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Verizon Communication India Pvt. Ltd. Versus Assistant Commissioner, Service Tax, Delhi III, Division-XIV & Anr.

2017 (9) TMI 632 - DELHI HIGH COURT

Refund of unutilised CENVAT credit - export of services - place of supply - telecommunication services or business support services - denial on the ground that the services provided by Verizon India do not qualify as 'export of services' as they are provided within India - arrangement between related persons - rejection also on the ground of time limitation. - Held that: - When the Master Supply Agreement between Verizon India and Verizon US is examined, it is plain that the recipient of the .....

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ipient' 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 Ind .....

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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 provision of telecommunication service shall be the location of the recipient of service. - Decision in the case of Paul Merchants Ltd v. CCE, Chandigarh [2012 (12) TMI 424 - CESTAT, DELHI (LB)] followed. - The Department was also not justified in characterising the arrangement of provision of s .....

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69/2016, W.P. (C) No. 11572/2016, W.P. (C) No. 11575/2016 & CM No. 45598/2016, W.P. (C) No. 11577/2016, - Dated:- 12-9-2017 - S. MURALIDHAR & PRATHIBA M. SINGH JJ. Petitioner Through: Mr. N. Venkataraman, Sr. Advocate with Mr. R. Satish Kumar, Advocate. Respondents Through: Mr. Sanjeev Narula, Sr. Standing Counsel with Mr. Abhishek Ghai, Advocate. J U D G M EN T Dr. S. Muralidhar, J.: 1.These four writ petitions by Verizon Communication India Pvt. Ltd. ('Verizon India'), under Articl .....

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ompany incorporated under the provisions of the Companies Act, 1956 and is registered with the Service Tax Department ( Department ) under the category of 'Business Support Services'. Verizon India entered into a Master Supply Agreement with Verizon US for rendering connectivity services for the purpose of data transfer. Verizon US is a company located outside India, inter alia engaged in the provision of telecommunication services for which it enters into contracts with its customers lo .....

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ovides 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 .....

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s an export of services under the Export of Service Rules 2005 (ESR) is the same. Verizon India contends that it satisfied the twin requirement under the ESR for the service rendered by it to Verizon US to be considered to be an export of service viz., the recipient of the service is located outside India and the payment for the service rendered is received by Verizon India in convertible foreign exchange. Rejection of the Petitioner's refund applications 6. Verizon India filed fifteen appli .....

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refund claims were for the period from January 2011 to March 2012; one for period April to June 2012 and nine for the period July 2012 to September 2014. 7. The refund claims were rejected by the Assistant Commissioner, Service Tax by three separate orders dated 12th September 2016 on the ground that the services provided by Verizon India do not qualify as 'export of services' as they are provided within India. Reference was made to Circular No. 90/1/2007-Service Tax dated 3rd January 2 .....

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of ₹ 2,65,25,46,712 (including education cess and secondary and higher education cess) along with 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 interi .....

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, 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 from the entities in India for transmission to Verizon US, Verizon India avails of the services of a telecommunication services providers like Vodafone and Airtel. These service providers raise invoices on Verizon Ind .....

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rges by Verizon India. Verizon US in turn raises invoices on its customers in the US. Since those transactions are entirely outside the taxable territory, they are not amenable to service tax under the FA. As already noticed, these petitions are concerned with the claim for refund of unutilised Cenvat credit lying in the Petitioner s account for the period January 2011 to September 2014. The chain of provision of services involving Verizon India and Verizon US is sought to be depicted by thus: N .....

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f goods and provision of services. VAT is a consumption tax as It is borne by the consumer. 7. In the light of what is stated above, it is dear that Service Tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer and it would, logically, be leviable only on services provided within the country. Service tax is a value added tax . xxx 17. As stated above, the source of the concept of se .....

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003 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 .....

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Union of India 2010-(20) STR-417 (SC) as under: In All India Federation of Tax Practitioners' case (supra), this Court explained the concept of service tax and held that service tax is a Value Added Tax ('VAT' for short) which in turn is a destination based consumption tax in the sense that it is levied on commercial activities and it is not a charge on the business but on the consumer. That, service tax is an economic concept based on the principle of equivalence in a sense that co .....

