Facts of the case
· M/s Western Union Network Ltd. (‘WUN’), Ireland, is a company engaged in money transfer from persons located in one country to persons located in any other country. M/s Paul Merchants Ltd. (‘PML’) entered into an agreement with WUN for executing part of the business activities of WUN in India as an agent, through sub-agents appointed with the prior approval of WUN.
· The mechanism of money transfer from a person in a foreign country to a person in India is as follows:
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- The customer’s request is logged on to the WUN network and a unique code number is generated as an acknowledgement.
- The customer of WUN abroad passes the code number to the intended recipient in India.
- The intended recipient in India approaches PML (being an agent of WUN) or any sub-agents of WUN appointed by PML with the code number and the intended recipient’s identity proof.
- PML/sub-agent of WUN verifies the code numbers, identity of the intended recipient on the basis of the prescribed identity proof and makes the payment.
- PML/sub-agent informs the WUN through its intranet network about the payment having been made to the intended beneficiary of a particular code number.
- WUN reimburses the money paid out to PML in convertible foreign currency along with PML’s/ sub-agents’ commission.
- When the payment to the intended recipient of WUN’s customer abroad has been made by the sub-agent appointed by PML, PML reimburses such amounts to the sub-agent along with commission in Indian currency.
· PML also undertakes certain promotional activities like advertising, organizing promotional programmes etc. for WUN in India for which reimbursement is made by WUN in convertible foreign exchange.
Issues
The following questions were laid down for determination initially before a two member bench of the Tribunal and after their difference of opinion, before the third member of the Tribunal:
· Classification of services provided by PML or its sub-agents; and
· Whether services provided by PML and its sub-agents constitute ‘export of service’ and thus, not subject to levy of service tax.
Contention of the Revenue
· Revenue contended that what constitutes ‘export of service’ must be decided in accordance with the concept of ‘export’ in Art 286 (1)(b) of the Constitution of India read with Section 2 (18) of the Customs Act, 1962.
· Applying the principle of equivalence between the taxation of goods and taxation of services as laid down by the Apex court in the cases of Association of Leasing & Financial Service Companies Vs. Union of India reported in 2010 (20) STR 417 (SC) and All India Federation of Tax Practitioners Vs. Union of India reported in 2007 (7) STR 625 (SC) (para-20), Revenue contended that the question as to what constitutes ‘export of services’ must be decided on the basis of criteria for export of goods, not on the basis of Export of Service Rules, 2005 (the ‘Export Rules’).
· The definition of ‘export of service’ in the Export Rules is at variance with the definition of ‘export’ in the Constitution and various Apex Court's decisions cited supra. This will make the Export Rules ultra vires the Constitution of India.
· The Revenue contests that activity of making payment to the recipient in India is the only service which PML is rendering and this service is rendered in India. For ‘export of service’ the crucial fact is the delivery of the service to a foreign destination where the same would be received as ‘import’. However, no such fact emerges from the contracts of PML with WUN and of the sub-agents with PML.
· The ultimate consumers of the service are in India and India is the ultimate destination of the services provided by PML and sub-agents. No service goes from India to a foreign destination. Hence, this cannot qualify as ‘export of service’.
· Revenue has further relied on the principle laid down by the Supreme Court in the case of All India Federation of Tax Practitioners Vs UOI that service tax is a ‘destination based consumption tax’ and service is terminated on its consumption in India.
· As regards the service rendered by sub-agents, since the same is rendered to the main agent (PML) in India, it is not ‘export of service’ and hence it is taxable. Further, benefit of small scale exemption is not available to sub-agents, since they are rendering services using the brand name of WUN.
Contention of the Taxpayers
· The services are classifiable as ‘Banking and Financial Services’ with effect from 1 June 2005 and not under ‘Business Auxiliary Service’ prior to that. However, notwithstanding the classification issue, both the categories are covered under Rule 3(iii) of the Export Rules. Accordingly, in either case, if the services have been provided in respect of a business located abroad, the same would constitute ‘export of service’.
· What constitutes as ‘export of service’ has to be decided strictly in terms of the provisions of the Export Rules and not on the basis of definition of export in Section 2(18) of the Customs Act, 1962. Services being intangible in nature, the concept of ‘export’ in case of goods cannot be applied to the export of services.
