2014TIOL465CESTATDEL

INTHECUSTOMS,EXCISEANDSERVICETAXAPPELLATETRIBUNAL
WESTBLOCKNO.2,RKPURAM,NEWDELHI110066
PRINCIPALBENCH,NEWDELHI
COURTNO.I
STAppealNo.819of2008
ArisingoutoftheOrderinOriginalNo.70/VKG/CST/2008Dated:29/08/2008
PassedbyTheCommissionerofCentralExcise,Meerut
DateofHearing:10.1.2014
DateofDecision:28.2.2014
M/sGAPINTERNATIONALSOURCING(INDIA)PVTLTD
Vs
COMMISSIONEROFSERVICETAX
AppellantsRepby:S/ShriNVenkataraman,Sr.Adv.,ShriDheerajSrivastavaAndMsRajeshwariKG,
Advs.
RespondentRepby:ShriAmreshJain,AuthorizedRepresentative(DR)
CORAM:ArchanaWadhwa,Member(J)
RakeshKumar,Member(T)
ServiceTaxservicesforforeignentityrelatingtoprocurementofgoodsrecommendingfabrics
to be used for manufacture of garments, recommending vendors from which fabrics, yarn,
zippers, buttons, snap fasteners etc. can be procured, reporting the status of manufacture of
products by the chosen vendors, analyzing the reports of the samples sent by the vendors,
givingrecommendationabouttheproductintegrity,inspectingexportconsignmentsandissuing
inspection certificates etc. Whether export of service or taxable in India: when the service
providedbyapersoninIndiaisconsumedandusedbyapersonabroad,itistreatedasexport:
ThoughtheserviceshavebeenperformedinIndia,theseservicesbeingBusinessAuxiliaryServicesare
inrespectofthebusinessoftheappellantsprincipallocatedabroad.Theservicesbeingprovidedbythe
appellant are obviously meant for and are used by M/s GAP, U.S.A. for their business. The services
being provided by the appellant are covered by Clause (iii) of Rule 3 (1) of Export Service Tax Rules,
2005, as these services are in relation to business or commerce and in terms of this clause, readwith
subrule (2) of Rule 3, these services would be treated as exported out of India if the recipient is
located outside India and the same have been delivered outside India and used India and payment for
the same has been received by the service provided in convertible foreign exchange. There is no
disputethatthepaymentfortheseserviceshasbeenreceivedinconvertibleforeignexchangeandthe
paymenthasbeenmadebyM/sGAP,U.S.A.locatedabroad,nothavinganyestablishmentorbranchin
India.
Export of Service Rules, 2005 and Taxation of Service (provided from outside India and received in
India) Rules, 2006, readwith Section 66A of theFinance Act, 1994 are fully in accordance with the law
laiddownbytheApexCourtincaseofAllIndiaFederationofTaxPractitioners(supra)andAssociation
of Leasing and Financial Service Companies (supra) that service tax is a value added tax, which, in
turn, is a destination based consumption tax in the sense that it is not a charge on business but is a
charge on the consumer. Therefore what constitutes export of service has to be decided strictly in
accordancewiththeprovisionsofExportofServiceRules,2005.
Inthiscase,M/sGAP,U.S.A.donothaveanybranchorprojectorbusinessestablishmentinIndia.The
serviceinrelationtoprocurementofgoodsbeingprovidedbytheappellantareentirelymeantforM/s
GAP,U.S.A.andtheserviceinquestion,businessauxiliaryservice,coveredbyRule3(1)(iii)of the

