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Sara Sae P. Ltd. v. Commissioner, Custom...
Factual and Procedural Background
This appeal challenges the order dated 11 December 2013 passed by the Commissioner of Central Excise, Meerut, which partly confirmed and partly dropped demands raised in a show cause notice dated 11 October 2012 for the period 1 April 2007 to 31 March 2011. The principal confirmed demand related to service charges (foreign commission service charge) of Rs. 46,61,774 for services rendered to foreign companies for the period April 2007 to 27 February 2010, and a partly confirmed demand of Rs. 6,75,403 on commission paid to foreign agents (for the financial years 2008-09 to 2010-11).
The appellant is engaged in providing business auxiliary services ("BAS") and transport of goods by road ("GTA"). The appellant represented foreign companies in India that had no office in India, and rendered services which included procuring orders from Indian clients on behalf of foreign companies, giving technical support, liaising, preparing documents, obtaining and negotiating tenders. The appellant treated such services as export of services under the Export of Service Rules, 2005, and did not pay service tax for the relevant period.
The Department compared certain balance-sheet "other income" figures with ST-3 returns and issued the show cause notice proposing demand of service tax on differential income items (including "foreign commission service charge") and on expenditure for "commission paid to foreign agents". By its order of 11 December 2013, the Commissioner confirmed some demands and dropped others. The appellant appealed against that order to the Tribunal. The Tribunal pronounced its decision on 17 December 2020 (bench comprising Justice Dilip Gupta — President and P. Anjani Kumar — Member (Technical)).
Legal Issues Presented
- Whether the commission/fees received by the appellant from foreign companies for promotion/marketing/representation services qualify as "export of services" under Rule 3(2) of the Export of Service Rules, 2005 (in particular, for the period prior to the amendment removing the "used outside India" requirement and for the period after that amendment).
- Whether service tax is leviable under reverse charge on commission paid by the appellant to foreign agents for receipt of services (for the financial years 2008-09 to 2010-11), and whether amounts shown to have been paid or reversed by the appellant discharge that liability.
Arguments of the Parties
Appellant's Arguments
- The services rendered by the appellant to foreign companies (promotion and marketing of goods of foreign companies in India) qualify as export of services under the Export of Service Rules, 2005, and authorities/decisions support that conclusion.
- The Commissioner misread Circular dated 13 May 2011; the Circular provides that a service would be "used outside India" if the benefit accrues outside India, and the accrual of benefit must be tested beyond the identity of the person who pays for the service.
- Promotion and marketing services ultimately increase the foreign companies' business and revenue outside India; hence, even under the Circular, the appellant's services qualify as export.
- The 2005 Rules were amended w.e.f. 27 February (the appellant's submissions refer to 2012), deleting the condition that the service must be "used outside India"; after the amendment the only requirements are that the service recipient be situated outside India and consideration be received in foreign currency — both satisfied here.
- The demand on commission paid to foreign agents is unsustainable because the appellant has discharged service tax on substantial parts of that demand; specific ledger and payment entries show amounts already deposited, some entries were duplicated in error, and service tax should only be leviable on amounts actually paid (not on amounts reversed).
Department's Arguments
- The services provided by the appellant are provided in India and used in India, and therefore do not qualify as export of services under the 2005 Rules for the relevant period; consequently the appellant is liable to pay service tax on the commissions received.
- The appellant is liable to pay service tax under reverse charge on commission paid to foreign agents because documentary evidence for the appellant's claims was not submitted to the Department.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Service Tax Appeal No. 55146 of 2013 (M/s Involute Engineering Pvt. Ltd.) | Held that commission/fees received from foreign companies for services of promotion/representation can qualify as export of services for the period prior to 27 February 2010 and w.e.f. 27 February 2010 (i.e., the decision addressed both periods and treated such receipts as not taxable). | The Tribunal relied on this decision as directly dispositive: applying the Involute reasoning to the present facts, the Tribunal concluded that the demand on commission received from foreign companies could not be sustained and set aside that portion of the Commissioner's order. |
| GAP International Sourcing (India) Pvt. Ltd. vs. Commissioner of Service Tax | Identified as one of the authorities relied upon in support of the Involute decision (principles supporting treatment of such services as export). | Noted as a decision upon which Involute placed reliance; used to support the Tribunal's view that the revenue's demand on foreign commission receipts could not be sustained. |
| Commissioner of Service Tax, Mumbai-VI vs. A.T.E Enterprises Private Limited | Identified as a decision relied upon by Involute (supporting the rule/principle relevant to export classification of services). | Referenced as authority relied on by Involute; formed part of the legal foundation for disallowing the demand on commission received from foreign companies. |
| Commissioner of Service Tax-VII vs. Wartsila India Limited | Identified as one of the precedents placed reliance upon in the Involute decision. | Referenced as supporting authority relied upon by Involute and thereby informing the Tribunal's conclusion in the present appeal. |
| Verizon Communication India Private Limited vs. Assistant Commissioner of Service Tax, Delhi | Identified as another precedent relied upon by Involute for related legal principles concerning export of services. | Referenced as a supporting authority for the position that promotional/representation services to foreign clients can qualify as export of services; relied upon indirectly through Involute. |
Court's Reasoning and Analysis
The Tribunal considered the submissions of the parties and analysed the matter primarily through the lens of an earlier bench decision in Involute Engineering (Service Tax Appeal No. 55146 of 2013), which had already addressed the levy on commission/fees received from foreign companies for similar kinds of promotional/representation services.