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eiver. It is this principle of equivalence which is inbuilt into the concept of service tax under the Finance Act, 1994. That service tax is, therefore, a tax on an activity. That, a service tax is a value added tax. The value addition is on account of the activity which provides value addition, for example, an activity undertaken by a chartered accountant or a broker is an activity undertaken by him based on his performance and skill. This is from the point of view of the professional. However, .....

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event is each exercise/activity undertaken by the service provider and each time service tax gets attracted. The same view is reiterated broadly in the earlier Judgment of this Court in Godfrey Phillips India Ltd. 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, .....

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n 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, 'taxable service' was defined under Section 65 (105) of the FA to mean any service provided or to be provided i .....

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kes no difference if the services provided are classified as 'telecommunication services' since 'business support services' fall under the same export criteria. Nevertheless, both provisions as they stood prior to 1st July 2012 need to be referred to. 16. Under Section 65 (105) (zzzx) of the FA the provision of service to any person, by the telegraph authority in relation to telecommunication service' would be a 'taxable service'. Section 65 (111) states that telegrap .....

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r intelligence or information of any nature, by wire, radio, optical, visual or other electro-magnetic means or systems. Including the related transfer or assignment of the right to use capacity for such transmission, emission or reception by a person who has been granted a licence under the first proviso to sub-section (1) of section 4 of the Indian Telegraph Act, 1885 (13 of 1885) and includes - (i) voice mail, data services, audio text services, video text services, radio paging; (ii) fixed t .....

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nations; (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 waiti .....

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ransmission of data; and (viii) communication through facsimile, pager, telegraph and telex, but does not include service provided by - (a) any person in relation to online information and database access or retrieval or both referred to in sub-clause (zh) of clause (105); (b) a broadcasting agency or organisation in relation to broadcasting referred to in sub-clause (zk) of clause (105); and (c) any person in relation to internet telecommunication service referred to in sub-clause (zzzu) of cla .....

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d fulfillment services. Information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, operational or administrative assistance in any manner, formulation of customer service and pricing policies, infrastructural support services and other transaction processing. Explanation. For the purposes of this clause, the expression infrastructural support services includes providing office along wi .....

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. When Verizon India pointed out that they were not, the Department sought to classify it as 'Supply of tangible goods services.' When Verizon India again protested, the Department took the stand that it was providing 'telecommunication services' and not 'business support services.' 21. 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 .....

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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 s .....

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roviding telecommunication services in India. This is the nub of the controversy. Export of Services 24. While there is a clear definition in the Customs Act, 1962 as to what constitutes 'export', the FA itself does not define export of services . Section 94 (2) (f) of the FA enables the central government to make rules for 'determining export of taxable services'. 25. The question as to what constitutes export' of goods has engaged the Supreme Court in the context of statute .....

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d to move or between which they were intended to be transported and not a mere movement of goods out of the country without any intention of their being so moved in specie to some foreign port. 26. In the context of services, when services are provided outside the 'taxable territory' i.e. where the service provider is in India and the recipient of the services is located outside India there would, in normal parlance, be an 'export of services'. In exercise of its powers under Sec .....

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e 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 .....

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ort of services was simplified and only two conditionalities were required to be satisfied, viz., (i) the service recipient was located outside India; and (ii) payment for such service was received by the service provider in convertible foreign exchange. 30. At this juncture it is required to be recalled that the refund claims of Verizon India are for the period from January 2011 to September 2014. Some part thereof fell within the period 27th February 2010 till 30th June 2012 when Rule 3 of the .....

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Section 6D of the Act, (d) the place of provision of the service is outside India. (e) The payment for such service has been received by the provider of service in convertible foreign exchange; and (f) The provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 3 of clause (44) of Section 65B of the Act. (2) Where any service is exported, the Central Government may, by notification, grant rebate of service tax or .....

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side India. According to Verizon India, the recipient of the service is Verizon US whereas the Department's case is that the recipient of the service is an Indian entity from whom electronic data is collected or to whom data is transmitted. 32. Even for the period post 1st July 2012, it is not in dispute that Rule 6A (1) (a) of the ST Rules is fulfilled inasmuch as Verizon India, which is the service provider, is located in the taxable territory i.e. India. There is also no difficulty as far .....

