Paul Merchants Limited. Commissioner of Central Excise and Service Tax, Chandigarh-I

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1 [2013] 62 VST 501 (CESTAT) [CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL] (NEW DELHI BENCH) Paul Merchants Limited V. Commissioner of Central Excise and Service Tax, Chandigarh-I PANDA D.N., JUDICIAL MEMBER AND MATHEW JOHN, TECHNICAL MEMBER AND RAKESH KUMAR, TECHNICAL MEMBER November 21, 2012 HF Assessee, including dealer (Registered or Unregistered) SERVICE TAX MONEY TRANSFER SERVICE FROM JULY 1, 2003 TO JUNE 30, 2007 BUSINESS AUXILIARY SERVICE EXPORT OF SERVICE CUSTOMER IN FOREIGN COUNTRY PAYING MONEY TO W, ABROAD, TO BE TRANSFERRED TO PERSON IN INDIA ALONG WITH SERVICE FEE INTENDED RECIPIENT IN INDIA APPROACHING AGENTS OR SUB-AGENTS WITH CODE NUMBER AND IDENTITY PROOF AGENT/SUB-AGENT VERIFYING CODE NUMBERS, IDENTITY OF INTENDED RECIPIENT AND MAKING PAYMENT W REIMBURSING MONEY TO AGENT IN CONVERTIBLE FOREIGN CURRENCY ALONG WITH AGENTS /SUB-AGENTS COMMISSION AGENT PASSING ON REIMBURSEMENT MONEY ALONG WITH SUB-AGENT S COMMISSION TO SUB-AGENT, IN INDIAN CURRENCY AGENT ALSO ADVERTISING, ORGANIZING PROMOTIONAL PROGRAMS, DISTRIBUTING PROMOTIONAL MATERIAL, ETC., AMOUNT INCURRED FOR WHICH REIMBURSED BY W BUSINESS AUXILIARY SERVICE PROVIDED BY AGENTS AND SUB-AGENTS CONSUMED BY W LOCATED ABROAD IS EXPORT OF SERVICES NOT TAXABLE FINANCE ACT (32 OF 1994), S.65(19), (105)(ZZB) EXPORT OF SERVICES RULES, 2005 R. 3(1)(III), (2). A contract was entered into between W, Ireland, and the appellant, PML in India, dealing with remittances from persons abroad to persons located in India in which business the person located abroad approached any of the offices of W and gave money to be remitted to a person in India, the office abroad charging the person abroad commission for remitting money to India. No charges were levied from the recipient of money in India. PML, W s agent, appointed sub-agents within the territories allotted to them to establish a large number of outlets in the area to make it easy for the recipient in India to get the money easily without much travel and hassles. The intended recipient in India approached any of the agents or sub-agents with the code number and his identity proof. The agent/sub-agent of W verified the code numbers, identity of the intended recipient and made the payment. W reimbursed the money paid to the agent in convertible foreign currency along with agents /sub-agents commission and the agent passed on the reimbursement money along with the sub-agent s commission to the sub-agent, but in Indian currency. PML did some promotional activities like advertising, organizing promotional programs, etc., the amount incurred for which was reimbursed by W to certain extent. PML compensated the sub-agents by sharing the commission received by them from W. A show-cause notice was issued for payment of tax on such commission and re-imbursements received by PML in this business during the period from July 1, 2003 to June 30, 2007 and an order was passed confirming tax demand with interest and imposing penalties classifying the service provided by PML as business auxiliary service as defined under section 65(105)(zzb) of the Finance Act, On an appeal: Held, per Mathew John (Technical Member) and Rakesh Kumar (Technical Member) ; D. N. Panda (Judicial Member) (dissenting) that money transfer service is being provided by the W from abroad to their clients who approached their offices for remitting money to friends/relatives in India. The service being provided by the agents and sub-agents is delivery of money to the intended beneficiaries of the customers of W abroad and this service is business auxiliary service, being provided to W. It is W who is the recipient and consumer of this service provided by their agents and sub-agents, not the persons receiving money in India. The consumer

