CESTAT dismisses Service Tax Demand as Remittances Made for Meeting Establishment Costs at Branch Locations

Facts of the Case

• Appellant is a ‘export oriented unit (EOU)’ approved under the eponymous scheme in the Foreign Trade Policy for production and export of ‘pharmaceutical products’ and, in pursuit of its business strategy, has established representative offices at several places outside the country, as ‘cost centres’, dependent on the principal establishment in India for operational existence.
• By taking recourse to the special design in Finance Act, 1994, intended for taxing recipients as ‘deemed provider’ of services received from abroad, to the transfer of funds as recorded in the books of accounts, the jurisdictional service tax authority initiated proceedings for recovery on the taxpayer.
• Taxpayer has filed this appeal challenging order of Commissioner of Central Excise, demanding tax of on the finding that remittances made to their branches and offices abroad was ‘consideration’ for ‘taxable service’ procured from outside the ‘taxable territory’.
• Another submission of the taxpayer, is that these remittances are for payments for supplies procured by overseas branches and offices, which would have excluded them from being deemed to have received in the ‘taxable territory’.

Discussion

• In the present, it is the admitted flow of funds for maintenance and upkeep of the branch offices that has been presumed to be the quid pro quo for rendering of ‘taxable service’ by the branch to the principal office. That the remittances were made for meeting the establishment costs at the location of the branches is not disputed.
• In Milind Kulkarni & others v. Commissioner of Central Excise, Pune [2016 (44) STR 71 (Tri-Mum)], the Tribunal had been called upon to adjudge the legality of subjecting remittances made by the principal office to tax as ‘consideration’ for procurement of ‘business auxiliary service’ from their overseas branches for the period upto June 2012 and for procurement of ‘taxable service’ thereafter. Elaborating upon the scheme for taxing of services procured from abroad in Finance Act, 1994 read with the relevant Rules, it was held by the Tribunal that the deeming provision in a statute is a temporary suspension of conventional wisdom and existing legislative formulation of a concept or situation for a specified purpose and that the graft so incorporated is intended to be applied in its entirety and within the intended context. It, then, went on to enunciate the purpose of deeming demutualization as a contrivance to assure that structuring of such dependent establishments would not provide an avenue for escapement, either overtly or covertly, from the enforcement of the levy on the ‘taxable event’; concomitantly, the deemed demutualization does not demonstrate legislative intent to tax transactions that are normal to such dependent existence.
• The determination of rendering of ‘taxable service’ in accordance with Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 was essential for validation of any levy on ‘consideration’ remitted by principal office before July 2012, the Rules above, along with the parent provision in Finance Act, 1994 and the charging provision are applicable only to ‘services’, conforming to the description elaborated in section 65B(44) of Finance Act, 1994 therein, without exception after June 2012.
• Consequently, the conclusion in Milind Kulkarni is relied upon to set aside the demand.