ExportofServiceRules,2005haveobviouslybeenusedbyM/sGAP,U.S.A.inrelationtotheirbusiness
locatedabroad.ThereforetheseserviceshavetobetreatedasdeliveredoutsideIndiaandusedoutside
India and since payment for the service has been received in convertible foreign exchange, the same
wouldhavetobetreatedasexportedoutofIndia.
AppealAllowed
Caselawscited
PaulMerchantsLtd.&Ors.vs.CCE2012TIOL1877CESTATDELfollowedpara3,10
AllIndiaFederationofTaxPractitioners2007TIOL149SCSTpara8.1
AssociationofLeasingandFinancialServiceCompanies2010TIOL87SCSTLBpara8.1
FINALORDERNO.ST/A/50780/2014CU(DB)
Per:RakeshKumar:
Theappellant are a company registered in India and are subsidiary of M/s GAP International Sourcing,
Inc., U.S.A. who are a prominent retailer in U.S.A. and other countries. The appellant entered into a
servicesupportagreementwithM/sGAP,U.S.A.forrenderingvariousservicesrelatingto procurement
of goods recommending fabrics to be used for manufacture of garments, recommending vendors from
which fabrics, yarn, zippers, buttons, snap fasteners etc. can be procured, reporting the status of
manufacture of products by the chosen vendors, analyzing the reports of the samples sent by the
vendors, giving recommendation about the product integrity, inspecting export consignments and
issuing inspection certificates, screening the vendors suitability in terms of child labour norms and
pollutioncontrolnormsandrecommendingtheteamstobeengagedinlogisticworkliketransportation,
clearing and forwarding etc. for export of the purchased products out of India. The department was of
the view that the services being rendered by the appellant are Business Auxiliary Service covered by
Section65(105)(zzb)readwithSection65(19)oftheFinanceAct,1994.However,theDepartmentwas
of the view that since the service has been rendered in India and is not export of service in terms of
ExportofServiceRules,2005,theappellantwouldbeliabletopayservicetaxinrespectofthesame.
There is no dispute that the appellant for providing the above mentioned services to M/s GAP, U.S.A.
receivedtheremunerationfromtheminconvertibleforeignexchange.Thedisputeisonlyonthepoint
as to whether the services provided by the appellant are export of service or not. After issue of show
cause notice dated 10/01/08, the Jurisdictional Commissioner vide orderinoriginal dated 01/9/08
confirmed the service tax demand of Rs. 5,66,98,112/ alongwith education cess for the period from
19/4/06to31/5/07andalsotheinterestthereonunderSection75oftheFinance Act, 1994 and beside
this,imposedpenaltyofRs.5,66,98,112/ontheappellantunderSection78andalsothepenaltyofRs.
1,000/underSection77.AgainstthisorderoftheCommissioner,thepresentappealhasbeenfiled.
2.Heardboththesides.
3. Shri N. Venkataraman, Senior Advocate alongwith Shri Dheeraj Srivastava, Advocate and Ms. K.G.
Rajeshwari, Advocate, the learned Counsels for the appellant, pleaded that the service in relation to
procurementofgoodsbeingprovidedbytheappellantisBusinessAuxiliaryServicecoveredbySection
65(105)(zzb)readwithSection65(19)oftheFinanceAct,1994,thatthisserviceisbeingprovidedby
theappellanttoM/sGAP,U.S.A.intermsoftheiragreementwiththem,thattheappellantreceivedthe
paymentfortheservicesfromtheM/sGAP,U.S.A.inconvertibleforeignexchange,thattheseservices
are in relation to Business or Commerce, and the same having been used by M/s GAP, U.S.A. in
relationtotheirbusinesslocatedabroad,havetobetreatedasexportofserviceintermsofRule3(1)
(iii) readwith Rule 3 (2) of the Export of Service Rules, 2005 as M/s GAP, U.S.A. do not have any
establishmentorbranchinIndiaandtheservicebeingreceivedbythemfromtheappellantaremeant
for and have been used in their business located abroad, that the services provided by the appellant
cannotbetreatedashavingbeenreceivedandconsumedinIndia,thattheissueinvolvedinthiscaseis
squarely covered by the judgment of the Tribunal in the case of Paul Merchants Ltd. & Ors. vs. CCE
reportedin 2012TIOL1877CESTATDEL,andthatinviewofthis,theimpugnedorderisnotsustainable.
4. Shri Amresh Jain, the learned DR, defended the impugned order and made oral as well as written
submissions. The written submissions which include the submissions made in course of hearing are
reproducedbelow:

