CESTAT Allahabad Quashes ₹77 Cr Demand On Samsung, Holds Mere Foreign Payments Do Not Trigger Service Tax

On 19 May, the Allahabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that service tax under the reverse charge mechanism cannot be levied merely on the basis of payments made in foreign currency, and that the Department must first establish receipt of a taxable service.

Judicial Member P.K. Choudhary and Technical Member P. Anjani Kumar set aside service tax demands exceeding Rs 77 crore raised against Samsung Electronics India Pvt. Ltd. for the period July 2006 to June 2017. The Bench held:

“....in case of expenses on events, exhibition and accommodation services etc., the place of provision of service is the location of said event. As the place of provision in these cases is outside India, we hold that services have not been received or imported into India. Therefore, the Appellants are not liable for payment of service tax on the expenses incurred on these events outside India. Demand of Rs.3,44,90,334/- is therefore hereby set aside…”

The dispute arose from a departmental audit which noted that Samsung had made foreign currency payments to overseas entities and recorded them under “Advertisement and Sales Promotion Charges.”

The Department alleged that these constituted import of taxable services and issued multiple show cause notices demanding service tax under Section 66A of the Finance Act, 1994 and subsequent reverse charge provisions.

Samsung contended that the payments included import of goods, overseas exhibitions and events, accommodation services consumed abroad, reimbursements, accounting entries, and currency fluctuations, none of which amounted to taxable import of services.

The Tribunal accepted this position and held that payments for import of goods cannot be recharacterised as services merely because they are made in foreign currency. It further held that the Department proceeded on presumptions without identifying any specific taxable service and relied on Chartered Accountant certificates and import documentation produced by Samsung.

On accounting entries, the Bench held that provisional or accrual entries do not create service tax liability in the absence of actual payment or a taxable transaction. It also noted that under Rule 7 of the Point of Taxation Rules, liability under reverse charge arises only on payment or within the prescribed period from the invoice date.

For expenses relating to overseas events, exhibitions, accommodation, and FIFA World Cup-related activities, the Bench held that the place of provision was outside India under the Place of Provision of Services Rules, and therefore no tax could be levied.

The Tribunal also held that reimbursements to overseas group entities or expenses incurred on behalf of foreign headquarters do not constitute consideration for taxable services, and rejected the Department's attempt to treat all foreign currency payments as taxable imports of services. It noted:

“....in respect of above demand Revenue has not identified the nature of service. There can be no presumption that all payments in foreign currency are towards receipt of taxable service...... demand of service tax Rs.11,71,274/- & Rs.8,764/- is not maintainable and is therefore set aside.”

Finally, the Bench accepted Samsung's plea of revenue neutrality, noting that any service tax liability under reverse charge would, in any case, have been available as Cenvat credit to the company.

Accordingly, the CESTAT quashed the entire demand of service tax, along with interest and penalties.

For Appellant: Shri Kapil Vaish, Chartered Accountant and Ms. Daliya Singh, Advocate

For Respondent: Shri A. K. Choudhary, Authorized Representative