Key elements of the Tribunal's reasoning included:
- Interpretation of Rule 3(2) of the Export of Service Rules, 2005 (as it existed prior to 27 February): prior to the relevant amendment, export required that (a) the service be provided from India and used outside India, and (b) payment be received in convertible foreign exchange. The Tribunal noted there was no dispute about foreign currency receipts in the present case.
- Factual analysis (following the Involute decision): the appellant's activities — representing foreign companies in India, procuring orders on their behalf, submitting bids and obtaining purchase orders in the name of foreign companies which then export goods and invoice customers — indicate that the appellant provided services from India which were used outside India (benefit accrues to foreign companies outside India). This satisfied the twin conditions of Rule 3(2) for the pre-amendment period.
- On the Commissioner's reliance on Circular dated 13 May 2011 (which had been used to assert that the services were used in India), the Tribunal accepted the Involute treatment that benefit accrual to the foreign company outside India can satisfy the "used outside India" requirement where the factual matrix shows the foreign company benefits from the appellant's activities.
- For the period after the amendment to Rule 3(2) (the opinion refers to the omission of the "used outside India" condition w.e.f. a 27 February date), the Tribunal noted that the only requirements post-amendment are that the recipient be situated outside India and consideration be received in foreign currency — both satisfied in the present case. The Tribunal observed that because the pre-amendment period already warranted no levy, an inability to substantiate the quantum of services after the amendment was immaterial to the legal conclusion on export status.
- Regarding the demand on commission paid to foreign agents, the Commissioner had confirmed the demand on the ground that documentary evidence was not produced. The appellant, however, produced evidence showing payment deposits, claimed duplicate ledger entries and reversals; the Tribunal did not decide the quantum conclusively but directed that these factual contentions be examined afresh by the Commissioner on the production of a representation and supporting documents.
Holding and Implications
Core Ruling: The appeal was partly allowed. The Tribunal set aside the portion of the Commissioner's order dated 11 December 2013 insofar as it related to the demand of service tax on commission/fees received from foreign companies (i.e., the demand of Rs. 46,61,774 for the period April 2007 to 27 February 2010 was not sustained).
Implications and direct consequences:
- The confirmed demand in the impugned order relating to commission received from foreign companies has been set aside; that portion of the Commissioner's order is vacated.
- The issue of service tax on commission paid to foreign agents (demand of Rs. 6,75,403, partly deposited) was not finally decided by the Tribunal. The Tribunal directed that the appellant may submit a representation with factual material and supporting documents to the Commissioner within six weeks; the Principal Commissioner is to decide the matter within three months, uninfluenced by the observations in the Tribunal's order. Thus, the Commissioner must re-examine that demand afresh in light of the appellant's evidence.
- The Tribunal's decision applied prior authorities (including Involute Engineering and the cases upon which Involute relied) to conclude that the appellant's receipts from foreign principals qualify as export of services under the 2005 Rules for the relevant period; the order does not purport to lay down a novel legal principle beyond applying existing precedents to the facts of the case.
- The appeal was pronounced on 17 December 2020 and is recorded as partly allowed.
JUSTICE DILIP GUPTA This appeal has been filed for setting aside the order dated December 11, 2013 passed by the Commissioner of Central Excise, Meerut1 , by which certain demand raised in the show cause notice dated October 11, 2012 for the period from April 1, 2007 to March 31, 2011, have been confirmed and certain demands have been dropped.