"1.Theshowcausenoticehasbeenissuedfortheperiodfrom19.04.06to31.5.07.During
therelevantperiodthelawrelatingtoexportwasspecifiedintheExport of Service Rules,
2005. The specified service(BAS) was covered under Rule 3(1)(iii). The said sub Rule
providedthefollowingconditionsforthisserviceinordertoconstituteasexport:
From19.04.06to28.02.2007:
(i)RecipientshouldbelocatedoutsideIndia
(ii) Such service is delivered outside India and used outside
Indiaand
(iii) Payment for such service providedoutsideIndiaisreceived
bytheserviceproviderinconvertibleforeignexchange.
From01.03.2007to31.05.07:
Whilecondition number (i) and (iii), as mentioned above, remained
sametheconditionnumber(ii)wasrevisedasfollows:
(ii) Such service is provide from India and used
outsideIndiaand
In other words the difference incorporated w.e.f. 01.03.07 was that the words
"delivered outside India" were deleted from condition number (ii) and
replacedwiththewords"providedfromIndia". However the requirement that
service should be "usedoutsideIndia" coupled with the requirement that the
serviceshouldbe"providedoutsideIndia"remainedunchanged.
2. The expression 'delivered outside India' and 'used outside India' were akin to
consumption as inferred from the Departments Circular B.1/4/2006 TRU dated 19.04.06
(Para4.3.6,copyenclosed)whichstatesasunder:
"ServicesconsumedwithinIndiadonotfallwiththescopeofExportofservice"
3. The Rules clearly specify two separate conditions i.e. the user should be located
outside India and the use should also be outside India. These conditions have to be
satisfied independently of each other. If the Noticees explanation were to be accepted, a
mere change in location of the recipient will also lead to change in the place of use of
service. For example, if in this case the recipient were to be relocated from USA to say
Japan, in terms of the Noticees logic, the place of use of service will stand automatically
shifted from USA to Japan. There is no effort made in the submissions to draw the
distinction and establish independently where the services are being provided and used. If
the mere location of the recipient was to determine the place of use, it will open
innumerable loopholes of misuse whereby services meant to be used in India would be
merelyroutedthroughaforeignrecipient.
4. The services involved in this case are by way of Support Services for sourcing of
garments for GAP International. This comprises a host of services e.g. vendor
development merchandising, product integrity, vendor compliance, quality
assurance, fabric sourcing and logistics support etc. Much of this is accomplished by
way of identifying and developing vendors capable of meeting stringent norms of GAP
International regarding production of the garments, having the capacity to handle the
volumes and adhere to the production schedules demanded by the buyers. This is
accomplishedbyconductingregularqualitychecksatthepremisesofthevendors, ensuring
that the vendors comply with the production schedules, or providing the logistic support
which involves physical effort together with professional expertise of a fairly high order to
ensure that the garment shipments are exported in time. Theseservicesonceprovided
are not capable of being used in a territory other than where they have been
provided.Infactmostofthetimeprovisionanduseishappeningsimultaneously.It
willbenaovetoevenconceivethattheservicesofMerchandising,Productintegrity,
Vendor Compliance, quality assurance, Fabric sourcing and Logistics support etc
providedinIndiancanevenbeusedremotelyinaterritoryotherthanwherethese
have been provided. In fact, it is not uncommon for corporate to emphasize the local

expertiseintherecruitmentofvariousstaffdeployedfortheprovisionoftheseservicesin
termsoftheirproficiencyinlocalknowledge,customsand/ortraditionsetc.
5.Distinctionneedstobeandmustbedrawnamongstthewords"user" "beneficiary" and
"buyer/payer"ofaservice.Whilemanyatimestheyaresame,theymaynotbesoinall
thecases.ThebenefitsinthiscasewoulddefinitelyflowtoGAPInternationalbutthatdoes
not mean that service has been used outside India. This will be clear from the following
diagram:

USER
Use

InIndia

OutsideIndia

InIndia

1(Taxable)

2(Taxable)

OutsideIndia

3(Taxable)

4(Export)

It is only in situation 4 (subject to meeting other conditions) that the conditions of export
are satisfied. It is inconceivable to imagine how Logistic Support Services can be rendered
in India and used elsewhere. Each of these services involves considerable physical
execution that can not be provided outside India or used outside. These are not mere
advisoryserviceswherebyanopinionorareportissentabroad.GapInternationalisinthe
business of sourcing garments from India which are sold abroad. It is an important pre
requisite for the business to source garments that meet the stringent quality standard and
are sourced at the best prices and shipped in time to meet the fairly exacting standards.
These services are continuously being provided when the various shipments are sent.
Merely, because the payments are being received from overseas does not mean that the
services have been used in a place outside India. If Gap International were to even try
using these services in a place outside India. If Gap International were to even try using
theseservicesinaplaceotherthatIndia,itwillnotbephysicallypossible.
6.Whether'"accrualofbenefit"'ofserviceisonlytothepersonwhopaysforit?
AsperCircularNo.141/10/2011TRUdt.13.5.2011itmaybenotedthatthewords "accrual
ofbenefit"arenotrestrictedtomereimpactonthebottomlineofthepersonwhopaysfor
the service. If that were the intention it would render the requirement of services being
usedoutsideIndiaduringtheperiodpriorto2822010infructuous.Thesewordsshouldbe
givenaharmoniousinterpretationkeepinginviewthatduringtheperiodupto27.2.2010the
explicitconditionwasprovidedintherulethattheserviceshouldbeusedoutside India. In
other words these words may be interpreted in the context wheretheeffectiveuseand
enjoymentoftheservicehasbeenobtained.Theeffectiveuseandenjoymentofthe
servicewillofcoursedependonthenatureoftheservice.Forexampleeffectiveuseof
advertisingservicesshallbetheplacewheretheadvertisingmaterialisdisseminatedtothe
audience though actually the benefit may finally accrue to the buyer who is located at
anotherplace.
7.WhethertheRoutingofpaymentforaservicedeterminestheplaceofconsumption
ofservice?
Routingofpaymentforaservicecannotdeterminewheretheservicewasconsumed.Asan
illustration,ifawardorapersonattendscoachingclassesinDelhibuttheguardianmakes
thepaymentfromhisworkstationabroad,insuchacaseitwouldbeabsurdtosaythatthe
ward has not consumed the services but by some fantastic imagination, the consumption
shouldbetreatedashavingbeenmadebytheguardianabroad.Thiskindoflogiccanlead
topeculiarresultsofraisingdemandoneverypersonwhosendsremittancefromIndiatoa
foreigncountryforenjoyingaserviceinaforeignterritory.
The business support service is a performance based service and the event of taxation is
the physical performance by the service provider. Services, and especially those that are
basedonperformance,cannotbestoredastheydonothaveanyshelflife.Theprovisionof
service and the consumption of the service are simultaneous. As in the case of coaching
service,inthecaseofbusinesssupport service too, the service provider performs in India
by approaching prospective clients to enter into a business relationship with the foreign
entity. The service provident by such performance gets consumed the moment the

