Pranav B Prem

The Chandigarh Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that commission-based activities, including sales facilitation and regional support services provided by an Indian entity to foreign group companies, qualify as “export of service” and cannot be taxed under the category of Business Auxiliary Services or Business Support Services. The Bench comprising Mr. S.S. Garg (Judicial Member) and Mr. P. Anjani Kumar (Technical Member) delivered the ruling while allowing the appeal filed by the assessee, a manufacturer of zippers operating in India and engaged in providing support services to its foreign parent and associated companies such as YKK Singapore.

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The dispute arose after the Department conducted an audit for the years 2006–07 to 2010–11, which culminated in two show-cause notices alleging that the assessee received commission for activities that amounted to Business Auxiliary Services rendered within India. A total Service Tax demand of ₹68,59,980 was confirmed, along with proposals to recover CENVAT credit worth ₹13,08,503 and to impose penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The Department’s case was that the services were consumed in India as the activities ostensibly related to identifying customers and facilitating sales within the Indian territory.

The assessee argued that the services were provided to foreign recipients, the consideration was received in convertible foreign exchange, and the benefit of the services accrued entirely to foreign entities located outside India. It contended that the services were classifiable as export of service under the Export of Service Rules, 2005, because the place of consumption and use was outside India. The Tribunal agreed with the assessee and placed heavy reliance on the Larger Bench ruling in Microsoft Corporation (I) Pvt. Ltd., which was subsequently affirmed by the Supreme Court through dismissal of connected appeals. The Larger Bench had conclusively held that services such as identifying customers in India at the behest of a foreign entity are consumed outside India, making them “export of service” notwithstanding the domestic situs of the activity.

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Applying this principle, CESTAT observed that the commission agreements made it clear that the assessee functioned as an agent to facilitate sales for YKK Singapore and other foreign companies, and the benefit of customer identification and market development accrued only to the foreign recipients. The Tribunal emphasised that Rule 3(1)(iii) read with Rule 3(2) of the Export of Service Rules requires that the service be provided from India and used outside India, which was fully satisfied in the present case. The Tribunal stressed that the Department’s attempt to treat these activities as taxable Business Auxiliary Services was contrary to the binding Microsoft ruling and therefore unsustainable.

On the issue of reimbursement of costs incurred in respect of personnel deputed by group companies, the Tribunal held that such reimbursements cannot form part of the taxable value in view of the decision of the Delhi High Court in Intercontinental Consultants & Technocrats, affirmed by the Supreme Court. It reiterated that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, had been declared ultra vires, and therefore reimbursable expenses could not be added to taxable value.

The Tribunal next examined whether the assessee was entitled to avail CENVAT credit on common input services used partly for trading activity. It held that prior to the insertion of Explanation to Rule 2(e) of the CENVAT Credit Rules in 2011, trading could not be considered as a “service,” and therefore the question of treating it as an exempted service did not arise. The assessee was thus entitled to take CENVAT credit for the period prior to the amendment. The Tribunal relied on the rationale that substantive changes in tax law cannot operate retrospectively, as recognised by the Supreme Court in the Martin Lottery Agency ruling.

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Finally, the Tribunal noted that the impugned order failed to appreciate the settled legal position regarding export of services. Since the services rendered by the assessee were actually used and consumed outside India by YKK Singapore and other foreign companies, they squarely qualified as “export of service.” The Tribunal therefore set aside the Service Tax demand, the penalty, and the proposed recovery of CENVAT credit while allowing the appeal in full.

Appearance

Mr. Kishore Kunal and Ms. Runjhun Pare, Advocates for the Appellant

Mr. Aniram Meena and Mr. Goverdhan Dass Bansal, Authorized Representatives for the Respondent

Cause Title: YKK India Private Limited V. Commissioner of Central Excise, Goods & Service Tax, Rohtak

Case No: Service Tax Appeal No. 51023 of 2014

Coram: Mr. S.S. Garg (Judicial Member), Mr. P. Anjani Kumar (Technical Member)