2 of the service provided by the agents and sub-agents of W in India is the W, located abroad who use their services for their money transfer business, not the persons receiving money in India. Since the service provided is business auxiliary service classifiable under section 65(105)(zzb) read with section 65(19) of the Finance Act, 1994, and has been provided in relation to business of W 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. It is the person who requested for the service and is liable to make payment for the same who has to be treated as recipient of the service, not the person or persons affected by the performance of the service. Thus, when the person on whose instructions the services in question had been provided by the agents/sub-agents in India and who is liable to make payment for these services, is located abroad, the destination of the services in question has to be treated abroad. The destination has to be decided on the basis of the place of consumption, not the place of performance of service, in the case of this service. Charges for advertisement and sales promotion activities reimbursed by W is not taxable as the same are for the services provided to W, which are export of service. Thus the services provided by the agents and sub-agents during the period of dispute, classifiable as business auxiliary service under section 65(105)(zzb) read with section 65(19) of the Finance Act, 1994 have been exported in terms of the provisions of rule 3(1)(iii) (rule 3(3) before amendment of the Export of Services Rules by Notification No. 13/2006-S.T., dated April 19, 2006) read with rule 3(2) of the Export of Services Rules, 2005 and hence not taxable. Per Mathew John (Technical Member): (i) PML was providing service to a customer on behalf of W and their activity came within the definition at sub-clause (vi) of section 65(19) pertaining to business auxiliary service. The activities of promotion and marketing are covered under sub-clause (ii) of section 65(19). However for the period after May 1, 2006, the service is covered under banking and financial service as defined in section 65(105)(zm). (ii) If the legal position prior to notification of the Export of Services Rules, 2005 on March 3, 2005 and amendments made in the said Rules thereafter is examined, it may be seen that the phrase delivered outside India used initially could not have been understood clearly in the case of services which are intangible and so the expression was replaced by is provided from India which is an expression better understood. However the meaning of the expression used outside India continued to create interpretational difficulty till this expression also finally got deleted on February 27, (iii) A service is used by the person paying for it. In this case it is used by persons abroad and as per provisions of laws in existence prior to March 15, 2005 and thereafter as per provisions of the Export of Services Rules, 2005, the services are exported. PML is getting their payment from W located abroad and it is very obvious that the service is used by the person making the payment and not the recipient of money in India who does not make any payment. The W is getting their payment from the person remitting money abroad and hence obviously the services rendered by PML is ultimately used by the person remitting the money from abroad. So the service is used outside India and would qualify as export of services as per conditions laid down in rule 3(1)(iii) of the Export of Services Rules, These arguments are equally applicable for the period from May 1, 2006, since the service is classifiable as banking and financial services, and this service is also specified under rule 3(1)(iii) of the Export of Services Rules, 2005 and not under rule 3(1)(ii). The same principle applies to the amounts reimbursed by W for expenses incurred in promoting the business of W in India. The nature of service will not change in the hands of a sub-agent who does essentially the same service for a certain leg of the activities to complete the service and hence finding in the matter of classification of service and export of service for PML will apply to the sub-agents also. Per Rakesh Kumar (Technical Member): (i) The services provided by the agents and sub-agents throughout during the period of dispute are classifiable as business auxiliary service under section 65(105)(zzb) read with section 65(19) of the Finance Act, Unlike the movement of the goods across the international border, where the event of export or import of goods can be easily detected, determining whether a service provided by a person in India is export, is a much complex question as, the services are intangible and can be provided by various modes and for this purpose one uniform criteria for all the services cannot be adopted. In this regard, the tax on services, like tax on sale of goods is a destination based tax on consumption and thus taxable service provided by a service provider in a particular taxable area would attract service tax only when the service has been consumed in that taxable area and if the consumption of service is outside the taxable area, the service tax would not be attracted and it would be treated as export of service. Thus for taxing a service, it is not the place of performance but the place of consumption which is relevant. But determining the place of consumption is a complex task on account of intangible nature of services and the different modes by

3 which a service can be provided and can be consumed, i.e., used by the recipient to satisfy his needs. For this reason the Export of Services Rules, 2005 have been framed by the Central Government under section 94(1)(f) of the Finance Act, In this case, the service is provided by the agents to W as business auxiliary service covered by section 65(105)(zzb) read with section 65(19) of the Finance Act, Since this service is in relation to the money transfer business of W having their business establishment abroad and since this service has been received by W and used by them in their business and payment for this service has been received in convertible foreign currency, in terms of the provisions of rule 3(1)(iii) read with rule 3(2) of the Export of Services Rules, 2005, the service provided by the agents has to be treated as export of service. Since the service provided by the agents has been used by W in their money transfer business abroad, the same has to be treated as received and consumed abroad, not received and consumed in India. Consequently they have to be treated as export of services and hence not taxable in India. (ii) The sub-agents are providing services to W and it is W who is the beneficiary of the service provided by the sub-agents and since the payment for these services is received in convertible foreign currency by the agent, the services provided by the sub-agent have to be treated as export of service, not the services received and consumed in India. Regarding the reimbursement of charges for advertising, organizing promotional programs, advertisement, etc., since these services have been provided to W, and the same are in relation to the business of W, the same have to be treated as export of service. Per D. N. Panda (Judicial Member) (dissenting): (i) Service tax is a VAT which in turn is destination based consumption tax. It is an economic concept based on the principle of equivalence. Applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services. It is this principle of equivalence which has received legal support in the form of the Finance Act, Concept of export in article 286(1)(b) of the Constitution postulated the existence of two termini between which the goods were intended to move and not a mere movement of goods out of the country without any intention of their being landed in some foreign port. It therefore follows that there are two termini between which the services are intended to travel and applying principle of equivalence, the termini of the money service is India when the advice of money transfer comes from principal abroad to India. The dominant object is delivery of the remittance on behalf of foreign principal to the receiver in India. Post-performance intimation by the assessees to their foreign principal is not material for incidence of levy while the service provided in India on behalf of the foreign principal is material for the levy. India is the destination for providing money transfer service travelled from outside India for ultimate consumption and termination in India. Just like the test that the goods must have a foreign destination where they can be said to be imported, taxable service provided in India should also satisfy such basic test to say that such service was exported from India. Crucial fact is sending of the service to a foreign destination where they would be received as imports. But no such fact was present in this case. Consumption of such service was made in India and being terminated, the destination based consumption of service ended with performance thereof in India and that satisfies the performance based service tax concept. Thus no money transfer service having moved out of India to a place outside India in terms of representation, agreement, plea of export of service is untenable. The agents and sub-agents carried out the activity of money transfer in India on behalf of their foreign principals under class of business auxiliary service. Thus the assessees were liable to service tax under the taxing entry business auxiliary service. (ii) The receipts made for promotion or marketing of service provided by the foreign principal was in respect of business auxiliary service and was taxable. (iii) The Department could not demonstrate whether the gain made out of fluctuation of foreign exchange rate in any way is a consideration for providing taxable service. Therefore the gain made out of fluctuation of foreign exchange rate should not form part of assessable value. (iv) The scope of law relating business auxiliary service cannot be pleaded to be unknown to the parties. Intention to evade tax plays a vital role to invoke extended period of limitation and also levy of penalty. Therefore each and every case is to be decided on the facts. (v) Where there is claim of cum-tax benefit, such benefit may be extended subject to provision relating to determination of assessable value under the Finance Act, 1994 and also following law laid down in Amrit Agros Industries Ltd. v. Commissioner of C. Ex. [2007] 210 ELT 183 (SC) depending on the facts of each case.