prospectiveclientsinIndiaareinformedofthebusinessrelationshipthathecould possibly
have with the foreign entity. This business support service therefore essentially comprises
in preparing Indian clients to enter into business relationship with the foreign entity. It is
quite analogues to coaching class service where tutors in a class room teach, or prepare
throughtrialtest,thestudentsforappearinginacompetitiveexam,toenablethestudents
togainentryintoaneducationinstitutionoraprofession.
In the case of coaching service, it would be ridiculous to claim that the guardian of the
students has consumed the service even though he may have paid the coaching service
providers in foreign exchange from a foreign location. Similarly, it is not material whether
the payment for business support service has been received by the appellants from an
entity abroad or form the Indian clients he approached. If the business transactions are
analyzed it would be seen that the appellant actually receives his payments from the
revenue generated by the foreign entity from the business that is developed by the
appellant in India. Though, banking transaction may show a movement of funds from
foreign entity to the appellant, in business economics, the money that accrues to the
appellantisaportionofthemoneyspentbyIndiaclientsthattheytransitbusinesswiththe
foreignentity.
Asanillustration,ifaperson,whoisamemberofaclubinNewYork,allowshisdaughter
tousetheclubserviceinNewYorkandpaysthechargesfromhisresidenceinBangalore.
The consumption club service in New York would then become leviable to service tax in
India.SuchaconstructionisunrealastheServiceTaxisdestinationbasedtaxinthesense
that it is levied on commercial activities and it is not a charge on the business but on the
consumer.Theactivityofsale,promotion,salessupportsetc.,intheinstantcasehavebeen
performedandconsumedintaxableterritoryandhencetheservicesaretaxableinIndia.
5.Wehaveconsideredthesubmissionsfromboththesidesandperusedtherecords.
6. The service provided by the appellant to M/s GAP, U.S.A., is in relation to procurement of goods
fromIndia.Forthispurpose,theappellantconductthesurveyofthemanufacturersofvariousproducts
required by M/s GAP, U.S.A., and recommend the vendors who can supply the goods of the desired
quality. They also conduct inspection of the export consignments and issue inspection certificates. In
selecting the vendors they also examine not only the quality of their products, but also whether they
conform to child labour norms, Pollution control norms etc. as compliance with these norms is
importantfortheirPrincipals.TheyalsorecommendtheTransportersandlogisticserviceprovidersfor
export of the products purchased. Thus, the services being provided by the appellant to their principal
aretheservicesinrelationtoprocurementofthegoodsandthereisnodisputethattheseservicesare
Business Auxiliary Services covered by Section 65 (105) (zzb) readwith Section 65 (19) of the Finance
Act,1994.TheonlypointofdisputeisastowhethertheservicesaretaxableinIndiaorthesameare
export of service outside India in terms of Service Rules, 2005 and for this reason are not taxable in
India. Though the services have been performed in India, these services being Business Auxiliary
Services are in respect of the business of the appellants principal located abroad. The services being
providedbytheappellantareobviouslymeantforandareusedbyM/sGAP,U.S.A.fortheir business.
TheservicesbeingprovidedbytheappellantarecoveredbyClause(iii)ofRule3(1)ofExportService
Rules, 2005, as these services are in relation to business or commerce and in terms of this clause,
readwithsubrule(2)ofRule3,theseserviceswouldbetreatedasexportedoutofIndiaiftherecipient
islocatedoutsideIndiaandthesamehavebeendeliveredoutsideIndiaandusedIndiaandpaymentfor
the same has been received by the service provided in convertible foreign exchange. There is no
disputethatthepaymentfortheseserviceshasbeenreceivedinconvertibleforeignexchangeandthe
paymenthasbeenmadebyM/sGAP,U.S.A.locatedabroad,nothavinganyestablishmentorbranchin
India. The departments contention, however, is that the conditions of delivery outside India and "use
outside India" are not satisfied, as the services have been performed in India and the same are not
capableofbeingusedinterritoryotherthantheplacewherethesamehavebeenprovided. According
tothedepartmentmostofthetime,theprovisionanduseoftheservicesishappeningsimultaneously
and it would be to naive to even conceive that services of merchandising, product integrity, vendor
compliance, quality assurance, fabric sourcing and logistic support etc. provided in India can even be
usedremotelyinaterritoryotherthanwherethesamehavebeenprovided.Ithasbeenpleadedthatif
M/s GAP, U.S.A. were even to try using these services in a place other than India, it will not be
physicallypossible.Ithasalsobeenpleadedthatroutingifpaymentforaservicecannotdetermine the
placeofconsumption.

