Online reservation services by overseas company to foreign company

In
a recent decision in relation to reverse charge mechanism in British
Airways vs. Commissioner (ADJN), Central Excise, Delhi
2014-TIOL-979-CESTAT -DEL, the Tribunal by majority set aside the demand
of service tax on British Airways, India (BA India) the branch of
British Airways PLC, U.K. (BA UK) at Gurgaon.

Background in brief
The
Appellant as branch office provides air transportation services for
passengers and cargo and on these services has been paying service tax
under (zzn) and (zzzo) of section 65(105) of the Finance Act, 1994 (the
Act). BA UK like airlines all over the world have agreements with
Central Computer Reservation System service providing companies such as
Galileo, Amadeus, Abacus, Sabre etc. (CRS companies) all located outside
India. These CRS companies facilitate reservation and ticket
availability position to air travel agents in India and all over the
world through online computer system. None of these service providers
has branch or an establishment in India. Accordingly, they maintain
database of BA UK as regards flight schedule, fares, seat availability
on flight etc. on real time basis and make information available to all
IATA agents across the world. In terms of the agreements with BA UK, CRS
companies provide hardware and connectivity with their network. Based
on the ticket sale by the IATA agents using their database, these
companies receive their fees from BA UK. The IATA agents do not have to
pay any fees. The services provided by CRS companies were considered
“online database access or retrieval service” by the department as
contained in section 65(105)(zh) read with sub-Clause (75) and (36) of
section 65 of the Act and since the services are used by IATA agents of
BA India in India to sell tickets, they were treated as received and
consumed in India by BA India. Hence, service tax was demanded on the
remuneration received by CRS companies from BA UK from the Appellant in
this case BA India, under reverse charge mechanism u/s. 66A of the Act
read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994. The
Commissioner confirmed the demand and imposed penalties against which
this appeal was filed.

The dispute in the appeal hinges around
the main issue viz. whether the Appellant BA India, a BA UK branch can
be treated as entity separate from its head office, BA UK in terms of
section 66A(2) and therefore the Indian branch be taxed as recipient of
services of CRS companies. Additional issue involved was whether or not
service provided by CRS companies be considered an online service since
both the members were in agreement with treating the service taxable as
online database access and retrieval service contained in section
65(105)(zh) of the Act read with section 65(75) thereof; not much
discussion is provided herein.

The Appellant contended that
service was provided outside India as the CRS companies and their parent
company were situated outside India. Therefore there cannot be tax
liability for the Appellant, BA India. The Appellant’s view of
non-taxability of service tax was based on the grounds that CRS
companies abroad provided services to their head office in London. CRS
company’s server was connected with the server of the head office of the
Appellant and thus the head office received those services abroad. In
terms of section 66A(2) of the Finance Act, 1994 (the Act), the branch
and the head office are to be treated as separate entities. Relying on
Paul Merchants 2012-TIOL-1877-CESTAT – Delhi, the Appellant also
contended that service recipient is the person on whose orders the
service is provided, who is obliged to make payment for the same and
whose need is satisfied by the provision of service. Further, they
advanced the argument that had they paid service tax, it was a revenue
neutral case as they would have got CENVAT credit of the same. They also
contended that longer period of limitation did not apply to them as
they bonafide believed that they had no tax liability.

Revenue
discarded this plea finding that CRS companies even if situated outside
India were providing services to the Appellant having establishment in
India which enabled their appointed IATA agents to use the system for
booking tickets and thus derived benefit therefrom and therefore the
Appellant was ultimate service recipient in India from foreign based CRS
companies of online database access or retrieval services u/s. 66A of
the Act from 18/04/2006. According to revenue, since BA UK was permitted
by Reserve Bank of India (RBI) to operate in India, the head office of
the Appellant and the Appellant cannot be two distinct entities under
law. Section 66A(2) of the Act did not apply to them. Existence of
Appellant in India without its head office was impracticable and
existence in India was only to fulfill object of its head office in UK
and act on its behalf in India under limited permissions granted by RBI
which in essence and substance is the same. The establishment in India
was created on temporary basis to carry out business in India. On the
above pleas made by the Appellant and the revenue, the two members of
the Division Bench of the CESTAT , Delhi had different views.
Consequently, the matter was referred to the Third Member. The views of
both the members along with those of the third member are summarised
below:

Conclusion: Member (Judicial):
The learned Member
(Judicial) after considering the case of the adjudicating authority and
examining relevant statutory provisions, examined the letter issued by
RBI to BA UK and the agreement between BA UK & Galileo, the CRS
company. RBI ‘s letter contained permission to carry out air
transportation business in India regulated by FEMA in view of the
foreign currency transactions involved.

