CESTAT: Foreign Agency or Overseas Permanent Establishment of Service Recipient in India is Excluded from Service Tax

CESTAT: Foreign Agency or Overseas Permanent Establishment of Service Recipient in India is Excluded from Service Tax

The Mumbai bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) observed that any foreign branch or foreign agency or overseas permanent establishment of the service recipient in India is excluded from the charge of service tax under the provisions of Section 66A.

The two-member bench S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) has ruled that the foreign companies, Star Asia Region FZ LLC, Star Asian Movies Limited, and Star Television Entertainment Ltd., remained separate entities from Star India Pvt. Ltd. (appellant) even after their merger in India.

In the present case, the Department claimed that the services provided by the international associate enterprises were received by the appellant's merged companies with a fixed establishment or usual place of residence in India.

Consequently, the Department initiated show cause notice proceedings, demanding service tax along with interest and proposing penalties under the relevant sections of the Finance Act, 1994.

The Commissioner confirmed the adjudged demands besides imposition of equal amount of penalty under section 78 and penalty of Rs. 5000/- for non-filing of return under section 77 of the Finance Act, 1994.

The issue before the CESTAT was whether the appellant was liable for payment of service tax in terms of section 66A of the Finance Act, 1994, in respect of services received by three foreign companies which were merged with the appellant company.

The Tribunal on perusal of Section 66A, found that the legal provision has been carved out to enable for application of the Chapter V – Service Tax provisions for the purpose of charging service tax on taxable services received from outside India in certain circumstances with few exceptions as provided therein under the first proviso to subsection (1) and under sub-section (2) to Section 66A.

“Accordingly, we find that when a taxable service is provided by a service provider having a fixed establishment or permanent address or usual place of residence in a foreign country and such service is being received by a person having place of his business or fixed establishment or permanent address or usual place of residence, in India, then by treating that the service recipient had himself providing such service, the applicable service tax is payable,” the bench observed.

The CESTAT held that the exception provided in the first proviso of sub-section (1) from the charge of service tax in the above Section 66A is in relation to personal consumption by individuals, not concerning with services provided for the purpose of any business or commerce.

Further, as per sub-section (2) to Section 66A another exception has been made for the situation that where a service recipient is having a permanent establishment in India and is also carrying on business in a foreign country through another permanent establishment in that country, then these two business entities shall be treated as separate persons for the purpose of Section 66A, noted the bench.

Accordingly, the CESTAT observed that any foreign branch or foreign agency or overseas permanent establishment of the service recipient in India is also excluded from the charge of service tax under the provisions of Section 66A.

Averting to the present case, the CESTAT noted that the three foreign companies/overseas business entities having their establishments out of India viz., Star Asia Region FZ LLC, incorporated in Dubai; Star Asian Movies Limited and Star Television Entertainment Ltd., incorporated in British Virgin Islands, even after their merger with the appellant company in India till their closure of their business abroad, could be treated as a branch or agency of the appellant and for service tax purposes they are separate persons from the appellant.

Thus, CESTAT ruled that the payments effected for the services received from another service provider abroad by the three foreign companies/overseas business entities which were proposed to merged with the appellant, is not amenable to charging service tax under section 66A of the Finance Act, 1994.

Based on the discussions, the bench decided to set aside the order of the Commissioner of CGST & Central Excise, Mumbai Central, Mumbai, which confirmed the demands made against the appellant.