7.Inour view the arguments of the department are absurd as the DR has not mentioned as to who is
the consumer of the services in India, if the services, in question, provided in India by the appellant
havenotbeenusedandconsumedbytheir principal in U.S.A. When the appellant identify the vendors
for their principal abroad on the basis of the quality of their products, their manufacturing
infrastructure, compliance with child labour laws and pollution control norms and also provide the
servicesofinspectionoftheexportconsignments,besidesidentifyingthelogisticserviceprovidersfor
smooth transportation of the goods purchased to the port for their export, the user and beneficiary of
all these services is their principal abroad. It would be absurd to say that the recipient and user of
these services are the persons in India and not M/s GAP, U.S.A. for whom all these services provided
by the appellant are meant, who have used these services for their business and have made payment
fortheseserviceinconvertibleforeignexchange.
8.ThelearnedDRreliesupontheBoardsCircularNo.141/10/2011TRU dated 13/05/11. This Circular
hadbeenissuedinthecontextthatsincebyNotificationNo.6/2010STdated27/2/10,Rule3(2)ofthe
Export of Service Rules, 2005 has been amended and clause (a) of Rule 3 (2) regarding use of the
service being outside India has been deleted, during the period prior to 27/2/10, the condition of "use
outsideIndia"alsoneedstobesatisfiedforavailingthebenefitofexport.Onthepointofthecondition
regarding"useoutsideIndia",anearlierCircularNo.111/5/09dated24/2/09hadclarifiedasunder
"For the services that fall under category III [Rule 3 (1) (iii)], the relevant factor is the
location of the service receiver and not the place of performance. In this context, the
phraseusedoutsideIndiaistobeinterpretedtomeanthatthebenefitoftheserviceshould
accrue outside India. Thus, for category III services [Rule 3 (1) (iii)], it is possible that
exportofservicemaytakeplaceevenwhenalltherelevantactivitiestakeplaceinIndiaso
longasthebenefitoftheseservicesaccruesoutsideIndia.Inalltheillustrationsmentioned
in the opening paragraph, what is accruing outside India is the benefit in terms of
promotion of business of a foreign company. Similar would be the treatment of other
categoryIII[Rule3(1)(iii)]servicesaswell."
FirstparagraphofthisCircular,amongotherexamples,mentioned
"IndianagentswhoundertakemarketinginIndiaofgoodsofaforeignseller. In
this case, the agent undertakes all activities within India and receives
commissionforhisservicesfromforeignsellerinconvertibleforeignexchange
Circular 141/10/2011 dated 13/5/2011 without superseding the Circular No.
111/5/09STdated24/2/09furtherclarifiesthat
(i) the words "accrual of benefit" are not restricted to mere impact
onthebottomlineofthepersonwhopaysfortheserviceand
(ii) these words may be interpreted in the context where effective
use and enjoyment of the service has been obtained, which will
depend upon the nature of the service and that effective use of
advertising service shall be at the place where the advertising
materialisdisseminatedtotheaudience,thoughactuallythebenefit
mayfinallyoccurtothebuyerwhoislocatedatanotherplace.
8.1Apexcourt,inthecasesofAllIndiaFederationofTaxPractitionersreported in (2007) 7 SCC 527
2007TIOL149SCSTandAssociationofLeasingandFinancialServiceCompaniesreportedin 2010TIOL87
SCSTLB ,hasheldthat
(i)servicetaxisavalueaddedtaxwhichinturnisadestinationbasedconsumption tax in
thesensethatitisleviedoncommercialactivitiesanditisnotachargeonbusinessbuton
theconsumer
(ii)Valueadditionisonaccountoftheactivitywhichprovidesvalueadditionand
(iii) Service tax is an economic concept based on the principle of equivalence in the sense
that consumption of goods and consumption of services are similar, as they both
satisfactoryhumanneeds.
Theimportantpointsemphasizedinthesejudgmentsarethatservicetax,thoughleviedoncommercial
activities, is a destination based consumption tax and that it is not a charge or business but on the
consumer.ThereforewhentheserviceprovidedbyapersoninIndiaisconsumedandusedbyaperson

