TMI Blog2017 (9) TMI 632X X X X Extracts X X X X X X X X Extracts X X X X ..... , the 'recipient' of the service is determined by the contract between the parties and by reference to (a) who has the contractual right to receive the services; and (b) who is responsible for the payment for the services provided (i.e., the service recipient). This essential difference has been lost sight of by the Department. In the present case there is no privity of contract between Verizon India and the customers of Verizon US. Such customers may be the 'users' of the services provided by Verizon India but are not its recipients. Circular No. 141/10/2011 dated 13th May, 2011 also throws light on this aspect - It was clarified that the words ‘accrual of benefit’ was not restricted to mere impact on the bottom-line of the person who pays for the service. It had to be given a harmonious interpretation in the context where the effective use and enjoyment of the service has been obtained. The position becomes even clearer in the post July 2012 period during which the POPS Rules 2012 apply. As already noted provision of telecommunication services does not have a specific rule and so Rule 3 of the POPS Rules, which is the default option, applies. In terms thereof, the place of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to provide such services in all geographical areas across the globe, it utilises the services of other Verizon entities including Verizon India to provide connectivity to its customers. It is stated that such connectivity is provided in the form of: (a) Local Access: where Verizon India facilitates provision of wire line telecommunication circuit between two Verizon Business designated locations. (b) Bandwidth: where Verizon India provides diverse wire line telecommunication circuit of a specified bandwidth at the designated locations. (c) MPLS VPN: wherein a virtual private network is established through a private line. 4. Verizon India states that in order to provide the above services, it has obtained the National Long Distance ( NLD ) and International Long Distance ( ILD ) licences from the Government of India. Verizon India does not provide voice/telephony services but only data transfer service. It is stated that in order to provide wireless voice telephony services, separate licence and spectrum is required. It is stated that Verizon India did not have to obtain such licence or spectrum as those services are not provided by it. 5. Verizon India further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th applicable interest and penalty in respect of the amounts received by Verizon India from Verizon US towards export of services. The case of the Department is that telecommunication services rendered by Verizon India during the period April 2011 to September 2014 do not qualify as export of services . 9. While issuing notice on these writ petitions on 7th December 2016, this Court passed interim order as far as Writ Petition (Civil) No. 11575 of 2016 was concerned to the effect that during the pendency of the said writ petition the Department should not pass any final orders on the impugned SCN although the proceedings may continue. The nature of service provided by the Petitioner 10. Before examining the relevant provisions of the Finance Act, 1994 (FA), it is important to understand the nature of the service provided by Verizon India to Verizon US. Typically, customers of Verizon US, located in the US, will engage Verizon US to carry and collect data from their Indian entities. Under the Master Supply Agreement entered into between Verizon India and Verizon US, Verizon India provides to Verizon US connectivity service. 11. In the process of gathering the data f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an economy, particularly knowledge based economy. With the enactment of Finance Act, 1994, the Central Government derived Its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the Introduction of Article 268A In the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also Introduced In the Union List for the levy of service tax. As stated above, as an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003. Further, it is important to note, that service tax is a value added tax which in turn is a general tax which applies to a commercial activities involving production of goods and provision of services. Moreover, VAT is a consumption tax as it is borne by the client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. State of U.P. (2005 (2) SCC 515 in which a Constitution Bench observed that in the classical sense a tax is composed of two elements: the person, thing or activity on which tax is imposed. Thus, every tax may be levied on an object or on the event of taxation. Service tax is, thus, a tax on activity whereas sales tax is a tax on sale of a thing or goods . (emphasis supplied) Relevant provisions of the Finance Act 1994 14. Under Section 64 (3) of the FA, the entire Chapter V which pertains to service tax applies only to taxable services . The expression 'taxable services' has been defined under Section 65B (51) of the FA to mean the services which are subject to tax as per Section 66B of the FA. In turn Section 66B talks of levy of service tax on services provided in the taxable territory which expression is defined under Section 65B (52) of the FA to mean the territory to which Chapter V applies. That takes us to Section 64 (1) of the FA which makes it clear that Chapter V applies to whole of India except the State of Jammu and Kashmir. Service tax is leviable, therefore, only in the taxable territory i.e. India. 15. Up to 1st July 2012, 'taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obile telephone services including provision of access to and use of switched or non-switched networks for the transmission of voice, data and video, inbound and outbound roaming service to and from national and international destinations; (iv) carrier services including provision of wired or wireless facilities to originate, terminate or transit calls, charging for interconnection, settlement or termination of domestic or international calls, charging for jointly used facilities including pole attachments, charging for the exclusive use of circuits, a leased circuit or a dedicated link Including a speech circuit, data circuit or a telegraph circuit; (v) provision of call management services for a fee including call waiting, call forwarding, caller identification, three-way calling, call display, call return, call screen, call blocking, automatic callback, call answer, voice mail, voice menus and video conferencing; (vi) private network services including provision of wired or wireless telecommunication link between specified points for the exclusive use of the client; (vii) data transmission services including provision of access to wired or wireless facilities and ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The FA underwent several changes with effect from 1st July 2012. The concept of negative list of services was introduced by inserting Section 66D in the FA. The charging provision Section 66 was replaced by Section 66B of the FA which stated that service tax would be levied on the value of the services other than those specified in the negative list that have been provided or agreed to be provided in the taxable territory by one person to another. These provisions, therefore, made it explicit that for service tax to be levied in terms of Chapter V of the FA, the services had to be provided within the taxable territory. 