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t 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 betwee .....

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services . 34. Mr. Sanjeev Narula, learned Senior standing counsel for the Department further explained that the Department relies on Circular No. 141/10/2011TRU dated 13th May, 2011 issued by the Central Board of Excise and Customs (CBEC) which, inter alia, clarified that where the consultancy, though paid by a client located outside India, is actually used in respect of a project or an activity in India the service cannot be said to be used outside India. Reliance is also placed on Circular No .....

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im, the Circular dated 23rd August, 2007 nowhere mentions the services provided by the party and claimed as export by them. Case of Verizon India 36. On the other hand, the case of Verizon India, as articulated by Mr. Venkataraman, learned Senior counsel appearing on its behalf, is based on the major premise underlying service tax viz., it is a destination based consumption tax. According to him the Department's case is based on a misconception of the 'recipient' of the service. Acco .....

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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 I .....

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P) Ltd. v. Commissioner of Service Tax, New Delhi 2014-TIOL-1964-CESTAT-DEL. Analysis and Reasons 39. The refund claims of Verizon India pertain to the period January 2011 to September 2014. For the period prior to 1st July 2012, under Rule 3 (1) (iii) of the ESR, two conditions were to be fulfilled for the provision of telecommunication service by Verizon India to be considered export of service. One of the conditions was that payment for the service had to be received by Verizon India in conve .....

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e provision of service is outside India. 41. The stand of the Department as can be gleaned from the order dated 12th September 2016 is the telecommunication services are provided within India and hence there is no 'export of service'. In the counter affidavit filed to these writ petitions it is contended that the recipient of the service i.e. Verizon US is present in India through its subscribers and, therefore, the condition that the 'recipient is located outside India' is not f .....

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ly to an inbound roamer and used internally it remained a service of a telephone connection. It was clarified that during the period of roaming, the Indian Telecom service provides telephone service to an international inbound roamer. This service to an inbound roamer is delivered and consumed in India and, therefore, is not an export of service. 43. The said Circular dated 3rd January 2017 did not deal with telecommunication services involving transfer of electronic data. Then came the Circular .....

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e 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 wi .....

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ns and communications issued from time to time stands superseded. There is nothing to replace what has been superseded as far as the Circular dated 3rd January, 2007. 45. In any event the Circular dated 3rd January 2007 would in any event not apply to the services provided by Verizon India to Verizon US. In order to determine who the 'recipient' of a service is, the agreement under which such service has been agreed to be provided has to be examined. When the Master Supply Agreement betw .....

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whose services they engage to provide service to the former's subscribers. Yet, 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 t .....

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e to Verizon US remains outside India. This is made explicit by Circular No. 111/5/2009 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 ex .....

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ent. 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. 49. 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 PO .....

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d period. There the Assessees were intermediary agents providing money transfer services to foreign travellers who were the end user on behalf of their principals. The contention of the Department that this did not qualify as 'export of service' was rejected by the CESTAT. It noted that the CBEC had to issue a clarification letter No. 334/1/2010-TRU dated 26th February, 2010 acknowledging the difficulties that were faced by the trade in complying with the condition that the services had .....

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e. The Court further affirms the following passage in the said judgment in Paul Merchants Ltd v. CCE, Chandigarh (supra) which correctly explains the legal position: It is the person who requested for the service is liable to make payment for the same and whose need is satisfied by the provision of service who has to be treated as recipient of the service, not the person or persons affected by the performance of the service. Thus, when the person on whose instructions the services in question ha .....

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t 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 .....

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uary 2011 till 1st July 2012 complied with the two conditions stipulated under Rule 3 (1) (iii) of the ESR to be considered as 'export of service'. In other words, the payment for the service was received by Verizon India in convertible foreign exchange and the recipient of the service was Verizon US which was located outside India. (iii) That Verizon India may have utilised the services of Indian telecom service providers in order to fulfil its obligations under the Master Supply Agreem .....

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