abroad, it is treated as export and is not taxed in India as the destination of the service provided and
itsuseisoutsideIndia.Inareversecase,whentheserviceprovidedbyapersonfromoutsideIndia,is
consumed and used by a person in India, it is taxed in India under reverse charge mechanism of
Section66AoftheFinanceAct,1994.Thustheschemeoflevyofservicetaxaccordingtowhich
(a) when the service provider and service receiver, both, are in India, service tax is
chargedinIndiafromtheserviceprovider
(b)whenserviceproviderisinIndiaandservicerecipientislocatedabroad,noservice tax
ischargedfromtheserviceprovider,and
(c) when service provider is abroad, not having any establishment or branch in India, and
the service recipient is in India, service tax is charged from the service recipient under
reversechargemechanism
is in accordance with the principle laid down by the Apex court that service tax is a destination based
taxonconsumption.Inthisregard,servicetaxissimilartootherindirecttaxeslikecentralexciseand
customs duties, as central excise duties or import duties paid on the goods are refunded as drawback
orexportrebateonexportofthegoodsoutofIndia.Sinceunlikegoods,whereapersonmay purchase
and receive some goods, store them and thereafter sell the goods to some other person who may
consume those goods to satisfy his need, in case of service, receipt and consumption takes place
simultaneously, the person receiving the service is also the person consuming the same or using the
same.ThoughRule3(2)ofExportofServiceRulesduringperiodtill01/3/07usedtheword'delivery
of service outside India', in view of intangible nature of services, these words should be construed as
receiptofserviceoutsideIndia,which,asexplainedabove,isthesameasconsumptionoutsideIndiaor
"useoutsideIndia".Thus,incontextofservice,thereceipt,consumptionanddeliveryoftheserviceis
the same and accordingly the place of consumption and, hence, the place of taxation, would be the
sameastheplaceofreceiptofservice.
8.2 Since unlike goods, the services are intangible and can be provided by more than one mode and
place of performance cannot be uniformally adopted as the criteria for determining the place of
receipt/consumptionofservices,asservicesinrelationtobusinesslikeconsultancyserviceprovidedby
apersoninIndiacanbereceivedbyandusedbyapersonabroadforhisbusiness,withouttheservice
recipienthavingtocometoIndia,andsincebecauseofcomplexityofservicetransactionsanddifferent
natureofdifferentservices,thequestionofdeterminingplaceofreceipt/consumptioncannotbeleftto
the deductive abilities of an individual tax assessing officer, the Government for smooth service tax
administration has framed Export of Service Rules, 2005 and Taxation of Services (provided from
outside India and received in India) Rules, 2006, which put together, are basically the rules for
determining the place of receipt (which is same as the place of consumption) i.e. for determining
whether a particular service provided from outside India by an offshore service provider, not having
any branch or establishment in India, has been received in India and hence is taxable in India under
reversechargemechanismorwhetheraserviceprovidedinIndiahasbeenreceived/consumedoutside
India and, hence, is not taxable in India. In fact the Export of Service Rules, 2005 and Taxation of
Services(providedfromoutsideIndiaandreceivedinIndia)Rules,2006,have,inthebudgetof2012
13,beenreplacedbythePlaceofProvisionofServicesRules,2012,theRule3ofwhichstatesthatthe
placeofprovisionofaserviceshallbetheplaceofservicereceiver(whoistheserviceconsumer).
8.2.1 Under Export of Service Rules, 2005 and Taxation of Services (provided from outside India and
receivedinIndia)Rules,2006,forthepurposeofdeterminingwhether a service provided in India has
been exported out of India i.e. has been received/consumed outside India or whether a service
provided from outside India by an offshore service provider has been received/consumed by a person
inIndia,theserviceshavebeendividedintothreecategories
(i)Servicesinrelationtoimmovablepropertyasspecifiedintheserules,whicharetreated
as exported if the services provided from India are in relation to an immovable property
locatedoutsideIndiaandpaymenthasbeenreceivedinforeignexchangeandsuchservices
whenprovidedfromoutsideIndiaaretreatedasreceivedinIndiaifthesameareinrespect
ofanimmovablepropertylocatedinIndia
(ii)performance based services, as specified in these rules, which are treated as exported
if the same have been performed outside India, either in full or even partly and payment
hasbeenreceivedinconvertibleforeignexchangeandsuchservices,whenprovidedbyan

