Expenses incurred for services provided and consumed outside India are not taxable under Reverse Charge Mechanism
CESTAT Rules Against Service Tax on Overseas Services by Rategain I.T. Solutions. Tribunal Upholds Non-Taxability of Services Provided and Consumed Outside India under Reverse Charge Mechanism
In a significant ruling, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) New Delhi Principal Bench has upheld the decision exempting Rategain I.T. Solutions Pvt. Ltd. from paying service tax under the Reverse Charge Mechanism for services provided and consumed outside India. The decision comes as a relief for companies engaged in international operations, offering clarity on the application of service tax laws to services rendered in non-taxable territories.
The Tribunal, comprising Ms. Binu Tamta and Mr. Sanjiv Srivastava, dismissed the appeal filed by the Principal Commissioner, CGST, Delhi South Commissionerate, challenging the adjudicating authority's order which dropped the demand for service tax amounting to Rs. 5,97,36,178. The appeal had contested the non-payment of service tax by Rategain for expenses incurred in foreign exchange for services such as marketing, professional fees, and software licenses, among others.
Rategain, a software solutions provider to the hospitality and travel sectors, argued that the services were performed and consumed entirely outside India, specifically by their branch office in the UK. The company emphasized that no services were received in India, making them non-taxable under the Reverse Charge Mechanism. The Tribunal agreed, noting that the Place of Provision of Services Rules, 2012 and Section 66B of the Finance Act, 1994, support the non-taxability of services rendered and consumed outside India.
The Tribunal underscored the importance of determining the location of service consumption for tax liability, stating that service tax is applicable only within the taxable territory, defined as the whole of India except Jammu and Kashmir. It further clarified that intermediary services provided through agents located abroad fall outside the scope of Indian service tax under Rule 9 of the Place of Provision of Services Rules, 2012.
The judgment also addressed the SEZ exemption, noting that services provided within the Special Economic Zone (SEZ) are treated as outside the customs territory of India, thereby exempt from service tax. Rategain's operations within the SEZ until August 2012 were deemed non-taxable under Section 53 of the SEZ Act.
This ruling provides a precedent for companies with overseas branches, reinforcing the principle that service tax is a destination-based tax applicable only within the jurisdiction of consumption. Legal experts view this as a reaffirmation of established norms in international taxation, ensuring that services consumed abroad remain outside the purview of Indian tax authorities.
Bottom Line:
Expenses incurred for services provided and consumed outside India are not taxable under Reverse Charge Mechanism (RCM). Interpretation of Place of Provision of Services Rules, 2012 and Section 66B of the Finance Act, 1994.
Statutory provision(s): Section 66B of the Finance Act, 1994, Place of Provision of Services Rules, 2012, Section 53 of the SEZ Act, Section 66D of the Finance Act, 1994, Notification No. 17/2011-ST, Rule 9 of Place of Provision of Services Rules, 2012