4 (vi) Plea of small tax-payer s benefit may be extended subject to scrutiny of facts and law applicable to the appropriate case to avoid hardship to the small tax payers. Final Order No. ST/A/699/12, Cus. in Service Tax Appeal No. 240, Cus. in Service Tax Appeal No. 241, Cus. in Service Tax Appeal No. 652, Cus. in Service Tax Appeal No. 833, Cus. in Service Tax Appeal No. 834, Cus. in Service Tax Appeal No. 835, Cus. in Service Tax Appeal No. 836, Cus. in Service Tax Appeal No. 837 of 2008, Cus. in Service Tax Appeal No. 10, Cus. in Service Tax Appeal No. 14, Cus. in Service Tax Appeal No. 20, Cus. in Service Tax Appeal No. 285, Cus. in Service Tax Appeal No. 311, Cus. in Service Tax Appeal No. 423 of 2009, Cus. in Service Tax Appeal No. 107, Cus. in Service Tax Appeal No. 206, Cus. in Service Tax Appeal No. 224, Cus. in Service Tax Appeal No. 230, Cus. in Service Tax Appeal No. 274, Cus. in Service Tax Appeal No. 275, Cus. in Service Tax Appeal No. 276, Cus. in Service Tax Appeal No. 277, Cus. in Service Tax Appeal No. 278, Cus. in Service Tax Appeal No. 296, Cus. in Service Tax Appeal No. 297, Cus. in Service Tax Appeal No. 298, Cus. in Service Tax Appeal No. 300, Cus. in Service Tax Appeal No. 314, Cus. in Service Tax Appeal No. 315, Cus. in Service Tax Appeal No. 316, Cus. in Service Tax Appeal No. 317, Cus. in Service Tax Appeal No. 321, Cus. in Service Tax Appeal No. 323, Cus. in Service Tax Appeal No. 359, Cus. in Service Tax Appeal No. 380, Cus. in Service Tax Appeal No. 381, Cus. in Service Tax Appeal No. 388, Cus. in Service Tax Appeal No. 520, Cus. in Service Tax Appeal No. 802, Cus. in Service Tax Appeal No. 810, Cus. in Service Tax Appeal No. 1085, Cus. in Service Tax Appeal No of 2010 decided on November 21, 2012 Joseph Vallaypally, Senior Advocate, Atul Khullar, S. Malhotra, Regvesh Singh, Rajesh Chibber and Harvinder Singh, Advocates, for the appellants Fateh Singh, Sumit Kumar and B.L. Soni, Senior Department Representatives, for the Department Cases referred to : All India Federation of Tax Practitioners v. Union of India [2007] 9 VST 126 [2007] 293 ITR 406 (SC) Amrit Agros Industries Ltd. v. Commissioner of C. Ex. [2007] 210 ELT 183 (SC) Association of Leasing and Financial Services Companies v. Union of India [2010] 35 VST 549 [2010] 5 GSTR 326 (SC) Burmah Shell Oil Storage and Distributing Co. of India Ltd. v. Commercial Tax Officer [1960] 11 STC 764 Chandra Kumar (L.) v. Union of India [1997] 105 STC 618 [1997] 228 ITR 725 (SC) Commissioner of C. Ex. v. Ratan Melting & Wire Industries [2008] 12 STR 416 (SC) Commissioner of C. Ex. v. Ratan Melting & Wire Industries [2008] 231 ELT 22 (SC) Godfrey Phillips India Ltd. v. State of U. P. [2005] 139 STC 537 Jaspreet Kaur (Mrs.) & Mr. Gagandeep Singh v. CCE [2012] TIOL 142 (CESTAT-Delhi) Kerala State Financial Enterprises Ltd. v. Commr. of C. Ex. [2011] 24 STR 585 (Trib.-Bang) Moti Laminates Pvt. Ltd. v. Collector of Central Ex. [1995] 76 ELT 241 (SC) Muthoot Fincorp Ltd. v. Commissioner of Central Excise [2010] 33 VST 714 Nipuna Services Ltd. v. Commr. of C. Ex., Cus. & S. T. (AII) [2009] 14 STR 706 (Trib-Bang) Peoples Automobiles Ltd. v. Commissioner of C. Ex. [2011] 24 STR 635 (Trib.-Delhi) Ranadey Micronutrients v. Collector of Central Excise [1996] 87 ELT 19 (SC) State of Kerala v. Cochin Coal Company Ltd. [1961] 12 STC 1 Sumangalam Suitings (P) Ltd. v. Commissioner of Central Excise [2010] 19 STR 809 (Trib-Delhi) ORDER OF TWO-MEMBER BENCH MATHEW JOHN (Technical Member).-In this proceeding 10 COD applications, 6 stay applications and 42 appeals are being decided. Out of these 42 appeals 15 are filed by the assessees where the main issue is decided