• The Bench observed
that BA UK had its place of business in India in terms of section
66A(1)(b) of the Act during the impugned period. As a participant of CRS
agreement, the Appellant at its own cost was required to provide
Galileo complete data, timely and accurate in order that the CRS company
would be able to maintain and operate the system to provide access to
the IATA agents the services of reservation, seat availability etc. on
real time basis for a consideration payable by BA UK. According to the
Member, BA India was in no way different from its head office and
therefore the contention that BA India was not party to the agreement
was not correct.
• Air travel agents appointed by the Appellant
received and used the services of CRS and Appellant having place of
business in India is the recipient of services from foreign based CRS
companies.

• Who makes payment to the service provider is not material and no free service is provided by the service provider.

•
When the Appellant is covered by section 66A(1)(b) of the Act as
recipient of taxable service u/s. 65(105)(zh) of the Act, their plea
that they are immune from service tax in India is ill-founded as their
existence in India is only under the RBI permission whereas 66A(2) of
the Act recognises only different situs under law, but the said s/s.
does not grant immunity from taxation in India once incidence of tax
arises in India. What is charged by revenue is services received in
India and the Appellant has consumed them in India and not the services
received by its head office outside India.

• Appellant’s plea of
revenue neutrality would not exonerate them from the liability it has
under the law and reliance on Paul Merchants (supra) is misplaced as it
related to export of service.

•    Since the Appellant failed to register and file Returns periodically, they committed breach of law which cannot be eroded by lapse of time. Bonafide should be apparent from conduct and a mere plea does not render the adjudication time-barred and thus extended period could be invoked.

Conclusion: Member (Technical) the   member   (technical)   differing   from   the   above conclusion drawn by the member (judicial) made following observations. He however agreed on the issue of classification that services were classifiable as online/ access/retrieval services:

•    Since the term ‘service’ was not defined during the period under appeal, not only there must be an activity provided by a provider of service to the recipient thereof, but there must also be flow of consideration, cash or other than cash, direct or indirect from recipient to the provider and the provision of services must satisfy some need of the recipient which may be personal or business.

•    Under Rule 3 of the Export of Service Rules, 2005, when a service provider is in india and the recipient thereof are outside india, no service tax is chargeable and when the provider is located abroad being a person having a business or fixed establishment outside India and the recipient is located in india being a person having a place of business, fixed establishment in india, he is a person liable for service tax in terms of section  66A read  with  rule  2(1)(d)(iv)  of  the  service tax rules.

•    U/s. 66A(2), when a person carries out a business through a permanent establishment in india and through another permanent establishment in another country, the two establishments  are  separate  persons  for the purpose of this section. second proviso to section 66a(1) is that when a service provider has his busies establishment in more than any one country, the establishment which is directly concerned with the provision of service will be considered service provider.   This  principle  in  the  hon.  Member’s  view would apply to determine as to who is the service recipient in the instant case when provider of service is located abroad and it will be reasonable to treat the establishment most directly concerned with the use  of the service provided as recipient of such services provided by the person abroad.

•    Unlike the transaction of goods, receipt and consumption of a service goes together, as the provision of a service satisfies the need of recipient, the service stands consumed. Accordingly, if service recipient is located in india, the service is received and hence consumed in india but if the recipient is located abroad, there is no liability for the person in india to pay service tax. This is in accordance with the principle of equivalence mentioned in the apex Court’s judgment in the case of all India Federation of Tax Practitioner 2007-TIOL-149-SC-ST and association of Leasing and Financial service companies 2010 (20) STr 417 (SC).

•    Conceptually, Export of Service Rules, 2005 and taxation   of   service   (provided   from   outside   india and received in india)  rules, 2006 put together are the rules which determine the location of service recipient.  thus, when the provider of service is located in india and the recipient thereof is outside india, in accordance with rule 3(iii) applicable to the services other than these in relation to immovable property and performance based services and when they relate to business or commerce, these will be export services and there would be no taxation in india whereas in  the reverse scenario, there will be import of service   in respect of which the service recipient is located in india. However, if both service provider and receiver  of category (iii) for use in his business are also located outside india, there would be no import and therefore no taxation in india.

•    As regards services of CRS companies located abroad, whether they can be treated as received by the appellant in india is to be determined based on the above legal provisions.

•    As regards letter from RBI, it was observed as follows:

i)    BA UK and Ba india are separate establishments and that the branch was not in the nature of a temporary establishment as contended by the department.
ii)    the   agreement   was   between   BA  UK   and   CRS companies abroad which did not have any branch or establishment in india.
iii)    entire payment to Crs companies was made directly by Ba uK outside india and no part was paid by Ba india.

Thus,  the  services  provided  by  CRS  companies  were received by BA UK as both Ba UK and Ba India are to be treated as separate persons in view of the provisions  of  section  66a(2).  They  would  be  treated as received in india only if it has been received by the recipient located in india for use in relation to business or commerce.

