Design and Development Services to Foreign Clients Independently Qualify as Export, Not Intermediary: CESTAT [Read Order]

The Allahabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that design and development services provided independently to foreign clients qualify as export of services and do not fall under the scope of intermediary services.

The PDQ Asia, the appellant, is a Noida-based service provider engaged in rendering business support and design and development services to overseas clients, primarily in the United States. The dispute arose when the department classified the appellant’s services as intermediary in nature and issued a show cause notice demanding service tax for the financial years 2014–15 to 2016–17.

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The department also sought to tax intermediary services related to goods for the period from April 1, 2014, to September 30, 2014, despite the fact that such services were not taxable until October 1, 2014. The adjudicating authority confirmed the demand of Rs. 13,54,282 along with interest and penalties, which was later upheld by the Commissioner (Appeals). Aggrieved by the order, the appellant approached the CESTAT.

The appellant’s counsel stated that its design and development services involved no third party and were provided on a principal-to-principal basis. It submitted that the services were performed independently by its team in India and delivered to clients located abroad.

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The appellant’s counsel also clarified that once sample products were delivered based on approved designs, its role concluded, and any further commercial transaction was decided solely by the foreign clients. The appellant argued that these services met all the conditions under Rule 6A of the Service Tax Rules, thereby qualifying as export of services.

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The revenue counsel argued that the appellant’s activities constituted intermediary services and argued for the applicability of service tax. They also invoked the extended period of limitation under Section 73(1) of the Finance Act, 1994, citing suppression of facts and discrepancies in records based on information from the Income Tax Department.

The two-member bench comprising Mr. P.K. Choudhary (Judicial Member) observed that the appellant was not an intermediary, as there was no facilitation or arrangement of supply between third parties. The tribunal observed that the appellant directly rendered services to foreign clients without any involvement of other entities, and the place of provision was outside India. Since all conditions under Rule 6A were fulfilled, the services qualified as export and were not taxable.

The appeal was allowed with consequential relief.

To Read the full text of the Order CLICK HERE

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