· PML is providing services to WUN situated abroad with whom PML has entered into a contract for providing services and gets remuneration for the services rendered.
· Further, the persons in India to whom the money is delivered by PML/ sub-agents are only the recipients of money sent to them by persons aboard through WUN. They are not the recipients of service provided by PML/ sub-agents; the ultimate beneficiary of the service being the person situated abroad who approaches the office of WUN and pays for the services.
· Since the service has been received by WUN, the services have to be treated as having been delivered to WUN and used by them outside India, and hence, exported out of India.
· Further, PML has not provided any marketing or advertising service to WUN which is provided by advertising agencies who have deposited service tax on the same. PML has merely claimed reimbursement for payments made to the advertising agencies.
· Even if advertising services are treated as having been provided by PML, since the recipient and beneficiary of the same is WUN and reimbursement is received in convertible foreign exchange, the same shall be treated as export of service.
· The demand is time barred because the whole matter arises out of different interpretations of law and not on account of any suppression on part of PML.
· Further, a sub-agent of an agent of WUN in India represents WUN and provides services to WUN. Basis the various Tribunal judgments and Board Circular dated 11 June 1997 issued in this regard, service tax cannot be levied on the services provided by the sub-agents.
· If the services by sub-agents are not treated as exports, they would become eligible for exemption for small scale service providers.
Judgment of the Third Member of the Tribunal (after difference of opinion between first two members) pronounced in the open court on November 21, 2012
· Service provided by the PML/ sub-agents would be correctly classifiable as ‘Business Auxiliary Service’ as the function of PML/ sub-agents is essentially an agency function i.e. ‘providing services on behalf of WUN in India for commission’. Further, the activity of marketing and promotion of money transfer service of WUN in India is also covered by the definition of ‘Business Auxiliary Service’.
· The term ‘export’ has not been defined either in Article 286 (1)(b) or in any of the article of the Constitution of India. Article 286 simply puts certain restrictions on imposition of sales tax by the State Governments on the sale or purchase of the goods or imposition of sales tax on sales taking place outside the state or on the goods imported into India or exporting out of India. There is no question of the Export Rules being in conflict with Article 286 (1) (b) of the Constitution of India.
· Services being intangible can be provided in various modes. Thus, what constitutes ‘export of service’ is difficult to conceive and define unlike in the case of goods which are tangible. The ratio of judgments with regard to export of goods is not relevant for determining what constitutes ‘export of services’.
· The principle of equivalence between taxation of goods and taxation of service as laid down by the Apex Court does not imply that service tax should be levied and collected in exactly the same manner as the levy and collection of tax on goods or that ‘export of service’ should be understood in exactly the same manner in which export of goods is understood.
· The Export Rules are in accordance with the Apex Court’s ruling that service tax is a value added tax, which in turn is a destination based consumption tax in the sense that it is levied on commercial activities, and it is not a charge on the business but a charge on the consumers.
· What constitutes ‘export of service’ is to be determined strictly with reference to the provisions of the Export Rules. Not doing so and leaving this question to be determined by individual tax payers or tax collectors for each service, based on their deductive ability would result only in total confusion and chaos.
· It is that person who requested for the service who is liable to make payment for the same and whose need is satisfied by the provision of the service in question, who has to be treated as recipient of the service - not the person/persons affected by the performance of the service. The consumer of the service provided by PML and sub-agents of WUN in India is WUN, located abroad who uses this service for its money transfer business and not the persons receiving money in India.
· Since the service provided is Business Auxiliary Service which has been received and used abroad, in relation to business of WUN located abroad, and the payment for the service has been received in India in convertible foreign currency, the same has to be treated as export of service.
· Further, from a perusal of the tripartite arrangement between WUN, PML and the sub-agents, Tribunal concluded that the sub-agents are providing services to WUN and it is WUN who is the beneficiary of the service provided by the sub-agents. Since the payment for these services is received in convertible foreign currency by PML, the services provided by the sub -agents have to be treated as ‘export of service’.
· Reimbursement for advertisement and sales promotion activities received from WUN is not taxable as the same is for the services provided to WUN, which qualify as ‘export of service’.
· The question of time bar is not relevant when the main question has been answered in favour of the agents and sub-agents.
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