22. Section 66 C FA stated that the central government may by rules determine the place of provision of service. The central government accordingly made the Place of Provision of Service Rules 2012 (POPS Rules). Rule 3 of the POPS Rules is applicable when the other rules do not apply. Thus while Rule 4 of the POPS Rules is concerned with performance based services, Rules 5 to 8 and 10 to 13 relate to event based services. Rule 9 applies to specified services like banking, intermediary services etc. Provision of telecommunication services does not have a specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Rule 4 of the ESR, any service which is taxable under clause (105) of Section 65 may be exported without payment of service tax. 27. This position underwent changes from time to time. Between April 19, 2006 to February 28, 2007 the requirement to be fulfilled for treating services rendered as export of services was as under: (a) The service recipient was located outside India; (b) Such service was delivered outside India and used outside India and (c) Payment for such service, provided outside India was received by the service provider in convertible foreign exchange. 28. For the period from 1st March 2007 to 26th February 2010, the criteria for the provision of service to be considered as export of service were as under: (a) The service recipient was located outside India; (b) Such service had to be provided from India and used outside India; (c) Payment for such service, provided outside India, was received by the service provider in convertible foreign exchange. 29. Finally, for the period from 27th February 2010 to 30th June 2012 the criteria for considering the provision of taxable services to be export of services was simplified an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... izon India, which is the service provider, is located in the taxable territory i.e. India. There is also no difficulty as far as the criteria at Rule 6A (1) (d) of the ST Rules is concerned since 'telecommunication service' is not in the negative list under Section 66D of the FA. Rule 6A (1) (e) of the ST Rules is also fulfilled since payment for the service rendered by Verizon India has been received by it in convertible foreign exchange. There is also no dispute as regards Rule 6A (1) (f) of the ST Rules. The controversy is regarding Rule 6A (1) (b) and (d) of the ST Rules are fulfilled. In other words can it be said that (i) the recipient of the service is located outside India and (ii) the place of the provision of service is outside India. While Verizon India asserts that the answers to both questions are in the affirmative, the Department asserts t the contrary. The case of the Department 33. The impugned order dated 12th September 2016 as well as the resultant SCN dated 11th November 2016 encapsulates the case of the Department. According to it, on a study of the Master Supply Agreement between Verizon India and Verizon US, it is plain that Verizon is provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied the Circular dated 3rd January 2007 which no longer applies. In any event that Circular was concerning telephony services and not electronic data transmission service. Mr Venkataraman clarified that although Verizon India had classified the services provided by it under the category of 'Business Support Services' while the Department had classified it under 'telecommunication services', it made no difference to the refund claims since the same export of services rules applied to both types of services. Thus, even if the export of Verizon India's services were tested by classifying them as 'telecommunication services', Verizon India still met the export criteria and no service tax can be levied on such services. 38. Mr. Venkataraman referred to a number of decisions of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) including Paul Merchants Ltd v. CCE, Chandigarh (2012(12) TMI 424 - CESTAT, Delhi (LB), Vodafone Essar Cellular Ltd. v. CCE, Pune-III 2013-TIOL-566 CESTAT-Mum and Microsoft Corporation (I) (P) Ltd. v. Commissioner of Service Tax, New Delhi 2014-TIOL-1964-CESTAT-DEL. Analysis and Reasons 39. The refund c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 96/7/2007-ST dated 23rd August, 2007. This was on the basis of the report of the Committee chaired by Shri T.R. Rustagi, former Commissioner of Customs Central Excise and Director General (Inspection). On the basis of comments received, the CBEC issued the above circular. Paragraph 6 of the said circular reads thus: 6. This circular supersedes all circulars, clarifications and communications, other than Orders issued under Section 37B of the Central Excise Act, 1944 (as made applicable to service tax by section 83 of the Finance Act, 1994), issued from time to time by the CBEC, DG (Service Tax) and various field formations on all technical issues including the scope and classification of taxable services, valuation of taxable services, export of services, services received from outside India, scope of exemptions and ail other matters on levy of service tax. With the issue of this circular, all earlier clarifications issued on technical issues relating to service tax stand withdrawn . (emphasis supplied) 44. What this circular does is to indicate, in an Annexure thereto, the classification (by a three digit code) of services for the purposes of levy of service tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /5/2009 dated 24th February, 2009, which clarified: 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 service [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 benefits of these services accrue outside India... 48. Circular No. 141/10/2011 dated 13th May, 2011 also throws light on this aspect. It was issued to clarify the position prior to 28th February, 2010 and became necessary in view of the question raised whether for the period prior thereto the requirement that the service should be used outside India invariably meant the location of the recipient. It was clarified that the words accrual of benefit was not restricted to mere impact on the bottom-line of the person who pays for the service. It had to be given a harmonious interpretation in the context where the effective use and enjoyment of the service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness, is located abroad, the destination of the services in question has to be treated abroad. The destination has to be decided on the basis of the place of consumption, not the place of performance of Service. 52. In Vodafone Essar Cellular Ltd. v. CCE (supra), the CESTAT explained the arrangement lucidly in the following words: Your customer s customer is not your customer. When a service is rendered to a third party at the behest of your customer, the service recipient is your customer and not the third party. For example, when a florist delivers a bouquet on your request to your friend for which you make the payment, as far as the florist is concerned you are the customer and not your friend. 53. The Department was also not justified in characterising the arrangement of provision of services as one between related persons viz., Verizon India and Verizon US. In doing so the Department was applying a criteria that was not stipulated either under the ESR or Rule 6A of the ST Rules. Summary of conclusions 54. To summarise the conclusions: (i) It made no difference that Verizon India may have provided 'telecommunication service' and not &# ..... X X X X Extracts X X X X X X X X Extracts X X X X
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