2. The issue involved in this appeal relates to confirmation of demand of Rs. 53,37,177/- on services rendered to foreign
1. the Commissioner ST/51772/2014 companies for the period April 1, 2007 upto February 27, 2010 and service tax demand under reverse charge on the amount paid to foreign agents from the Financial Year 2008-09 to Financial Year 2010-11.
3. The appellant is engaged in the business of provision of services under the category business auxiliary service 2 and 'transport of goods by road3 . The appellant represents foreign companies in India who do not have any office in India and promotes the business of such foreign companies. The work undertaken by the appellant for foreign companies, to a large extent, involves procuring orders from Indian clients on behalf of the foreign companies, giving technical support in respect thereof to the foreign companies, assisting the foreign companies for liasioning, preparing documents, obtaining tenders and negotiating the tenders on behalfof the foreign companies. The said services provided by the appellant are classifiable under BAS'.
4. According to the appellant, these services qualify as export of services under the provision of Export of Service Rules 2005 and so no service tax was paid by the appellant during the relevant period from April 2007 to March 2011.
5. In addition to the provision of such services to the foreign companies, the appellant also paid commission to foreign agents for receiving services.
6. Proceedings were, however, initiated by the Department.The Department entertained a view that the appellant had not shown any amount in the ST-3 returns for services
2. BAS
3. GTA
4. 2005 Rules ST/51772/2014 rendered to the foreign companies and had not paid service tax on commission paid to foreign agents.
7. Accordingly, a show cause notice dated October 11, 2012 was issued to the appellant. The Department compared the figure of 'other income' appearing in the Balance Sheet for the period from Financial Year 2007-08 to Financial Year 2010-11 with the figures of ST-3 returns filed by the appellant for the said period and proposed a demand of service tax on the differential income arising on account of 'commission on sale', 'export incentives', 'foreign commission service charge', 'royalty' and 'miscellaneous. income' and on expenditure on account of 'commission paid to foreign agents'.
8. The Commissioner partly confirmed and partly dropped the demands, by order dated December 11, 2013. Details of the demands are contained in the following Table. Category of Demand Transaction Quantum of Service Tax Findings of the
1. Commission on Sale - Rs. 43,466 Dropped as service tax had been paid.
2. Export Incentives Relates to income from sale of DEPB licenses Rs. 1,06,77,889 Dropped as not taxable
3. Foreign Commission Service charge Services rendered to foreign companies. Services rendered to Global in respect of supply of personnel. Rs. 46,61,774/- confirmed (partially dropped for the period after 27.02.2010 and extending cum-tax benefit) Demand partially Confirmed
4. Miscellaneous Income Relates to amounts received from workers/employees as notice pay or amounts payable to the employees but remained unpaid Rs. 3,56,474 Dropped as not taxable
5. Royalty Services received by the Appellant Rs. 1,63,385 Service tax paid before issuance of SCN, hence demand dropped. Interest confirmed and deposited.
6. Commission paid to foreign agents Commission paid for receipt of services Rs. 6,75,403 confirmed and Rs. 21,705 dropped as evidence of payment of service tax was available Demand partly confirmed ST/51772/2014
9. It is seen that with respect to foreign commission service charge at Serial Number 3 of the above Table, the demand of Rs. 46,61,774/-, for the period from April 2007 to February 27, 2010, has been confirmed. The findings, in short on this issue, are as follows:
(i) Upto February 27, 2010, the 2005 Rules mandated that services must be provided from India and used outside India. The appellant was providing services in relation to procurement of orders from customers located in India. These services cannot be delivered outside India and therefore, the appellant does not satisfy the condition of services being 'used outside India'. In this regard, reliance was placed on the Circular dated May 13, 2011;
(ii) For the period February 27, 2010, the condition in relation to service being used outside India has been omitted. However, since the appellant could not substantiate the quantum of services provided after February 27, 2010 and the consideration received thereon, service tax demand of Rs. 71,190/- has been confirmed.
10. With respect to the Commission paid to foreign agents, the Commissioner has confirmed the demand as documentary evidence for the claims made by the appellant had not been submitted.
11. This appeal deals with service tax on foreign commission received for services rendered to foreign companies and on commission paid to foreign agents.
