The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that services performed entirely outside India are not liable to service tax under the Reverse Charge Mechanism (RCM), even if payments are made by an Indian entity or the arrangement involves group companies. The Tribunal further clarified that reimbursements made to overseas subsidiaries do not amount to an “import of services” unless there is clear evidence of a service being rendered by the foreign entity to the Indian assessee.
The ruling came in an appeal filed by Intellect Design Arena Limited, a software development company, challenging a service tax demand for the period from April 2014 to June 2017. The Bench comprising Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao examined whether service tax was payable under RCM on amounts paid by the assessee to its overseas subsidiaries and associate companies.
Intellect Design Arena develops software in India and licenses it to its foreign subsidiaries and associate entities under inter-company agreements. These overseas entities, referred to as licensees, enter into end-user licence agreements and implementation contracts with customers located outside India. Where a part of the implementation work was carried out by the licensees, the Indian entity reimbursed the costs incurred by them.
Based on audit objections, the Department alleged that these reimbursements constituted consideration for services such as manpower supply or software support received from foreign entities, and therefore attracted service tax under RCM. It was also alleged that the assessee had under-reported taxable value in its ST-3 return for December 2016, though the assessee maintained that the entire tax had been paid and that the difference was only due to a clerical reporting error. A show cause notice was issued, and the demand was confirmed by the adjudicating authority.
Before the Tribunal, the assessee argued that the remittances to overseas licensees were not consideration for any service rendered to it, but were merely commercial adjustments and revenue-sharing arrangements under inter-company agreements. It was emphasised that the assessee was the sole service provider and that no activity was carried out by the licensees “for” the assessee, a basic requirement for a taxable service under Section 65B(44) of the Finance Act, 1994.
The Revenue, on the other hand, contended that there was a flow of service from the foreign entities to the assessee and that the definition of “service” was wide enough to cover such arrangements, making the reimbursements taxable under RCM.
After examining the agreements on record, the Tribunal found that they clearly established the assessee as the sole service provider to the foreign licensees. It noted that none of the agreements created any service obligation on the overseas entities in favour of the assessee. The Bench observed that the Department had failed to produce any document showing that the licensees rendered services to the assessee. It held that the reimbursements were merely part of inter-company commercial arrangements and did not constitute consideration for services. Revenue-sharing or cost-reimbursement arrangements, by themselves, do not amount to provision of service.
On the issue of place of provision, the Tribunal held that even if the alleged services were assumed to exist, they were performance-based and were carried out entirely outside India. Under the Place of Provision of Services Rules, such services could not be treated as taxable in India.
As regards the alleged short payment for December 2016, the Tribunal noted that the assessee had claimed full payment of tax and that the discrepancy appeared to be a clerical reporting error. It remanded this limited issue to the adjudicating authority for verification, holding that the demand of ₹1.16 crore would not survive if full payment was confirmed.
However, the Tribunal categorically set aside the main demand of ₹36.77 crore raised on the ground of import of services, along with interest and penalties under Sections 75, 77 and 78 of the Finance Act, 1994, holding it to be unsustainable in law. The appeal was partly allowed with consequential relief.
