Service Recipient in India not liable to Pay Service Tax when PE of Foreign Service Provider Exists in India: CESTAT [Read Order]

The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) observed that service recipient in India not liable to pay service tax when pe of foreign service provider exists in India.

The brief facts of the case are that the Appellants are engaged in the export of cut and polished Diamonds. In the impugned order the Commissioner (Appeals) upheld that the Appellants are liable to pay Service Tax under Reverse charge mechanism in terms of Section 68 (2) of the Finance Act, 1994 read with Rule 2(1) (d) of Service Tax Rules, 1994 on the services received from foreign country.

The Counsels appearing on behalf on the Appellants submitted that the Appellants are engaged in the business of importing rough diamonds and exporting them only after cutting and polishing for which they require diamond processing machines that run on a specific type of software – HASP.

It was further submitted that all activities including marketing & promotion, being the sole point of interaction, placing order, raising of invoice, advancing of payments, installation, repairs and maintenance and training of employees in furtherance of setting up of these machines for use are conducted by none other than Sarin Technologies India Pvt. Ltd. which is a wholly owned subsidiary company of Sarin, Israel.

The counsels further that from the legal structure, rendering of different services and audit report of Sarin India it can be established that Sarin Israel has been providing services to the Appellants in India through their permanent establishment functioning under Sarin Technologies India Pvt. Ltd and therefore by applicability of Section 66A of the Finance Act, the Appellants shall be discharged of the demand raised against them for recovery of Service Tax.

A Two-Member Bench of Ramesh Nair, Judicial Member and Raju, Technical Member observed that “Since Sarin India is a wholly owned subsidiary of Sarin Israel carrying out and coordinating essential trading activities it would be safe to say that Sarin India is in itself a branch office of the Israel company. Therefore, just for the sake of levy of service tax liability under section 68 ibid, it cannot be denied that Sarin India is not a permanent establishment of Sarin Israel. Therefore, we note that it was erroneous conclusion on the part of the department to allege that Sarin India will not be considered a Permanent Establishment of Sarin Israel.”

“Therefore there is no second thought required to be arrived at the conclusion that the Appellants had received goods from a foreign country and services in its extension from service provider in India through the said foreign company’s Branch office at that time one of which is located in India thereby sufficiently establishing that they have a permanent establishment hence the Appellants cannot be fastened with the liability of service tax for being a recipient of service under section 68(2) of the Finance Act read with rules 2(1)(d) as a ‘deemed service provider’ in India” the Bench concluded.

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