12. Shri B.L. Narasimhan, learned counsel for the appellant made the following submissions:
(i) The appellant is not liable to pay service tax on commission received from foreign companies and the findings recorded in the impugned order are clearly contrary to the principles laid down in various decisions that promotion and ST/51772/2014 marketing of goods of foreign companies in India would qualify as export of service under the 2005 Rules;
(ii) The Commissioner has misread the Circular dated May 13, 2011 in as much as the said Circular provides that services would be used outside India if a benefit of such service accrues outside India and accrual of benefit should be tested beyond the factor of the person who pays for such service;
(iii) The promotional and marketing services of goods of foreign companies would ultimately result in increase in business and revenue of such foreign companies. Hence, even by virtue of the Circular dated May 13, 2011, service rendered by the appellant would qualify as export;
(iv) The 2005 Rules were amended w.e.f February 27, 2012 and the condition "such service is provided from India and used outside India" was deleted from Rule 3(2) of the 2005 Rules. Thus, for the period 2010-11, the only requirement is that the service recipient should be situated outside India and consideration is received in foreign currency. Since both the conditions have been satisfied, no service tax was payable by the appellant, as the service provided by the ST/51772/2014 appellant to the foreign companies qualifies as export; and
(v) The demand on commission paid to foreign agents is not sustainable, as the same has been discharged by the appellant. In the connection it has been pointed out of the demand amount of Rs. 6,75,403/-, the appellant has already discharged service tax of Rs. 4,28,369/- and rest of the amount of Rs. 2,47.034/- is not payable.
13. Shri K. Poddar, learned authorized representative for the Department has however supported the impugned order and has made the following submissions:
(i) The services provided by the appellant is in India and is used in India and, therefore, would not qualify as export of services under the 2005 Rules and the appellant is liable to pay service tax on the commission paid by the appellant to foreign agents.
14. The submissions advanced by the learned counsel for the appellant and the learned authorized representative of the Department have been considered.
15. The first issue is regarding the levy of service tax on the commission received from foreign companies has recently been decided against the Revenue by this Bench in M/s Involute Engineering Pvt. Ltd.5, both with regard to the period prior to
5. Service Tax Appeal No. 55146 of 2013 ST/51772/2014 February 27, 2010 and w.e.f. February 27, 2010. The relevant portion of the decision is reproduced below:
18. A perusal of rule 3 (2) of the 2005 Rules, as it existed prior to February 27, 2010, would indicate that the provision of any taxable service specified in sub-rule (1) of rule 3 shall be treated as export of service when the following two conditions are satisfied: (a) such service is provided from India and used outside India; and (b) payment of such service is received by the service provider in convertible foreign exchange.
19. There is no dispute in the present appeal that the payment for the service was received by the appellant in convertible foreign exchange. The dispute is whether the service was provided from India and used outside India. The Commissioner has observed, for the period prior to February 27, 2010, that the appellant was providing services in relation to procurement of orders from customers located in India and these services cannot be delivered outside India. Thus, the appellant would not satisfy the condition of requiring the services to be used outside India and in this connection, the Commissioner placed reliance upon the Circular dated May 13, 2011. Thus, the demand has been confirmed on the premise that the appellant was rendering services in relation to promotion of goods in India (including procurement of orders; collection of payment, etc.), and therefore, the services were being provided and used in India. On this basis, the transactions have been held to not qualify as export of services in terms of rule 3(2) of the 2005 Rules.
22. It would be seen from the aforesaid factual position stated by the appellant in reply to the show cause notice that the appellant had been representing various foreign companies in India and these foreign companies did not have any business or any other office in India. The appellant promoted the business of such foreign companies in India and as a consideration for this service, received commission from the foreign companies in convertible foreign exchange. In fact, the appellant has also described the manner in which it had promoted the business of such foreign companies. The appellant has stated that it procured orders on behalf of such foreign companies in India and whenever any Indian company issued a tender, the appellant sent it to the foreign companies and also bid on behalf of the foreign companies under their instructions. If the bid is accepted, the appellant procures orders from the Indian company on behalf of the foreign companies. The purchase orders are raised in the name of foreign companies. The foreign companies thereafter export the goods to the customers in India and the invoices are raised directly on the customers. The appellant thereafter raises an invoice for its commission on the foreign companies and receives the commission amount in convertible foreign currency. It is, therefore, clear that the appellant supports such foreign companies to procure orders in India. Such service is provided from India and used outside India. The service rendered by the appellant would, therefore, satisfy the twin conditions set out in rule 3(2) of the 2005 Rules as has also been clarified by the Circular dated February 24, 2009.
