CESTAT Quashes Service Tax Demand on Cross-Border Cost-Sharing, Holds Downward Price Adjustments are Not Consideration [Read Order]

The Chennai Bench of the Customs, Excise andService Tax Appellate Tribunal (CESTAT) held that inter-company cost sharing and downward price adjustments arising out of software implementation arrangements do not constitute “import of services” liable to Service Tax under the Reverse Charge Mechanism. The Tribunal set aside a demand exceeding ₹36.77 crore along with interest and penalties, holding that no taxable service was rendered to the Indian entity by its foreign subsidiaries and that the dispute was largely interpretational in nature.

The appeal arose from an order confirming Service Tax demands on payments made to overseas subsidiaries during the period April 2014 to June 2017, treating them as consideration for manpower and software support services. In the present case, Intellect Design Arena Limited, the appellant, develops software and licenses it to overseas group entities, which in turn enter into implementation agreements with foreign customers. Where part of the implementation work was performed by the overseas entities, the corresponding cost was adjusted against the implementation fee payable to the appellant.

The matter was heard by a Bench comprising P. Dinesha (Judicial Member), and Vasa Seshagiri Rao (Technical Member). The Tribunal examined the inter-company agreements, customization and implementation contracts, and debit notes relied upon by the Department. It noted that the contractual framework clearly established the appellant as the primary service provider to the overseas licensees and not the recipient of any service from them.

The Tribunal found that the debit notes merely reflected netting off of costs for work not performed by the appellant and did not represent consideration for any service rendered by the foreign entities.

Relying on decisions including Tech Mahindra Ltd., Man Trucks India Pvt. Ltd. and KPIT Technologies Ltd., the Tribunal held that internal cost-sharing arrangements and revenue adjustments within a multinational group do not satisfy the essential ingredients of a taxable service under Section 65B(44) of the Finance Act, 1994. It further held that even otherwise, the implementation activities were performed outside India and were not taxable in India under the Place of Provision of Services Rules, 2012.

The Tribunal also held that the extended period of limitation and penalties were not invocable. However, with respect to a separate demand of ₹1.16 crore for December 2016 arising from a clericalerror in ST-3 returns, the Tribunal remanded the matter to the adjudicating authority for verification, noting the appellant’s claim that the tax had already been paid.

As a result, the appeal was partly allowed and partly remanded by the Tribunal.

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