By CA Puloma Dalal, CA Jayesh Gogri,CA Mandar Telang, Chartered Accountants
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ii. Tribunal
Reimbursements made to Overseas Branch Office by head Office in india
are not liable to service tax.
Facts
The appellant viz. the Head
Office had established network of branches at different locations outside the
country. The branches acted as salary disbursers of the staff deputed from
india to client locations and carried out other assigned activities. The
salaries and other expenses of running the branch are borne by the head office.
Payments made by the customers are also received in the branches and
transmitted to the head office after netting the expenses incurred by the
branch. Show Cause notice was issued demanding service tax under reverse charge
mechanism on the payments made to the branches considering it business
auxiliary services rendered by them to their head office along with interest
and penalties thereon. The adjudicating authority confirmed the demand
primarily on the basis that head office and its branches were different
persons. Accordingly, the present appeal was filed.
Held
The tribunal noted that there was no dispute
that the appellant had entered
into contractual agreements with overseas customers for
supply of services which also involved onsite activity undertaken by deputing
employees at the site. Section 66a(2) of
the finance act, 1994 provided that “a person carrying on a business through a
permanent establishment in India and through another permanent establishment in
a country other than India, such permanent establishments shall be treated as
separate persons for the purpose of this section”. The explanation 1 in s/s.(2)
has designated branches as business establishment overseas. It was observed
that the section is not elastic enough to govern the corporate intercourse and
commercial indivisibility of headquarters and its branches. Accordingly, any service rendered to the other contracting
party by the branch as branch of the service provider would not be within the
scope of section 66A. Such a legal fiction in relation to overseas activities
is undertaken to prevent escapement from tax by resort to branches to take
advantage of principles of mutuality. A branch by its very nature cannot
survive without resources assigned by the head office. Its employees are the
employees of the organisation itself. There was no independent existence of the
overseas branch as a business. The transfer of funds by gross outflow or by netted
flow is, therefore, nothing but reimbursements and taxing of such reimbursement
would amount to taxing of transfer of funds which was not contemplated by the
act whether before 2012 or after. Accordingly the appeals were allowed.