offshoreserviceprovideraretreatedasreceivedinIndia,ifthesamehavebeenperformed
inIndiaeitherinfullorevenpartlyand
(iii) Services in relation to business or commerce as specified in these rules, which are
treated as exported, when the same have been provided in relation to business or
commerce to a recipient located outside India and payment for the service has been
received in foreign exchange and in case of such services are provided by an offshore
serviceprovider,thesamearetreatedasreceivedinIndiaifthesamehavebeenreceived
byarecipientlocatedinIndiaforuseinrelationtobusinessorcommerce.
8.2.2Thereislittlescopeforconfusioninrespectoftheservicesinrelationtoimmovable property or
performance based service for determining whether the same have been exported or imported.
Confusion arises in case of services in relation to business or commerce covered by Rule 3 (1) (iii) of
Export of Service Rules, 2005 and Rule 3 (1) (iii) of Taxation of Service (provided from outside India
and received in India) Rules, 2006, in respect of which, for export of service, the service should have
beenprovidedinrelationtobusinessorcommerceto"recipientlocatedoutsideIndia"andforimportof
service into India, the service provided from outside India should have been "received by a recipient
located in India" for use in relation to business or commerce. The term recipient of service is not
definedinFinanceAct,1994orintherulesmadethereunder.
8.3 Though the term recipient in respect of a service is not defined in the Finance Act, 1994 or in the
rulesmadethereunder,thegaphastobefilledbyconstructionandontheanalogyofthetransactionof
saleofgoods,theservicerecipientinatransactionoftheprovisionofservice,hastobetreatedasthe
person
(a) on whose instructions the service has been provided and who is obliged to make
paymentfortheprovisionofserviceand
(b)whoseneedissatisfiedbytheprovisionofserviceitmaybehispersonalneedorthe
needofhisbusinessorneedtomeetsomeobligationtosomeperson.
Since service is normally an activity performed by a person A for some other person B for some
considerationandthisactivitybyAmayaffectsomeotherpersonsC,DandEinsomemanner,goodor
bad,thepersonsC,DandEarethepersonaffected by the service, they cannot be treated as service
recipient the service recipient would be B who has paid for the service and whose need has been
satisfiedbytheprovisionofservice.TheonlysituationwhereinrespectofsomeserviceprovidedbyA
whichwasorderedandpaidforbyB,apersonCwhohasbenefitedfromtheservice,canbetreatedas
service recipient, when B has acted purely as an agent of C. Therefore in respect of services covered
byRule3(1)(iii)oftheExportofServiceRules,2005,whicharetheserviceinrelationtobusinessor
commerce,thesameprovidedbyapersoninIndiaforusein relation to business or commerce would
betreatedreceivedoutsideIndiaandhence,exported,if
(i)theserviceshavebeenprovidedontheinstructionofapersonlocatedoutsideIndia for
useinhisbusiness
(ii)paymentforthoseserviceshasbeenmadebyhiminconvertibleforeignexchangeand
itishewhohasusedtheservicetosatisfytheneedofhisbusiness.
It would be absolutely wrong to say that the services like advertisement, publicity, marketing etc.
provided by a person in India on the instructions of a corporation located outside India for use in its
business and the payment for which has been made by that corporation located outside India, have
beenreceived/consumedinIndia,justbecausethesamehavebeenperformedinIndia.
8.4 Thus the Export of Service Rules, 2005 and Taxation of Service (provided from outside India and
received in India) Rules, 2006, readwith Section 66A of the Finance Act, 1994 are fully in accordance
withthelawlaiddownbytheApexCourtincaseofAllIndiaFederationofTaxPractitioners(supra)and
Association of Leasing and Financial Service Companies (supra) that service tax is a value added tax,
which, in turn, is a destination based consumption tax in the sense that it is not a charge on business
butisachargeontheconsumer.Thereforewhatconstitutesexportofservicehastobedecidedstrictly
in accordance with the provisions of Export of Service Rules, 2005 and for this purpose, in case of
servicesinrelationtobusinessorcommercecoveredbyRule3(1)(iii),thetermservicerecipienthas
tobeunderstoodinthesenseasexplainedinpara8.3above.

