What is uncertain in tax laws is interpretation of legal provisions, with certainty of litigation. This is particularly true, where nothing/ less goes to kitty of the Government, and more are to be doled out as incentives. Export of services is one such transaction, which is treated as tax-free or zero-rated (as it is called under GST laws). From being regulated by way of delegated legislations in the form of rules and circulars in initial days of service tax regime, it has come a long way, where the whole regime is governed by the Act itself.
Rules governing export of services were introduced for the first time in 2005 in the form of Export of Services Rules, 2005 (‘EOS Rules’). EOS Rules were no exception and witnessed heavy litigation from the department as also frequent amendments. The condition of ‘used outside India’ posed interpretational issues for all stakeholders, having views in the form of different judgments from courts, as also circulars from CBIC.
In Arcelor Mittal Stainless India Private Limited v. CST, Mumbai-II[1], the Larger Bench of the Hon’ble CESTAT has recently delivered its judgment on 9 June 2023, interpreting this condition in favour of exporters and holding that where Business Auxiliary Services (‘BAS’) are provided to recipient located outside India and consideration is received in convertible foreign exchange, it will qualify as export of service.
In this particular case, Arcelor France was appointed as a commission agent for steel mills situated outside India. Arcelor France was required to procure sale orders for the products manufactured by these steel mills from customers across the world. Arcelor India was appointed as a sub-agent by Arcelor France. Arcelor India had a limited role to identify prospective customers and forward their requirements or the requirements of customers who approached it on their own, to foreign steel mills. Once the request was forwarded, the customers and foreign steel mills would directly communicate with each other. Arcelor India was not privy to details such as purchase orders/agreements etc., entered between foreign steel mills and Indian customers. Even the goods were supplied directly by the foreign steel mills to the Indian customers. Being commission agent, Arcelor France received commission from foreign steel mills and a part of this commission was paid to Arcelor India by Arcelor France on the basis of volume of sales.
In this background, it was concluded that since services are provided by Arcelor India to Arcelor France located outside India, such services are used outside India, qualifying as export of services. That location of service recipient being outside India is the determining factor for fulfilment of this condition.
It extensively referred to CBIC’s Circular dated 24 February 2009 to conclude that the phrase ‘used outside India’ would mean that the benefit should accrue outside India. Distinguishing the judgment of Hon’ble Supreme Court in GVK Industries Ltd. v. Income Tax Officer[2], it observed that service tax is destination-based consumption tax, wherein location of service receiver is relevant factor and not place of performance. Moreover, on the basis of fact that consideration was flowing from Arcelor France, it held that Arcelor France used the services of Appellant to provide services as main agents to the mills located outside India.
In arriving at this conclusion, the bench also analyzed the important aspect of who is a ‘service recipient’. This term, unlike in GST regime, was not defined in service tax law, and was susceptible to doubts, particularly in cases of inter-dependent transactions with involvement of multiple parties. It has been held that service recipient is the person who makes a request for a service, in exchange for a consideration, and is liable to pay for such services received. Service recipient is not a person who is affected by performance of a service. In facts of this case, it was held that contractual relationship of Arcelor India was with Arcelor France, and not customers in India, though steel products were supplied to such customers in India. In other words, the customer of your customer is not your customer.
‘Recipient’ of supply, however, has been defined under the GST regime, largely based on the above explanation, which, prior to judgment of Larger Bench, was also explained in similar way in other judgments.
At this stage, it becomes pertinent to analyse whether this decision of the Larger Bench will have any impact in GST regime. The definition of export of services under Section 2(6) of the IGST Act, inter alia, provides that where the recipient of service is located outside India and the place of supply of service is outside India, it will qualify as export of service.
A perusal of definition of ‘location of the recipient of services’ in Section 2(14) of the IGST Act shows that it is based on where services are received. Premises, where services are received, becomes the location of the recipient of services. Further, the definition of ‘recipient’ given under the GST law refers to the person who is liable to pay the consideration. Therefore, the GST law has already taken care of similar situations and Larger Bench might have taken note of the definitions given in the GST law while arriving at its conclusion.
While the judgment by Larger Bench, settles the issue of whether BAS provided by Indian agents to foreign entities qualifies as export of services under service tax regime, it is important to note that the department has consistently challenged this settled position. This issue is also pending before the Hon'ble Supreme Court for final resolution.
The aforesaid decision of the Larger Bench will bring a sigh of relief for the assessees whose service tax litigations are pending at various forums. However, one should wait and watch the outcome at the Supreme Court.
Businesses must closely monitor and analyze the developments, as it will have significant implications for their operations and tax obligations in relation to cross-border service transactions.
[The authors are Consultant, Associate Partner and Partner, respectively, in the Indirect Tax practice at Lakshmikumaran & Sridharan Attorneys, Jaipur]
[1] 2023-VIL-516-CESTAT-MUM-ST
[2] 2015 (2) TMI 730 (Supreme Court)
