Consultancy Services Delivered Outside India Do Not Attract Service Tax Liability: CESTAT says Correlation of FIRCs and Invoices Procedural, Sets aside Order [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ), Allahabad bench has ruled that consultancy services provided to clients situated outside India do not fall within the ambit of taxable services under the Finance Act, 1994, as they qualify as “export of services.”

The bench, while setting aside the impugned order of the Commissioner (Appeals), allowed the appeal filed by M/s Refractories & Engg., represented by Shailesh Dayal holding that service tax cannot be levied on consultancy and commission services rendered to a foreign client when payments are received in convertible foreign exchange.

The Service Tax Department, acting on information received from the Income Tax Department for the financial year 2015-16, issued a show cause notice dated 9 December 2020 to the appellant, demanding service tax of ₹7,85,313 along with interest and penalties.

The Department alleged that the consultancy and commission receipts declared in the appellant’s income tax returns represented taxable services under the Finance Act, 1994.

The adjudicating authority, vide order dated 9 December 2021, confirmed the tax demand and imposed penalties under Sections 78 and 77 of the Finance Act, 1994 read with Section 174 of the CGST Act, 2017.

Although the Commissioner (Appeals) partly modified the order by setting aside some penalties, he upheld the service tax demand, prompting the present appeal before the Tribunal.

The appellant contended that the receipts in question, comprising consultancy fees of ₹54,15,953 and commission of ₹6,60,500 received from M/s Blasch Precision Ceramics Inc., New York, were squarely covered under the Export of Services Rules, 2005.

It was argued that since the services were provided to a client located outside India, the place of provision of service was outside the taxable territory, and consideration was received in convertible foreign currency.

They also submitted that all transactions were duly recorded in the books of accounts, audited by a chartered accountant, and supported by Foreign Inward Remittance Certificates (FIRCs).

The Department, on the other hand, defended the orders of the lower authorities, contending that the appellant had failed to properly correlate FIRCs with invoices and therefore had not conclusively established the export of services.

However, the bench of P.K. Choudhary found merit in the appellant’s arguments. The appellate tribunal noted that the appellant had indeed received foreign exchange amounting to USD 87,245.74 (equivalent to ₹56,85,074.84) for consultancy services, out of which ₹2,73,121.75 represented expenses incurred, leaving a net consultancy fee of ₹54,15,953.

In addition, the appellant had received USD 10,073.19 as commission (₹6,60,724.76) from the foreign client. Since the place of provision of service was outside India and the payments were received in convertible foreign currency, the conditions prescribed under Rule 6A of the Service Tax Rules for treating services as exports stood satisfied.

On the issue of FIRCs not being strictly correlated with invoices, the Tribunal held that such correlation is a procedural requirement, and if the assessee can establish receipt of foreign exchange with supporting documents, no adverse inference should be drawn.

Accordingly, it ruled that consultancy and commission services provided outside India are not taxable under the Finance Act, 1994.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates