Intermediary Service Classification: CESTAT Upholds Service Tax Demand, Citing Existing Rules Applied Before 2014 Amendment

The Ahmedabad Bench of Customs,Excise and Service Tax Appellate Tribunal(CESTAT)upheld the service tax demand on the assessee ruling that its services for Koch Membrane Inc., USA, qualified as intermediary services under the existing rules, even before the 2014 amendment.

Koch Chemicals Technology Group India Pvt Ltd,appellant-assessee,disputed the department's classification of after-sales services and goods promotion for Koch Membrane Inc., USA, as intermediary services under a 2011 agreement. For the period from July 2012 to September 2014, the department issued a show cause notice on September 27, 2016, for non-payment of Rs. 39,16,972 in service tax, along with interest and penalty.

The Assistant Commissioner confirmed the demand through an order dated February 6, 2017. The Commissioner (Appeals) later rejected the appellant-assessee's appeal on May 19, 2017, upholding the original order.

The assessee's counsel argued that they provided design, installation, and sales promotion services for goods from Koch Membrane Inc., USA. Since they dealt with goods before October 1, 2014, they claimed service tax was not applicable, as only intermediary services were taxable then.

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The counsel contended that the 2014 amendment, which included goods under intermediary services, could not be applied retrospectively. Referring to a 2011 certificate from Koch Membrane Systems USA, confirming the assessee's sales promotion role, the counsel urged that the appeal be allowed, as the amendment did not cover the disputed period.

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The revenue counsel argued that the assessee provided services in India for Koch Membrane Inc., USA, under the 2011 agreement, making them taxable even before the October 1, 2014, amendment. The counsel supported the Commissioner (Appeals) findings, stating that the services qualified as intermediary services and were taxable during the disputed period.

The counsel justified the extended period, claiming there was no interpretational issue and dismissed the assessee's cited judgments as irrelevant. The counsel added that companies operating internationally were expected to be aware of tax laws.

A single member bench comprising Somesh Arora(Judicial Member) reviewed the submissions and upheld the Commissioner (Appeals) findings. It noted that under the Place of Provision of Service Rules, 2012, intermediary services were determined by the location of the service provider, not the recipient. Since the assessee provided services in India for Koch Membrane Inc., USA, they were not treated as export services and were liable for service tax.

The appellate tribunal rejected the assessee's claim that their services were not intermediary services before the 2014 amendment. It held that the agreement clearly showed the assessee acted as an intermediary, arranging and facilitating services between Koch Membrane and its clients in India. The ITAT ruled that the 2014 amendment only expanded the scope to include intermediaries dealing with goods, but the assessee's services were already taxable under the existing rules.

It also supported the extended period, stating that the assessee failed to disclose the contract terms, which were only revealed during the audit. The tribunal found the cited judgments irrelevant, as they predated the 2012 rules. Consequently, it upheld the lower authorities' order and rejected the appeal.

In short,the appeal filed by the assessee was rejected.

To Read the full text of the Order CLICK HERE

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