Services Performed Outside India Not Taxable Under RCM; No Import Of Services: CESTAT Chennai

The Chennai Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) held that services performed outside India are not liable to service tax under the Reverse Charge Mechanism (RCM), even if payments are made by an Indian entity or involve group companies. The bench further opined that reimbursements to foreign subsidiaries do not constitute “import of services” in the absence of any service rendered by the assessee. P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) stated that when services are performed outside India, even if the payment is made by an Indian entity or the contract involves group companies, the services are not taxable in India. In the case at hand, it was alleged that the assessee/appellant had not paid Service Tax under the Reverse Charge Mechanism (RCM) on certain payments made to its subsidiary/associate companies located outside the taxable territory during the period from April 2014 to June 2017. The assessee develops software which is licensed to overseas subsidiaries (“Licensees”) under intercompany agreements. The Licensees execute EULA and implementation contracts with end-customers abroad. Where part of the implementation work is performed by the Licensees, the assessee reimburses the Licensees' costs, which the Department treats these reimbursements as consideration for import of manpower/software support services, liable to Service Tax under RCM. Further, for December 2016, the assessee declared Rs.24.26 crore in its ST-3 return instead of Rs.25.61 crore, though the full tax was admittedly paid, and the difference arose from a clerical reporting error. Based on audit findings, the Show Cause Notice was issued, and the demand was confirmed by the Adjudicating Authority. The counsel for the assessee submitted that foreign exchange remittances made by the assessee are in the nature of a reduction in consideration for the services rendered by the assessee to the Licensees. Thus, Service tax is not leviable. The revenue submitted that there is no merit in the assessee's claim of “no flow of service” and that Section 65B(44) is fully satisfied, whereby “Service” means any activity carried out by one person for another for consideration. The bench found that the Inter-Company Agreement clearly shows that the assessee is the sole service provider to the foreign Licensees. Section 65B (44) requires:(a) an Activity; (b) by one person for another;(c) for consideration. The Tribunal opined that none of the Agreements creates an activity performed “for” the assessee. The Department has not produced a single document evidencing any service obligation owed by the Licensee to the assessee. Thus, the first and foundational requirement of a taxable service is absent. The bench opined that the impugned remittances are not any consideration but mere settlement of inter-company commercial arrangements. Revenue-sharing arrangements do not involve the provision of service by one person to another. The Tribunal stated that by relying on Rule 3, the Revenue is applying a general rule to a situation that is specifically covered by a different rule. If the service in question is indeed a "performance-based service" as defined by Rule 4, the service provider can argue that the Revenue's position is incorrect. The argument would be that since Rule 4 specifically addresses their situation, it must be used to determine the place of provision. The bench held that the demand of Rs.1,16,11,766 is not sustainable if the tax paid is confirmed by such verification by the Adjudicating Authority. The Tribunal remanded the matter to carry out such verification. The bench set aside the demand of Service Tax under the alleged category of “import of services,” for Rs.36,77,40,000/- together with interest under Section 75 and penalties under Sections 77 and 78 of the Finance Act, 1994. In view of the above, the Tribunal partly allowed the appeal. Case Title: M/s. Intellect Design Arena Limited v. Commissioner of GST and Central Excise Case Number: Service Tax Appeal No. 40357 of 2022 Counsel for Appellant/ Assessee: Raghavan Ramabadran Counsel for Respondent/ Department: Sanjay Kakkar Click Here To Read/Download Order

Services Performed Outside India Not Taxable Under RCM; No Import Of Services: CESTAT Chennai

Mehak Dhiman

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