8.5Inthecontextofexportofservice,onceaservice,onthebasisofRule3(1)(i),3(1)(ii)or3(1)
(iii)oftheExportofServiceRules,2005hasbeendeterminedtohavebeenreceivedoutsideIndiai.e.
consumed outside India, the conditions in Rule 3 (2) regarding their delivery outside India and "use
outsideIndia"areautomaticallysatisfiedas,asexplainedinpara8.1above,inthecontextofservices,
the receipt, consumption and delivery of the service is the same. Therefore the condition regarding
deliveryofservicebeingoutsideIndiaanduseofservicebeingoutsideIndiaprescribedinRule3(2)of
ExportofServiceRules,2005weresuperfluousandforthisreasononly,theseconditionsweredeleted,
first, the condition regarding delivery of service being outside India was deleted w.e.f. 1/3/07 and
thereaftertheconditionregardinguseofservicebeingoutsideIndiawasdeletedw.e.f.27/2/10.These
amendments, therefore, have to be treated as clarificatory amendments. Therefore if some service
covered by Rule 3 (1) (iii) of Export of Service Rules, 2005, i.e. service in relation to business or
commerce,hasbeenprovidedbyapersoninIndiatoacompanylocatedabroad,nothavinganybranch
or establishment in India, for use in its business, the service provided in India shall be treated as
export, if the payment has been received in convertible foreign exchange. The performance of such
serviceinIndia,wouldnotmakethemreceived/consumedinIndia,ifbeneficiaryuser/recipientofsaid
serviceprovidedinrelationtobusinessorcommerce,whohaspaidfortheseserviceandhasusedthe
service in his business, is located abroad. The position would be different if the company located
abroadwhohaspaidfortheservice,alsohassomebranch/projectinIndiaandtheserviceprovidedin
Indiaismeantforthatbranch/projectonlyinthatcase,theconsumptionofservicewouldbeinIndia
and the service would be taxable in India. But if the recipient company located abroad, has no branch
or project or establishment in India and the service covered by Rule 3 (1) (iii) provided in India is
meantforuseinthebusinessofthecompanylocatedabroad,itwouldbeexportofservice.
8.6In view of the above discussion, the BoardsCircularNo.141/10/2011 dated 13/5/11 clarifying that
for the period prior to 27/2/10, the condition regarding used outside India also needs to be
independently satisfied for availing the benefit of export and that effective use of advertisement
services shall be the place where the advertising material is disseminated to the audience though the
actual benefit to my finally accrue to the buyer who is located at another place is not only not in
accordancewiththeprovisionsofRule 3 (1) of the Export of Service Rules, 2005, but is also contrary
to the law laid down by the Apex Court in the case of All India Federation of Tax Practitioners (supra)
and Association of Leasing and Financial Service Companies (supra), as a service which has not been
consumedinIndia,cannotbetaxedinIndia.
9.Inthiscase,M/s GAP, U.S.A. do not have any branch or project or business establishment in India.
Theserviceinrelationtoprocurementofgoodsbeingprovidedbytheappellantareentirelymeantfor
M/sGAP,U.S.A.andtheserviceinquestion,businessauxiliaryservice,coveredbyRule3(1)(iii) of
the Export of Service Rules, 2005 have obviously been used by M/s GAP, U.S.A. in relation to their
business located abroad. Therefore these services have to be treated as delivered outside India and
used outside India and since payment for the service has been received in convertible foreign
exchange,thesamewouldhavetobetreatedasexportedoutofIndia.Theimpugnedorderpassedby
thecommissionisanabsurdordercontrarytotheprovisionsofExportofServiceRules,2005.
10. In any case, the issue involved in this case is identical to the issue involved in the case of Paul
MerchantLtd.andOrs.vs.CCE(supra)whichstandsdecidedinfavouroftheappellant.
11.Inviewoftheabove,theimpugnedorderissetaside.Theappealisallowed.
(Orderpronouncedintheopencourton28.2.2014)
(DISCLAIMER:Thoughalleffortshavebeenmadetoreproducetheordercorrectlybuttheaccessandcirculation
issubjecttotheconditionthatTaxindiaonlinearenotresponsible/liableforanylossordamagecaused to anyone
duetoanymistake/error/omissions.)