The Ahmedabad bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that no service tax liability arises under section 66 A of the Finance Act, 1994 on a company operating as an agency to carry out under the purview of Section 66A of the Finance Act,1994 when a permanent establishment of the foreign service provider exists in India the recipient of service in India cannot be made liable to pay service tax under reverse charge mechanism.
Shri J C Patel, Shri Hardik Modh & Shri Amit Laddha appeared for the Appellant. Shri Rajesh R Kurup, Superintendent (AR) appeared for the Respondent.
Kiran Gems Pvt Ltd, the Appellants are engaged in the export of cut and polished Diamonds. In the impugned order the Learned Commissioner (Appeals) upheld that the Appellants are liable to pay Service Tax under Reverse charge mechanism in terms of Section 68 (2) of the Finance Act, 1994 read with Rule 2(1) (d) of Service Tax Rules, 1994 on the services received from foreign country.
It was submitted that the Appellants are engaged in the business of importing rough diamonds and exporting them only after cutting and polishing for which they require diamond processing machines that run on a specific type of software – HASP. He further submitted that all activities including marketing & promotion, being the sole point of interaction, placing order, raising of invoice, advancing of payments, installation, repairs and maintenance and training of employees in furtherance of setting up of these machines for use are conducted by none other than Sarin Technologies India Pvt. Ltd. which is a wholly owned subsidiary company of Sarin, Israel. That Sarin Israel and Galatea Ltd. are foreign companies incorporated under the laws of Israel and the latter is also a wholly owned subsidiary company of Sarin Israel.
It was argued that from the legal structure, rendering of different services and audit report of Sarin India it can be established that Sarin Israel has been providing services to the Appellants in India through their permanent establishment functioning under Sarin Technologies India Pvt. Ltd and therefore by applicability of Section 66A of the Finance Act, the Appellants shall be discharged of the demand raised against them for recovery of Service Tax.
Sarin India was performing all the activities regarding the supply of software, starting from placing orders to installation, upgradation and maintenance of software, installation and other relevant processes. Sarin India is an extension of the business activities of Sarin Israel, which has been carried out in India and hence, it can be termed as a fixed establishment through which the business of Sarin Israel was conducted in India.
A two-member bench comprising Mr Ramesh Nair, Member (Judicial) and Mr Raju, Member (Technical) observed that a branch office is covered under the scope of permanent establishment. Since Sarin India is a wholly owned subsidiary of Sarin Israel carrying out and coordinating essential trading activities it would be safe to say that Sarin India is in itself a branch office of the Israel company.
Further found that Sarin India Technology Ltd. was operating as an agency to carry out the business of trading in a different country in the instant case is, India and by flow of that we are of the considered view that by way of Section 66A discharge of liability of service tax cannot be made applicable to the Appellants. The CESTAT held that under the purview of Section 66A of the Finance Act,1994 when a permanent establishment of the foreign service provider exists in India the recipient of service in India cannot be made liable to pay service tax under reverse charge mechanism. While allowing the appeal, the Tribunal set aside the impugned orders
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