Reasoning why the Branch is not the recipient of service.

According to the hon. Member (technical), the revenue’s view that Ba india was the recipient of the services of CRS companies was incorrect for the following reasons:

•    In a transaction of service, the recipient consumes the service simultaneously with the performance of service. thus recipient of a service is the person who is legally entitled for provision of service.  further, consideration in some cases can be direct or indirect. applying this criteria, Ba india can be treated as recipient only if the service provided by CRS companies is meant for the BA india and if BA UK had acted as only facilitator and there was flow of consideration, direct or indirect from BA india to CRS companies. In the instant case, neither BA India is recipient nor is there a flow of consideration, direct or indirect form Ba India to CRS companies.

•    CRS companies did not provide any branch specific service.   The   job of BA india is only to appoint iata agents, collect sales proceeds of tickets sold by agents, fares and remitting the same to h.o. and nothing showed that key business decisions were taken by them for the entire company. applying the principle of second proviso of section 66A(1) discussed above,    it is BA UK – the H.O. office which is to be treated    as directly concerned with the services provided by CRS companies as it cannot be said that the indian branch was the sole beneficiary or that H.O. acted   as a facilitator to enter into the agreements with CRS companies on behalf of branches for providing services to them. The business needs of H.O. are satisfied and therefore h.o. is the recipient of service.

•    There is no evidence or even allegation that BA India made any payment to CRS companies directly or indirectly and there is an accepted position in the order that payment was made abroad by the h.o. directly   to CRS companies and that the two establishments   of BA india and BA UK their h.o. have to be treated   as separate persons in terms of section 66A(2), the transaction of provision of service has to be treated as  taken  place  outside  india.  therefore,  the  service received by BA UK cannot be treated as service received by Ba india.

•    Merely because IATA agents appointed by BA India used the services of CRS companies from abroad, the appellant does not become the recipient of service.

•    The only situation in respect of which service tax can be levied on the branch of a recipient company in india would be wherein the services provided by a service provider located outside india against an agreement with head office of a company incorporated and located outside India and when the head office has entered into a framework agreement with the service provider by way of centralised sourcing of service, the provision of service at various branches located in different countries and the service is provided at the branch in india and the role of the h.o. is only of facilitator. in the instant case of Ba india, from the agreement, it cannot be inferred that the Crs companies were to provide location specific service to the branches of BA UK all over the world.

•    As regards applicability of longer period of limitation also, it was found not available to the department in view of the fact that intent to contravene the provisions of the act could not be attributed when collection of tax would have been a revenue neutral exercise.

Reference to Third Member:
Briefly stated, the points of difference referred to the Third member were:

•    Whether on the facts and in the circumstances of the case, the appellant permitted by reserve Bank of india to carry out air transport activity in india was a branch in india and was recipient of “online database access or retrieval service” from Crs service providers abroad and liable for service tax in terms of section 65(105) (zh) read with section 65(75) under reverse charge mechanism u/s. 66a with effect from 18/04/2006 or exempt in terms of 66a(2) and also whether longer period of limitation was available to the department for recovery of tax.

•    The learned Third Member acknowledged various undisputed facts among others that the Crs companies were located outside india, the agreement was between Ba uK and them and payment for the said service was made by Ba uK and in the light of these facts, what was to be considered was whether Ba india was the extension of Ba uK or they had to  be treated as separate legal entities. She noted the contentions of the revenue that various provisions of the Companies act, 1956 which interalia included that the entire accounts from the indian operations stand debited by the head office along with the expenses incurred by the corporate office in relation to operations in india and which also included the payment of CRS debit for tax sold in indian ticketing.  Further, that there was no legal distinction between foreign companies with its parent office abroad and their local subordinate branch office in India and under these circumstances that Ba uK was given permission to open its branch office in India.

She nevertheless, discussed the provisions of 66A read with explanation to s/s. (2) in her observations and found herself in agreement with the observations and finding of Member (Technical) analysed above that services provided by a foreign based company to a foreign based head office cannot be any liability of the appellant to discharge its service tax in as much as service tax being a destination and consumption based tax cannot be created against the non-consumer of the  services.  Likewise  she  also  concurred  with  non- availability of longer period of limitation for recovery to the department as she found revenue neutral situation and also that the issue involved being complicated issue of legal interpretation which cannot be held to be a settled law also found favour with the appellant’s bonafide belief.

Conclusion:
The above decision allowing appeal by the majority will serve as a guiding decision for disputes relating to cross border transactions and particularly those relating to liability of service tax under reverse charge mechanism. the  decision  however  relates  to  the  period  prior  to introduction of definition of ‘service’ with effect from 01-07-2012 and also place of provision of services