Technical Services For Japan-Based Entity's Rajasthan Project Qualify As Export: CESTAT New Delhi

On 4 November, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, held that technical services provided to an overseas entity for a factory construction project in Rajasthan qualified as export of services and were not liable to service tax in India.

A Bench comprising Judicial Member Ashok Jindal and Technical Member P.V. Subba Rao allowed the appeal, holding that the services fell under Consulting Engineer Services rather than Real Estate Agent Services and that their place of provision was outside India. It said:

“Adopting section 65(2) (c), the services rendered by the appellant to C&B Japan deserve to be classified as 'Consulting Engineer Services' under section 65(105)(g). Consequently, the place of provision of service is the location of the service recipient, viz., Japan. Consequently, no service tax has to be paid on these services.”

The dispute arose from an audit covering the period 2005-06 to 2009-10. The Department alleged that the appellant had failed to pay service tax on services provided to an overseas associated entity in connection with the construction of a greenfield consumer products factory for Unicharm Corporation at Neemrana, Rajasthan.

The services included preparing bills of quantities for civil and mechanical, electrical and plumbing (MEP) works, estimating steel quantities, verifying specifications and analysing rates.

The Department classified these activities as Real Estate Agent Services on the ground that they related to the development and construction of immovable property in India.

The Commissioner confirmed a service tax demand of Rs. 34.07 lakh on these services, Rs. 30.03 lakh on alleged differences in debtors' reconciliation and Rs. 1.72 lakh on reimbursable expenses. The Commissioner also imposed interest and a penalty of Rs. 65.83 lakh.

The Tribunal observed that the services could fall under both Consulting Engineer Services and Real Estate Agent Services. Since neither the specific-description test nor the essential-character test resolved the classification dispute, it applied Section 65A(2)(c) of the Finance Act, 1994.

Under this provision, where two classifications equally merit consideration, the category appearing first in the statutory list must be adopted. Since Consulting Engineer Services precedes Real Estate Agent Services, the Bench classified the services under the former category.

As the recipient was located in Japan, the place of provision of services fell outside India under the Export of Services Rules, 2005. Therefore, the Tribunal held that the services qualified as exports and attracted no service tax.

On reimbursable expenses, it relied on the Supreme Court's decision in Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India. It noted that the Supreme Court had declared Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, ultra vires.

Further, the Bench noted that the subsequent amendment to Section 67, which included reimbursable expenses in the taxable value, took effect only on 14 May 2015. It therefore held that the Department could not sustain the demand for the earlier period.

It also set aside the demand arising from the debtors' reconciliation. It found that the Department had compared billing figures inclusive of service tax with receipts exclusive of service tax, resulting in an incorrect mismatch. It further held that the Department had to establish the actual receipt of additional consideration before raising a demand.

On limitation, the Tribunal held that mere non-payment of service tax or an incorrect self-assessment did not amount to suppression of facts. The Department could invoke the extended period under Section 73(1) only if it established fraud, collusion, wilful misstatement or suppression of facts with intent to evade tax. It said:

“...Even if there was a demand sustainable on merits and if no SCN is issued within time and there is no evidence of fraud or collusion or wilful misstatement or suppression of facts or violation of Act or Rules with an intent to evade, the demand cannot be sustained. The responsibility for time bar rests at the doorstep of the Range officer who failed to scrutinise the returns in time.”

Since the appellant had filed its ST-3 returns and the Department had not established deliberate suppression, the Bench held that the extended period was unavailable.

Accordingly, the CESTAT allowed the appeal, set aside the impugned order and granted consequential relief.

For Appellant: Shri A. K. Batra and Ms. Sakshi Khanna, Chartered Accountants

For Respondent: Shri Rakesh Kumar, Authorised Representative