Salaries And Consultancy Reimbursements To Foreign Joint Venture Not Taxable: CESTAT Chennai

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) on 5 February held that reimbursements made by an Indian company to its overseas joint venture do not constitute consideration for taxable services and are therefore not liable to service tax under the Finance Act, 1994.

A Bench comprising Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao dismissed the appeal filed by the Revenue and upheld the order dropping the service tax demand against Kaar Technologies India Pvt. Ltd. (the taxpayer), observing that no service provider–recipient relationship existed and that the entire activity took place in a non-taxable territory.

The Bench held:

"Payment of consultancy charges paid by the Respondent Assessee to a JV situated abroad (Saudi Arabia), in the present set of facts, cannot be subjected to levy of Service Tax under the Finance Act, 1994."

The taxpayer was engaged in providing Information Technology software services, including SAP implementation, to clients in India and the Middle East. For executing projects abroad, it had set up a joint venture with Baas International Group, Saudi Arabia, through an overseas entity, which incurred local expenses such as salaries, consultancy charges, accommodation, and other on-site costs. These expenses were periodically reimbursed by the assessee through debit notes and recorded as consultancy charges or purchase of services in its books.

The dispute arose from a service tax appeal filed by the Commissioner of GST & Central Excise, Chennai South, against the Order-in-Original. The Revenue alleged that these arrangements amounted to receipt of Business Support Services and Information Technology Services from a non-taxable territory, attracting service tax under reverse charge for the period prior to 1 July 2012 and under Section 65B(44) of the Finance Act thereafter. It further alleged that the taxpayer failed to realise full export proceeds in convertible foreign exchange, thereby violating Rule 6A of the Service Tax Rules, 1994, with implications under the Cenvat Credit Rules, 2004.

Rejecting these contentions, the Tribunal held that the overseas joint venture had not rendered any taxable service to the assessee and had merely acted as a pass-through entity to incur local expenses in compliance with business and regulatory requirements abroad. It noted that reimbursements of salaries and other on-site costs cannot be treated as consideration for services.

The Bench further observed that the expanded scope of "operational or administrative assistance" under Business Support Service was brought into the tax net only from 1 May 2011 and could not be applied retrospectively. Even after 1 July 2012, services rendered and consumed entirely outside India between entities located in a non-taxable territory were not liable to service tax.

The Tribunal opined:

"When any service is provided outside the taxable territory between two persons who are not connected to the branch office in India, and the services are not provided to the Assessee situated in India, such services cannot be brought under the tax net for payment of service tax."

Relying on various case laws, the Bench concluded that reimbursements are not taxable and that branches or overseas establishments cannot be artificially treated as independent service providers for the levy of service tax.

Accordingly, the CESTAT dismissed the Revenue's appeal and upheld the dropping of the service tax demand.

For Appellant: Advocate, Dr. S. Subramanian

For Respondent: Advocate, Radhika Chandrasekar