5 against the assessees and 27 by the Department where the main issue was decided against the Department. The facts and issues involved are common except that the facts and issues relating to M/s. Paul Merchants Ltd. (hereinafter referred to as "PML") are slightly different from that of others because PML is a main agent to Western Union Network Ltd. (hereinafter referred to as "Western Union") and others are sub-agents to PML or to other main agents of Western Union similarly placed as PML. Page No: A show-cause notice issued by the Directorate General of Antievasion alleging that service tax is to be paid on such commission and reimbursements and has been adjudicated by the impugned order confirming tax demand of Rs. 3,35,42,092 against PML with applicable interest. Penalty equal to the duty confirmed was imposed under section 78 of the Finance Act, 1994 in addition to penalties under sections 76 and 77 of the Finance Act. Aggrieved by this order PML is before this Tribunal. The show-cause notice and the impugned order classified the service provided by PML as "business auxiliary service" as defined under section 65(105)(zzb) of the Finance Act, It may be convenient to record the main points argued by the appellants before getting into details of the arguments. The main arguments are the following: (i) The service rendered by them are more akin to "banking and financial service" and it is covered under this category from May 1, 2006 after amendment made by section 68 of the Finance Act, 2006 in section 65(12) of the Finance Act, So it is to be presumed that prior to this date this service was not taxable under "banking and financial service" or any other entry like "business auxiliary service". (ii) Whatever be the classification of services the service was rendered to clients located outside India and hence were exported. There cannot be any service tax on services exported. (iii) The question whether the services have been exported has been decided by taking law as was in force for a fraction of the period in question and applying it for the entire period ignoring different laws in existence for different periods. (iv) The demand is time-barred because the entire matter arises out of different interpretations of law and not on account of any suppression on the part of PML and hence extended period cannot be invoked. (v) There is no such demand issued to various banks which were doing the same service during the relevant period. (vi) No tax has been demanded for services prior to the period specified in the show-cause notice and for period after the period specified in the show-cause notice. The nature of service has remained the same. The laws have changed only marginally by way of some clarificatory amendments. Since no tax is being demanded for the current period it is obvious that Revenue is conceding that the service in question is exported. Page No: A show-cause notice issued by the Directorate General of Anti-

6 evasion alleging that service tax is to be paid on such commission and reimbursements and has been adjudicated by the impugned order confirming tax demand of Rs. 3,35,42,092 against PML with applicable interest. Penalty equal to the duty confirmed was imposed under section 78 of the Finance Act, 1994 in addition to penalties under sections 76 and 77 of the Finance Act. Aggrieved by this order PML is before this Tribunal. The show-cause notice and the impugned order classified the service provided by PML as "business auxiliary service" as defined under section 65(105)(zzb) of the Finance Act, It may be convenient to record the main points argued by the appellants before getting into details of the arguments. The main arguments are the following: (i) The service rendered by them are more akin to "banking and financial service" and it is covered under this category from May 1, 2006 after amendment made by section 68 of the Finance Act, 2006 in section 65(12) of the Finance Act, So it is to be presumed that prior to this date this service was not taxable under "banking and financial service" or any other entry like "business auxiliary service". (ii) Whatever be the classification of services the service was rendered to clients located outside India and hence were exported. There cannot be any service tax on services exported. (iii) The question whether the services have been exported has been decided by taking law as was in force for a fraction of the period in question and applying it for the entire period ignoring different laws in existence for different periods. (iv) The demand is time-barred because the entire matter arises out of different interpretations of law and not on account of any suppression on the part of PML and hence extended period cannot be invoked. (v) There is no such demand issued to various banks which were doing the same service during the relevant period. (vi) No tax has been demanded for services prior to the period specified in the show-cause notice and for period after the period specified in the show-cause notice. The nature of service has remained the same. The laws have changed only marginally by way of some clarificatory amendments. Since no tax is being demanded for the current period it is obvious that Revenue is conceding that the service in question is exported. Page No: 509 Classification of the service during the relevant period As already explained the argument of PML is that their activity is specifically covered under banking and financial services with effect from May 1, 2006 consequent to amendment carried out by the Finance Act, Since the intrinsic nature of the service is that of banking and financial service and it was not covered till May 1, 2006 under the entry for banking and financial service as defined, the service could not have been covered under the heading for "business auxiliary service" which is in the nature of a residuary heading. Revenue argues that PML was undertaking the service promised by the

