Services Performed Outside India Not Taxable Under RCM; Reimbursements Not ‘Import of Services’: CESTAT Chennai
Pranav B Prem
The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that services performed outside India are not liable to service tax under the Reverse Charge Mechanism (RCM), even where payments are made by an Indian entity or the arrangement involves group companies. The Tribunal further held that reimbursements made to foreign subsidiaries do not amount to “import of services” in the absence of any service rendered by the overseas entity to the Indian assessee.
The Bench comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) was examining whether service tax was payable under RCM on payments made by the assessee to its overseas subsidiary and associate companies during the period April 2014 to June 2017.
The appellant, Intellect Design Arena Ltd., is engaged in the development of software, which is licensed to its overseas subsidiaries and associate entities (“Licensees”) under inter-company agreements. These Licensees, in turn, execute End User Licence Agreements (EULA) and implementation contracts with end-customers located outside India. Where part of the implementation work was carried out by the Licensees, the assessee reimbursed the costs incurred by them.
The Department alleged that the assessee had failed to discharge service tax under the Reverse Charge Mechanism on these reimbursements, treating them as consideration for import of manpower or software support services received from foreign entities. It was also alleged that for December 2016, the assessee had under-reported taxable value in its ST-3 return, though the assessee contended that the full tax had been paid and the difference was only due to a clerical reporting error.
Based on audit objections, a show cause notice was issued proposing demand of service tax under RCM, along with interest and penalties. The demand was confirmed by the adjudicating authority, leading to the present appeal before the Tribunal.
On behalf of the assessee, it was argued that the foreign exchange remittances made to the overseas Licensees were not consideration for any service rendered to the assessee, but merely represented commercial adjustments and revenue-sharing arrangements arising out of inter-company agreements. It was contended that the assessee was the sole service provider to the Licensees and that no activity was performed by the Licensees “for” the assessee. Therefore, the fundamental requirement of a taxable service under Section 65B(44) of the Finance Act, 1994 was not satisfied.
The Revenue, on the other hand, contended that there was a flow of service from the foreign entities to the assessee and that the definition of “service” under Section 65B(44), which covers any activity carried out by one person for another for consideration, stood satisfied. It was argued that the reimbursements constituted consideration for such services and were liable to service tax under RCM.
The Tribunal examined the inter-company agreements on record and observed that they clearly established that the assessee was the sole service provider to the foreign Licensees. The Bench noted that Section 65B(44) requires the existence of an activity carried out by one person for another for consideration. In the present case, the Tribunal found that none of the agreements created any service obligation on the Licensees in favour of the assessee.
The Bench specifically observed that the Department had failed to produce a single document evidencing any service rendered by the Licensees to the assessee. It held that the reimbursements made were not consideration for services, but merely settlement of inter-company commercial arrangements. The Tribunal further held that revenue-sharing or cost-reimbursement arrangements do not, by themselves, constitute provision of service.
On the issue of place of provision, the Tribunal noted that the Revenue had wrongly applied a general rule to a situation specifically governed by a different rule. It observed that if the services were performance-based in nature, the Place of Provision of Services Rules required the place of performance to be determinative. Since the activities, even assuming they existed, were performed entirely outside India, the services could not be treated as taxable in India.
The Tribunal also dealt with the alleged short payment of service tax for December 2016. It noted that the assessee had admittedly paid the entire tax amount and that the discrepancy arose due to a clerical reporting error. The Bench held that if verification confirmed full payment of tax, the demand of ₹1,16,11,766 on this count would not be sustainable and remanded the matter to the adjudicating authority for limited verification.
However, with respect to the major demand raised under the alleged category of “import of services,” the Tribunal categorically held that the demand of ₹36,77,40,000, along with interest under Section 75 and penalties under Sections 77 and 78 of the Finance Act, 1994, was unsustainable. The Tribunal set aside the said demand in its entirety. In view of these findings, the Tribunal partly allowed the appeal, set aside the service tax demand relating to import of services, remanded the limited issue of clerical discrepancy for verification, and granted consequential relief in accordance with law.
Appearance
Counsel for Appellant/ Assessee: Raghavan Ramabadran
Counsel for Respondent/ Department: Sanjay Kakkar
Cauise Title: M/s. Intellect Design Arena Limited v. Commissioner of GST and Central Excise
Case No: Service Tax Appeal No. 40357 of 2022
Coram: P. Dinesha (Judicial Member), Vasa Seshagiri Rao (Technical Member)