33. The Commissioner, in regard to the period post February 27, 2011 has recorded a finding that though the condition relating to service being used outside India has been omitted, ST/51772/2014 but the appellant could not substantiate the quantum of services provided after February 27, 2010 and the consideration received thereon and so the entire demand has to be confirmed.
34. As noticed above, the only requirement after the amendment in rule 3 (2) of the 2005 Rules is that the service recipient should be situated outside India and consideration should be received in foreign currency. Both the conditions stand satisfied. Even otherwise, for the period prior to February 27, 2010, it has been held that no service tax could be levied. Thus, it was immaterial as to whether the appellant was able to substantiate the quantum of services provided after February 27, 2010 and the consideration received thereon.
16. The aforesaid decision in Involute Engineering placed reliance upon the following decisions:
(i) GAP International Sourcing (India) Pvt. Ltd. vs. Commissioner of Service Tax6;
(ii) Commissioner of Service Tax, Mumbai-VI vs. A.T.E Enterprises Private Limited7;
(iii) Commissioner of Service Tax-VII vs. Wartsila India Limited8;
(iv) Verizon Communication India Private Limited vs. Assistant Commissioner of Service Tax, Delhi9;
17. Thus, for the reasons stated above and in Involute Engineering, it is not possible to sustain the demand confirmed by the Commissioner in regard to this commission received from the foreign companies.
18. The Commissioner has confirmed demand of Rs. 6,75,403/- on commission paid by the appellant to foreign agents during the period from Financial Year 2008-09 to Financial Year 2010-11. It has been submitted by learned counsel for the appellant that this demand is not sustainable for the reasons stated in the following Table.
6. 2014-TIOL-465-CESTAT-DEL
7. 2018(8)GSTL 123 (Bombay)
8. 2019(24) GSTL 547(Bombay)
9. 2018(8) GSTL 32(Delhi) ST/51772/2014 Year Taxable value Amount confirmed Amount deposited Balance Comments 2007-08 0 0 0 0 - 2008-09 Rs. 25,52,026 Rs. 3,15,430 Rs. 2,45,430 plus interest of Rs, 9,817 deposited on 20.07.2009 (Annexure-7) Rs. 70,000 Amount of Rs. 1,69,197 as commission has been reflected twice erroneously in the ledger. Further, the amount of commission was paid in May 2009, when effective rate of ST was reduced from 12.35% to 10.30%. Therefore, total tax payable on Rs. 23,83,829 was Rs. 2,45,430/ which has been deposited. (Annexure-7) 2009-10 - Rs.4,885/- Rs 4,885/- - Paid alongwith interest (Annexure-B) 2010-11 Rs. 34,47,460 out of which Rs. 12,49,800 reversed 3,55,088/- on amt. of 34,47,460/- Rs. 1,78,054 on actual commission of Rs. 17,38,681) 1,77,034/- Service tax is payable only on the amount of commission actually paid. TOTAL 6,75,403/- 4,28,369/- 2,47,034/-
i. Out of the demand amount of Rs. 70,000/- for Financial Year 2008-09, an amount of Rs. 52,571/- has been computed at a wrong rate of Service Tax i.e. 12.36%, instead of 10.30%;
ii. Demand of Rs. 17,429/- on Rs. 1,69,127/- is not sustainable as the commission has been erroneously entered by the appellant twice in its ledger; and
iii. The remaining demand of Rs. 1,77,034/- for Financial Year 2010-11 is also unsustainable as the service tax is liable to discharged only on the amount actually paid to foreign agents. In the instant case, the Appellant has paid commission of Rs. 17,38,681/- on which service tax has already been discharged by the appellant. Thus, the demand on an amount not paid as commission (reversed) is not sustainable.
19. These facts are required to be examined by the Commissioner afresh. For this purpose, it shall be open to the appellant to submit a representation with factual aspect and supporting documents before the Commissioner within a period of six weeks from today. The Principal Commissioner shall thereafter take a decision within a period of three months, without being influenced by any of the observation made in this order.
20. The order dated December 11, 2013 passed by the Commissioner in so far as it relates to the demand of service tax on ST/51772/2014 the Commission received from foreign companies is set aside. However, the Commissioner shall examine the second issue relating to Commission received from foreign agents in the light of the observations made above. The appeal is accordingly, partly allowed. (Pronounced on 17.12.2020) (JUSTICE DILIP GUPTA) PRESIDENT (P. ANJANI KUMAR) MEMBER (TECHNICAL)
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