7 Western Union to the person remitting money from abroad and thus was doing a services on behalf of their client as envisaged in clause (vi) of section 65(19) of the Finance Act, 1994 for "business auxiliary service". They further pointed out that they were doing advertising of the services of Western Union, distributing promotional literature and holding promotional activities as envisaged in clause (ii) of section 65(19) and activities incidental to such promotion as envisaged in clause (vii) of section 65(19). The fact that from May 1, 2006 the service is covered by the entry for "banking and financial service" cannot imply that the service was not covered by another entry for the previous period. This issue has to be seen with reference to the definition of the service for the relevant time. As argued by the Revenue, PML was providing service on behalf of Western Union when delivering money to the recipient in India, was providing the service of money transfer undertaken by Western Union abroad when it accepted money from a customer abroad. In fact PML was acting using the name and style of Western Union and there is hardly any scope to doubt the argument that PML was providing service to a customer on behalf of Western Union and their activity came within the definition at clause (vi) of section 65(19). PML was also doing activities of promotion and marketing of services provided by Western Union and hence covered also under clause (ii) of section 65(19). However for the period after May 1, 2006, the service is covered under "banking and financial service" as defined in section 65(105)(zm). The issue whether the service provided by PML was exported? Services being intangible, what constitutes export of services is difficult to conceive and define unlike in the case of goods which are tangible. There appears to be difficulty in identifying its direction of movement. But the matter has been receiving attention of world trading community and norms have evolved. Based on such norms, on March 3, 2005, the Government of India notified the Export of Services Rules, 2005 to Page No: 510 prescribe the Rules in this regard which rules came into force on March 15, So from March 15, 2005 the matter is to be tested in terms of the rules laid down in the said Rules and not according to the varying opinions of individuals. The period under dispute starts from July 1, So there is some dispute as to what should be the criteria to be adopted for the period prior to March 15, In fact one of the major contentions of the PML is that the case has been adjudicated without considering different laws that existed for different parts of the period in question. It is also relevant to note that after March 15, 2005 there have been few amendments in the Export of Services Rules, So even after March 15, 2005 the issue may have to be examined for different periods. After hearing both sides at length on the issue whether the service is exported or not, it is seen the contrast in the arguments on both sides is as under: (i) PML argues that it is providing services to Western Union situated abroad with whom PML is having a contract for providing services and PML gets its remuneration from Western Union. Further the ultimate beneficiary of the service is the person situated abroad who approaches the office of Western Union abroad and who pays for the services. So this is a

8 case of export of services as laid down in the Export of Services Rules, (ii) The Revenue contests that the activity of making payment to the recipient in India is the only service which PML is rendering and this service is rendered in India. The receiver of its service is the person receiving the remittance in India. The Revenue argues that no part of the service done by PML is exported. To buttress this argument the learned Senior Departmental Representative relies on clauses 1, 3, 4A and 4B of the contract. However there is no need to reproduce these clauses in this order because there is no contest on the issue that the activities of PML are carried out in India. Now it is beneficial to study the Export of Services Rules, As per these Rules, taxable services are categorized into three categories and for different categories different criteria are laid down to decide whether the service is exported. The position is explained below: (In the discussion below it may be noted that the rule numbers are quoted with reference to the position after amendment of the Export of Services Rules by Notification 13/2006-S.T., dated April 19, The rule 3(1)(i) corresponded to rule 3(1) earlier, rule 3(1)(ii) corresponded to rule 3(2) earlier and rule 3(1)(iii) corresponded to rule 3(3) earlier.) Page No: Category-I, i.e., for services specified in rule 3(1)(i) For services specified under this sub-rule, export of services shall be provision of services as are in relation to an immovable property situated outside India Category-Il, i.e., for services specified in rule 3(1)(ii) For services specified under this sub-rule, export of taxable services shall be provision of such services as are performed outside India. There are some additional conditions specified which are not relevant to the dispute at hand and hence not elaborated Category-Ill, i.e., for services specified in rule 3(1)(iii) For services specified under this sub-rule the export of taxable services shall be when such services are provided in relation to business or commerce and when provision of such service is to a recipient located outside India at the time of provision of such service. It needs to be recorded that "business auxiliary service" defined at section 65(105)(zzb) falls in this category and there is no dispute about it. So is the case of "banking and financial service" defined at section 65(105)(zm). There are additional conditions which need to be examined. There is also the complication that these additional conditions were changed from time to time during the disputed period. In the matter of services rendered by intermediaries like that of a stock broker, commission agent, insurance agent, etc., there are two sets of beneficiaries of the activity of the intermediary. In the case of a stock broker the buyer and seller of the stock are beneficiaries. In the case of a commission agent also the buyer and seller are beneficiaries. In the case of insurance policy, the insurer and the insured are beneficiaries. In the scheme of service tax levy, there is tax only if any remuneration is received by the person providing service. In the case of stock broker, commission is

