have to be ascertained. 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 bu .....

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ly does not pass the test of reason. More so, as there is no inference of 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. Conseque .....

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