Commission-Based Services To Foreign Clients As Agent Qualifies As 'Export Of Service': CESTAT

The Chandigarh Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that commission-based services such as sales facilitation and regional support services provided by Indian counterparts to foreign companies qualified as 'export' and not as 'Business Auxiliary Services'.

The assessee was engaged in the manufacture and sale of zippers and parts thereof in India and to neighbouring foreign companies, including YKK Singapore located in Singapore. The Department conducted an audit for FY 2006–07 to 2010–11, which led to two show cause notices—one covering FY 2006–07 to 2010–11 and the other covering FY 2011–12. Consequently, a Service Tax demand totalling Rs. 68,59,980 and CENVAT Credit recovery of Rs. 13,08,503, along with interest and penalties, was confirmed under Sections 76, 77 and 78 of the Finance Act.

As regards Export of Services (Business Auxiliary Services and Business Support Services), the Bench comprising Mr. S.S. Garg (Judicial Member) and Mr. P. Anjani Kumar (Technical Member) followed the binding precedent set by the Larger Bench of the Tribunal in the case of Microsoft Corp India Pvt. Ltd., which had been conclusively affirmed by the Supreme Court by dismissing a batch of appeals regarding determination of the 'recipient of services' for the purposes of qualifying as an 'export of services' under the Service Tax Rules, 1994, and the Place of Provision of Services Rules, 2012. The Larger Bench had held that “service of identifying the Indian customers for procurement of various goods at the behest of a foreign entity is the service provided by a foreign entity, and such service provided by a person in India is consumed and used by a person abroad and it has to be treated as export of service.”

Further, in terms of the various commission agreements signed by the assessee with group companies, CESTAT reckoned that twin conditions under Rule 3(1)(iii) read with Rule 3(2) of the Export of Service Rules, 2005, were not satisfied. It clarified that “as per the agreement…the appellant acted as an agent to facilitate sale of their product in India… service of identifying the Indian customers… is the service provided by a foreign entity and such service provided by a person in India is consumed and used by a person abroad and therefore, it has to be treated as 'export of service' in foreign currency.”

Besides, CESTAT observed that “services were actually used outside India and thus the same qualify as 'export of service',” noting that the beneficiary of Business Support Services such as advice, consultancy and technical assistance to manage its business entities in the South Asia Region was YKK Singapore.

As for the taxability of reimbursed costs incurred for group company personnel, CESTAT found that the issue was no longer res integra and was covered by the Delhi High Court's dicta in Intercontinental Consultants & Technocrats, whereby the Supreme Court affirmed the Delhi High Court's decision that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, was ultra vires the Finance Act, 1994. The dicta of the Delhi High Court had also been followed by the Tribunal in the case of Hewlett-Packard India Sales Private Limited.

As regards eligibility to avail CENVAT credit on trading activity, CESTAT held that prior to 2011, trading of goods could not be called a service because all essential characteristics of a service were missing and therefore, since trading of goods was not a service, the question of it being exempt did not arise. In this vein, the assessee relied on the rationale that if a substantive law was introduced, it would not have retrospective application, as propounded in the case of Martin Lottery Agency. CESTAT accepted the submission of the assessee.