9 paid by both the buyer and the seller and both the commissions are subject to tax. In the case of insurance policy only the insurer pays commission and not the insured. The commission paid by the insurer is subject to tax. In the case of impugned service the recipient of money in India is not paying any commission. So we are clearly not dealing with the service rendered by PML to the receiver of money. The entire discussion is about the commission received from Western Union and this commission is obviously for the service rendered to Western Union. Once it is recognized that service and consideration paid for such service flows in opposite directions, so long as the arrangement for payment is bona fide and is in the ordinary course of business, the entire issue can be dealt with clarity. Once this clarity is achieved the other issues that emerge can be very easily sorted out. Page No: 512 The entire argument of the Revenue is based on the fact that the activities of PML are performed in India though words like "used in India" are used while arguing the point. We say so because there is no doubt that the use of the service is by the person paying for it that is Western Union and through them the person abroad who wants to remit the money and hence the use is outside India. But Revenue wants that the issue of export should be decided with reference to place of performance of service by PML, ignoring the fact that business auxiliary service is not specified at rule 3(1)(ii) where performance of service is the criterion but specified at rule 3(1)(iii) wherein criteria are different. If performance is the criterion to be adopted for deciding what constitutes export for business auxiliary service what is required is to specify the service defined at section 65(105)(zzb) in rule 3(1)(ii) of the Export of Services Rules, It is a different matter that even under rule 3(1)(ii), the criteria laid down indicate that if the service is performed partly outside India, it will be considered that the service is performed outside India and specifying the service under rule 3(1)(ii) itself may not result in the outcome as desired by the learned Senior Departmental Representative. At any rate, after specifying it in rule 3(1)(iii), it is fallacious to argue that the criterion applicable for services at rule 3(1)(ii) should be applied for this service. Though the issue is fundamentally clear from what is stated above it is necessary to deal with the matter in more detail because of the cob-web accumulated by the arguments of the Revenue. It is also appropriate to note that the issue has been clarified by the Ministry vide Circular No. 111/ 05/2009-S.T., dated February 24, 2009 which is reproduced below: "Subject: Applicability of the provisions of the Export of Services Rules, 2005 in certain situations In terms of rule 3(2)(a) of the Export of Services Rules, 2005, a taxable service shall be treated as export of service if 'such service is provided from India and used outside India'. Instances have come to notice that certain activities, illustrations of which are given below, are denied the benefit of export of services and the refund of service tax under rule 5 of the Cenvat Credit Rules, 2004 (Notification No. 5/ 2006-C.E. (N.T.), dated March 14, 2006) on the ground that these activities do not satisfy the condition 'used outside India',- (i) Call centres engaged by foreign companies who attend to calls from customers or prospective customers from all around the world including from India;

10 Page No: 513 (ii) Medical transcription where the case history of a patient as dictated by the doctor abroad is typed out in India and forwarded back to him; (iii) Indian agents who undertake marketing in India of goods of a foreign seller. In this case, the agent undertakes all activities within India and receives commission for his services from foreign seller in convertible foreign exchange; (iv) Foreign financial institution desiring transfer of remittances to lndia, engaging an lndian organisation to dispatch such remittances to the receiver in India. For this, the foreign financial institution pays commission to the lndian organisation in foreign exchange for the entire activity being undertaken in India. (emphasis 1 supplied) The departmental officers seem to have taken a view in such cases that since the activities pertaining to provision of service are undertaken in India, it cannot be said that the use of the service has been outside India. 2. The matter has been examined. Sub-rule (1) of rule 3 of the Export of Services Rules, 2005 categorizes the services into three categories: (i) Category (I) (rule 3(1)(i)): For services (such as architect service, general insurance service, construction service, site preparation service) that have some nexus with immovable property, it is provided that the provision of such service would be 'export' if they are provided in relation to an immovable property situated outside India. (ii) Category (ll) (rule 3(1)(ii)): For services (such as rent-a-cab operator, market research agency service, survey and exploration of minerals service, convention service, security agency service, storage and warehousing service) where the place of performance of service can be established, it is provided that provision of such services would be 'export' if they are performed (or even partly performed) outside India. (iii) Category (lll) (rule 3(1)(iii)): For the remaining services (that would not fall under category I or II), which would generally include knowledge or technique based services, which are not linked to an identifiable immovable property or whose location of performance cannot be readily identifiable (such as, banking and other financial services, business auxiliary services and telecom services), it has been specified that they would be 'export',- 1 Here italicised. Page No: 514 (a) If they are provided in relation to business or commerce to a recipient located outside India; and (b) If they are provided in relation to activities other than busi-

