Dubai Branch Activities like Sales Promo fall Under BAS, But No Service Tax under RCM as Entities Not Distinct: CESTAT favours Skyline [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) ofBangalore ruled that the services offered by Dubai branch like sales promotion fall under Business Auxiliary Service, however no tax leviable under ReverseCharge Mechanism (RCM) as the entities are not distinct.

The appeal was filed by the Kerala based construction company Skyline Foundation and strutures alleging the demands covered the period from October 2006 to September 2009 under categories such as Construction of Residential Complex Service, Sponsorship Service, and BAS.

The primary issue was the taxability of construction services. On that, the Tribunal observed that prior to July 1, 2010, statutory amendments and official circulars clarified that builders were not liable for service tax on the construction of residential complexes. Consequently, the demand raised for the pre-amendment period was deemed unsustainable.

Similarly, the Tribunal also dismissed the demand under "Sponsorship Service." It found that payments made to a local associate in Dubai were actually for legal compliance and license renewals rather than sponsorship activities.

Since these payments were related to maintaining a business presence and regulatory adherence abroad, therefore, they did not fall under the taxable category of sponsorship.

Further, the Department argued that the Dubai branch, which engaged in sales promotion and liaison with NRI clients, should be treated as a distinct person from the Indian head office.

However, the Tribunal rejected this interpretation. It held that a branch office is merely an extension of the same legal entity. Under Section 66A of the Finance Act, 1994, a levy of service tax requires the existence of two distinct persons: a service provider and a service recipient.

Since the branch and head office are part of the same organization, any services rendered are effectively services "to self." Therefore, the important requirement for a taxable transaction is not met, and no tax is payable under the RCM.

With regards to the CENVAT credit, the bench of Dr. D.M. Misra (Judicial member) and R. Bhagya Devi (Technical member) upheld the disallowance of credit because the output services themselves were not taxable during that period.

However, it noted that the company had already reversed the unutilized credit, a fact verified by both a Chartered Accountant and departmental authorities. Therefore, the appellate tribunal set aside the penalties while maintaining the interest on the credit demand.

The appeal was partly allowed.

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