Service Recipient In India Not Liable To Pay Service Tax When PE Of Foreign Service Provider Exists In India: CESTAT

The Ahmedabad Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that under the purview of Section 66A of the Finance Act, 1994, when a permanent establishment of the foreign service provider exists in India, the recipient of service in India cannot be made liable to pay service tax under the reverse charge mechanism.

The bench of Ramesh Nair (Judicial Member) and Raju (Technical Member) has observed that the entire diamond industry did not pay service tax on the value of software installed in the computer on the basis of the bona fide belief that there was no liability for service tax under the reverse charge mechanism, and the appellant, being part of the industry, followed industry practice and did not pay any service tax. It is submitted that the entire diamond industry could not have had an intention to evade service tax, and therefore, it is a fit case for not invoking an extended period of limitation.

The appellants and assessees are engaged in the export of cut and polished diamonds. The Commissioner (Appeals) upheld that the appellants are liable to pay service tax under the reverse charge mechanism in terms of Section 68(2) of the Finance Act, 1994, read with Rule 2(1)(d) of the Service Tax Rules, 1994, on the services received from foreign countries.

The appellants are engaged in the business of importing rough diamonds and exporting them only after cutting and polishing, for which they require diamond processing machines that run on a specific type of software called HASP. All activities, including marketing and promotion, being the sole point of interaction, placing orders, raising invoices, advancing payments, installation, repairs, maintenance, and training of employees in furtherance of setting up these machines for use, are conducted by none other than Sarin Technologies India Pvt. Ltd., which is a wholly owned subsidiary company of Sarin, Israel. Sarin Israel and Galatea Ltd. are foreign companies incorporated under the laws of Israel, and the latter is also a wholly owned subsidiary company of Sarin Israel.

The assessee submitted that Galatea Ltd. has a permanent establishment in India, which is evidenced by the fact that they are holding a PAN in India. All companies of the Sarin Group are working under common management, and that fixed assets and all other major consumables required for the installation of software and conducting all the core activities are provided by Sarin and Galatea Israel to Sarin India, and that he takes the support of the audit report of Sarin India to establish that Sarin Israel is the holding company upon reflection of the terms “where control exists.”.

The rationale behind the scheme of levying service tax is that such tax should be levied on the value of taxable services that are provided by the service provider and received by the service recipient within the territory of India. The insertion of Section 66A of the Finance Act by the lawmakers embodies an exception to this general rule. Section 66A is an independent charging provision that, in its simplest understanding, provides for the levy of service tax in India on such services that are provided or are to be provided by a person located outside India and such services that have been received by a person located in India. Section 66A lays down that such services, as specified in clause (105) of Section 65 of the Act, shall be treated as having been provided in India by the recipient of such services. This deeming provision of Section 66A makes the Indian recipient liable under the scheme of the Reverse Charge Mechanism, unless, in the event that such a foreign company has its representation in India by way of a permanent establishment, then that establishment will be the service provider in the eyes of law and not the recipient.

The tribunal noted that the payments made to the parent company only by the appellants for the purchases were inclusive of the services with respect to installation and functioning, whereas the said services were provided by the Indian subsidiary to the appellants. No invoice has been raised with the appellants by Sarin India, which shows that the latter was discharging the services of the parent company situated in Israel in the capacity of an agent having its permanent establishment in India. The undisputed fact also makes it abundantly clear that Sarin India is a pure agent of Sarin Israel.

The CESTAT stated that a branch office is covered under the scope of a permanent establishment. Since Sarin India is a wholly owned subsidiary of Sarin Israel, carrying out and coordinating essential trading activities, it would be safe to say that Sarin India is in itself a branch office of the Israel company. Therefore, just for the sake of levying service tax liability under Section 68 ibid., it cannot be denied that Sarin India is not a permanent establishment of Sarin Israel.

“The entire diamond industry did not pay service tax on the value of software installed in the computer on the basis of the bona fide belief that there was no liability for service tax under the reverse charge mechanism, and the appellant, being part of the said industry, followed industry practice and did not pay any service tax. It is submitted that the entire diamond industry could not have had an intention to evade service tax, and therefore, it is a fit case for not invoking an extended period of limitation,” the tribunal said.

Counsel For Appellant: J C Patel

Counsel For Respondent: Rajesh R Kurup

Case Title: Kiran Gems Pvt. Ltd. Versus C.C.E. & S.T.-Surat-i

Case No.: Service Tax Appeal No. 10536 of 2015- DB

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