11 ness or commerce to a recipient located outside India at the time when such services are provided. 3. It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation. Keeping this principle in view, the meaning of the term 'used outside India' has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under architect service (a category I service (rule 3(1)(i)), even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service (rule 3(1)(ii)) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U. K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III (rule 3(1)(iii)), the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase 'used outside India' is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for category III services (rule 3(1)(iii)), it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company. Similar would be the treatment for other category III (rule 3(1)(iii)) services as well. 4. All pending cases may be disposed of accordingly. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned. These instructions should be given wide publicity among trade and field officers. 5. Please acknowledge receipt. 6. Hindi version follows." Because of the confusion that was building on the interpretation of the Export of Services Rules, the Government of India amended the Export of Services Rules vide Notification 6/2010-S.T., dated February 27, 2010 and Page No: 515 also issued Circular vide Letter D.O.F. No. 334/1/2010-TRU, dated February 26, Some relevant extracts from the letter are given below: "7. Amendment to the Export of Services Rules, Export of Services Rules, 2005 have been amended as follows: The taxable service, namely 'mandap keeper service' has been shifted from the list under rule 3(1)(ii) (i.e., performance related services) to the list under rule 3(1)(i) (immovable property related services) and three taxable services, namely 'chartered accountant services', 'cost accountant services' and 'company secretary's services', have been shifted from the list under rule 3(1)(ii), (i.e., per-

12 formance related services) to the list under rule 3(1)(iii) (residual category of services). Notification No. 6/2010-S.T., dated February 27, 2010 refers. Identical changes have been made under the Taxation of Services (Provided from outside India and Received in India) Rules, 2006 as well (Notification No. 6/2010-S.T., dated February 27, 2010 refers); The condition prescribed under rule (2)(a), i.e., 'such service is provided from lndia and used outside lndia' has been deleted (Notification No. 6/2010-S.T., dated February 27, 2010 refers). 6.1 (sic) These changes have been carried out keeping in view of certain difficulties that were faced by the trade while following the aforesaid rules." The learned Representative of the Department feels that these clarifications are not in conformity with the Rules and legal principles at large because service tax is a "destination based consumption tax" as held by the honourable Supreme Court in All lndia Federation of Tax Practitioners v. Union of lndia [2007] 9 VST 126 (SC) [2007] 293 ITR 406 (SC); [2007] 7 STR 625 (SC) and the service is consumed in India and the service is terminated in India according to his perception. (This perception needs testing against the fundamental postulate that the taxable part of the service provided by the service provider to the two parties and payment in consideration flows in opposite directions, so long as there is nothing artificial about the funds flow). At any rate the learned Senior Departmental Representative has serious reservation in applying these clarifications issued in 2009 and 2010 to a dispute for the period 2003 to Even with the clarification he has an argument because he does not agree that "benefits of these services accrue outside India". The matter has also been decided by the Bangalore Bench of the Tribunal in Muthoot Fincorp Ltd. v. Commissioner of Central Excise, Visakhapatnam [2010] 33 VST 714 (CES- TAT-Bang); [2010] 17 STR 303 (Trib.-Bang). But the learned Senior Page No: 516 Departmental Representative has serious reservations in accepting this decision. He argues that this decision relies on the decision of Nipuna Services [2009] 14 STR 706 (Trib.-Bang) which deals mainly with the issue whether the payments were received in foreign exchange and does not deal with the issue whether service was utilized outside India and that decision does not give any ratio applicable for this case. The reservation of the learned Senior Departmental Representative in accepting the decision in Muthoot Fincorp Ltd. [2010] 33 VST 714 (CESTAT-Bang); [2010] 17 STR 303 (Trib.-Bang) is so vociferous that this Bench is of the view that a second examination of the issue without any reference either to the Board's circular or the decision of the Tribunal in the case of Muthoot Fincorp Ltd. [2010] 33 VST 714 (CESTAT-Bang); [2010] 17 STR 303 (Trib.-Bang) may help in avoiding such arguments in future on the same issue. For this the legal position prior to notification of the Export of Services Rules, 2005 on March 3, 2005 and amendments made in the said Rules after March 3, 2005 need to be stated and examined From April 9,1999 to February 28, 2003 The service was exempt under Notification No. 6/99-S.T., dated April 9, 1999 so long as payment for the service was received in convertible

13 foreign exchange. The impugned order is bad in law because the matter relating to this period is not examined with reference to this notification From March 1, 2003 to November 19, 2003 Notification 6/99-S.T., dated April 9, 1999 was rescinded by Notification No. 2/03-S.T., dated March 1, But the Board issued a clarification vide Circular 56/05/2003-S.T., dated April 25, Para 3 is reproduced below: "3. The Board has examined the issue. In this connection I am directed to clarify that the service tax is destination-based consumption tax and it is not applicable on export of services. Export of services would continue to remain tax-free even after withdrawal of Notification No. 6/99 dated April 9, Further it is clarified that service consumed/provided in India in the manufacture of goods which are ultimately exported, no credit of service tax paid can be availed or reimbursed at present as inter-sectoral tax credit between services and goods are not allowed." 20.3 From November 20, 2003 to March 2, 2005 The exemption was restored under Notification No. 21/2003-S.T., dated November 20, 2003 subject to the condition that payment is received Page No: 517 in foreign exchange. The impugned order is bad in law because the matter relating to this period is not examined with reference to this notification Position from March 3, 2005 to June 15, 2005 For services specified under this sub-rule the taxable services shall be considered as exported if,- "(i) such taxable services which are provided and used in or in relation to commerce or industry and the recipient of such services is located outside India: Provided that if such recipient has any commercial or industrial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of services only if- (a) order for provision of such service is made by the recipient of such service from any of his commercial or industrial establishment or any office located outside India; (b) service so ordered is delivered outside lndia and used in business outside lndia; and (c) payment for such service provided is received by the service provider in convertible foreign exchange; (ii) such taxable services which are provided and used, other than in or in relation to commerce or industry, if the recipient of the taxable service is located outside India at the time when such services are received.

