No Service Tax Payable on expenses incurred by Branch office at Foreign Country in Absence of  Occurance of Taxable Activity: CESTAT [Read Order]

The Bangalore bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) has held that service tax not payable on expenses incurred by a branch office in foreign country in the absence of occurrence of taxable activity.

During the audit of the respondent's records by the department's internal audit, it was noticed that the respondent , Indo US MIM Tec Private Limited was reflecting foreign currency expenditure for October 2007 to March 2013 in their balance sheet as branch expenditure, which had been incurred towards expenses by the overseas branch officers.

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It further revealed that the expenditure incurred comprises of advertising, commission paid to commission agents, warehousing, secondary operations, sales promotion, etc., alleging that these expenses incurred by their overseas branch was like business support service to the respondent, therefore, under Section 66A read with Rule 3 of Taxation of Services ( provided from outside India and received in India ) Rules, 2006, service tax is required to be paid by the appellant and consequently, two show-cause notices were issued on 19.04.2013 and 23.10.2013 for recovery of service tax amount of Rs.8,72,17,866/- and Rs.3,65,78,435/- respectively with interest and penalty. On adjudication, the proceedings was dropped by the Commissioner. Hence, Revenue is in Appeal.

Authorized Representative ( AR ) for the Revenue reiterating the grounds of appeal has submitted that the adjudicating authority has erred in observing that there has been no service involved between the respondent and their overseas branches being not established in the show-cause notices. He has submitted that from the statement of Assistant General Manager ( Finance ) of the respondent, it is admitted that the activities undertaken by the overseas branches like meeting the customers, scheduling orders, follow-up of payments, deliveries, marketing, etc., for these activities, the respondentcompany in India transfers a lumpsum amount to the foreign bank.

 This is nothing but a ‘Business Support Service’ for undertaking business activities outside India i.e., USA and Germany. Hence, the levy under Section 66A of the Finance Act, 1994 is attracted. Further, the Commissioner has erred in observing that the foreign exchange payments made by the respondent to their branch offices are like reimbursable expenditure, which is also not correct in view of the facts of the case. The lumpsum amount had been transferred to the overseas branch under various heads in the books of accounts as stated in the show-cause notices.

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 The purpose for which the payments were made have been indicated, therefore, the same are not reimbursable expenditure and reliance placed on the judgment of the Supreme Court in the case of Union of India v. Intercontinental Consultants & Technocrats Pvt. Ltd. - 2014 .

 He submitted that the branches are not independent entities and they are part of the respondent’s organisation, accordingly, if the branches have undertaken and rendered service to the overseas customers for which expenditure was incurred and reimbursed by the Head Office, it cannot be considered as service received by the respondent as there cannot be a service to self. Thus, all the activities rendered by the branch office at USA were to cater the requirement of the USA market.

The allegation that the Head Office at Bangalore reimbursed expenses of the branch office towards payment of salary to its employees, rent and other maintenance cost be charged with service tax on reverse charge basis is totally inappropriate and contrary to the concept of service tax. In the present case, there is no service provider or service receiver as the activity of Bangalore office and that of Branch office is one and the same. The respondent have been reimbursing the expenses in convertible foreign exchange and there is no correlation between the salary given to the employees to the income earned by the main office.

The issue involved in the present appeals for consideration is whether the expenses incurred by the branch office of the respondent at USA and Germany in rendering certain services for and on behalf of respondent’s main office in Bangalore would attract service tax under Section 66A of the Finance Act, 1994.

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Revenue contended that the branch office of the respondent in the USA and Germany had rendered certain services like meeting the customers, scheduling orders, follow-up of payments, deliveries, marketing, etc., which is nothing but Business Support Service by the branch office to the main office of the respondent, since the expenditure had been paid in foreign exchange, service tax under Section 66A of the Finance Act, 1994 is required to be paid by the Respondent.

A two-member bench of Dr. D.M. Misra, Member ( Judicial ) and R. Bhagya Devi, Member ( Technical ) found that Revenue has not been able to show that service  has been received through their branch office in India and in the absence of receipt of service. Since there is no taxable event and therefore there is no liability on the receiver to pay tax.

While rejecting the appeal of revenue, the tribunal upheld the impugned order.

To Read the full text of the Order CLICK HERE

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