No Service Tax Leviable on Fund Transfers to Overseas Branch without Proof of Service: CESTAT Dismisses Revenue Appeal [Read Order]

The Bangalore Bench of the Customs, Excise and Service Tax AppellateTribunal (CESTAT) has dismissed an appeal of the revenue and upheld a decision of the commissioner observing that no service tax is leviable on fund transfers to overseas branches without proof of service.

The Revenue Department filed the appeal before the tribunal against the commissioner’s order which was in favour of the respondent company - M/s. Exilant Technologies Pvt. Ltd.

The tax department, initially issued show-cause notices alleging that these foreign currency expenditures were payments for taxable services like Information Technology Software Services or Business Support Services.

The original proceedings by the Commissioner had already dropped the tax demands after finding that the Department’s case rested almost entirely on the fact that funds were transferred, rather than on any documentation proving that a service was actually rendered.

There were no agreements, invoices, or analytical reports to show that the Indian entity had received a specific service from its branches. The assessee clarified that these overseas branches were essentially extensions of the head office rather than independent third-party vendors.

The funds sent abroad were intended to cover basic operational costs such as staff salaries, office rent, and administrative overheads because the branches were not yet self-sustaining. Since the branches were not charging a consideration for a specific service, the essential components of a taxable transaction were missing.

The Tribunal, after referring to Section 66A of the Finance Act, 1994, said that, for a tax liability to arise under the reverse charge mechanism, there must be a clear receipt of a taxable service within India. In this instance, the evidence suggested the opposite.

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Any work performed by the branches was rendered and consumed entirely outside of India for the benefit of international clients, using foreign earnings. Because service tax is a destination-based consumption tax, it cannot be levied on activities that take place and are finalized outside the country’s borders.

Even under the Post-2012 amendment, which allows for branches to be treated as "distinct persons" for certain tax purposes, the absence of an identifiable service transaction keeps these internal fund transfers outside the scope of taxation.

To sustain a tax demand, authorities must demonstrate that a taxable service was provided and received in India, observed the bench of P A Augustian (Judicial member) R. Bhagya Devi (Technical member) .

Accordingly, the CESTAT found no impairment in the Commissioner’s original reasoning and confirmed that fund transfers meant to reimburse branch expenses cannot be taxed as services.

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