14 Explanation. For the purposes of this rule 'India' includes the designated areas in the Continental Shelf and Exclusive Economic Zone of India as declared by the notifications of the Government of India in the Ministry of External Affairs Nos. S.O. 429(E), dated the July 18, 1986 and S.O. 643(E), dated the September 19, 1996." The learned Senior Departmental Representative is harping on the condition (i)(b) as highlighted above which is applicable only if such recipient has any commercial or industrial establishment or any office relating thereto, in India. There is no case that Western Union had an office in India and the agreement was signed by any office of Western Union in India. Of course the notification as amended for later periods this condition was made applicable without reference to office in India Position from June 16, 2005 to April 18, 2006 "After the first proviso, the following proviso shall be inserted, namely:- Page No: 518 Provided further that for the purposes of this sub-rule, any taxable services provided shall be treated as export of services only if- (a) such service is delivered outside India and used in business or for any other purpose outside India; and (b) payment for such service provided is received by the service provider in convertible foreign exchange." 20.6 Position from April 19, 2006 to February 28, 2007 "The provision of any taxable service shall be treated as export of service when the following conditions are satisfied, namely:- (a) such service is delivered outside India and used outside India; and (b) payment for such service provided outside India is received by the service provider in convertible foreign exchange." 20.7 Position from March 1, 2007 to March 31, 2008 "The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:- (a) Such service is provided from India and used outside India; and (b) Payment for such service provided outside India is received by the service provider in convertible foreign exchange." It may be seen that the phrase "delivered outside India" used initially could not have been understood clearly in the case of services which are

15 intangible and so the expression was replaced by "is provided from India" which is an expression better understood. However the meaning of the expression "used outside India" continued to create interpretational difficulty till this expression also finally got deleted on February 27, PML argues that their services are used in the business of Western Union in their business outside India. Revenue argues that the service is utilized in the business of Western Union in India, because all the activities of PML are carried out in India. Here it is to be noted that the Revenue is equating "used" with "performed" though they are directly not stating so. After having used the word "performed" in rule 3(1)(iii) of the Export of Services Rules, if the same word is not used and a different word is used in rule 3(1)(iii) it is obvious that the words are not interchangeable. Further as already explained PML is getting their payment from Western Union located abroad and it is very obvious that the service is used by the person making the payment and not the recipient of money in India who does not make any payment. The Western Union is getting their payment from the Page No: 519 person remitting money abroad and hence obviously the services rendered by PML are ultimately used by the person remitting the money from abroad. So we come to the conclusion that the impugned service is used outside India and would qualify as export of services as per conditions laid down in rule 3(1)(iii) of the Export of Services Rules, These arguments are equally applicable for the period from May 1, 2006, since when the service is classifiable as "banking and financial services", because this service is also specified under rule 3(1)(iii) of the Export of Services Rules, 2005 and not under rule 3(1)(ii). Now there is the issue whether any tax has to be paid on the amounts reimbursed by Western Union for expenses incurred in promoting the business of Western Union in India. In the context of these services PML makes it clear that for the advertisements given, the advertising agency has charged service tax from them and they have paid such tax. These services allegedly provided by PML to Western Union are also sought to be classified under business auxiliary services and hence the arguments given in respect of commission received from Western Union is equally applicable to these reimbursements also. So there is no scope for any separate examination of this issue Having formed our views we have checked whether our views are in conformity with the previous decisions of this Tribunal. We find that in the matter of classification of service the Tribunal in the case of Muthoot Fincorp Ltd. [2010] 33 VST 714 (CESTAT-Bang); [2010] 17 STR 303 (Trib.- Bang) had not given any specific ruling. We have ruled that the service was classifiable as business auxiliary service prior to May 1, 2006 and as banking and financial service from May 1, At any rate this finding is not of consequence to the final outcome of the dispute In the matter whether the service was exported the finding is the same as in previous decisions though the reasoning used and presentation of such arguments for arriving at the finding are different. The finding is essentially that the issue should be decided using the parameters specified in the relevant law, specifically the Export of Services Rules, 2005 after its notification and not according to any other criteria that may appear appealing to common sense. The ruling is also that the service is used by the person paying for the service and hence in this case it is used by persons abroad and as per the provisions of laws in existence prior to March 15,