Service Tax-Branches & Head

Office

PRAKHAR DUAV YEAR BBA LL.B

SYMBIOSIS LAW SCHOOL, PUNE

• Erstwhile: Section 66A (2) Where a person is 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 purposes of this section

Explanation 1- A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.• Section 65B (44) Explanation 3 (b)- an establishment of a person in the taxable

territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.

Explanation 4- A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory.

Relevant Provisions

• Scope of Section 66A • Reimbursement of expenses incurred by branch• Person raising the invoice• Payment of local taxes overseas• Scope of the contracts entered between the

entities• Situation on and after 1.07.2012 (Enactment of

Place of Provision of Services Rules, 2012)

Points to Ponder

• Remittances to branches towards salary expenses can’t be considered as service and thus no service tax liability [Torrent Pharmaceuticals Ltd. v. CST (2014)]

• Reimbursements of expenditure by way of salaries or other expenses can’t be said to be consideration paid for service rendered by the branch to the head office. The purpose of Section 66A is to tax the import of services and not to tax monetary transactions between the branch and the head office [KPIT Technologies v. CCEx (2014)]

• The employees of the branch are the employees of the organization itself and there is no independent existence of overseas branch as a business. Taxing reimbursement would be to tax transfer of funds [Milind Kulkarni v. CCEx (2016)]

Scope of Sec.66A & Reimbursement of expenses of

branch

Head Office: Service recipient?

ASSESSEE• If branch is considered as a service

provider to its own head office in India, it will amount to charging service tax for an activity provided to one’s own self. Section 66A is only to determine the provision of service whether in India or abroad [Torrent Pharmaceuticals v. CST (2014)]

• The service recipient is the client abroad as they have consumed the service and have paid the consideration [Tata Technologies Ltd. v. CCEx, Pune-I (2013)]

• If the services are provided outside India and also received and utilized outside India, unless it could be established that the services are received in India, service tax wouldn’t be payable [Infosys Ltd.v. CST (2014)]

REVENUE• The contract was between

the head office and the client. The branch was in essence providing the service to the head office as both are different establishments.

• Two demands: The daily expenses

reimbursed by the head office is nothing but consideration

The entire amount received by the branch office from the client abroad is the consideration paid by the head office (Indirect consideration)

Head Office: Service recipient?ASSESSEE

• The services received by an overseas branch (from sub-contractor engaged by it) wouldn’t attract service tax in India, notwithstanding the fact that payment for the same has been made by the Indian head office [M/s Infosys Ltd. v. CST (2014)]

• Intas Pharmaceuticals Ltd. v. CST (2009)

• IDS Systems Pvt. Ltd. v. CCEx, (2012)

• Aztescsoft Ltd. v. CCEx (2012)

REVENUE

• Head office and branch are not different entities. The services received by the branch are actually received by the head office.

• Head office is the one which is making the payment, hence liable to service tax payment.

• Sub-contract agreement is merely in furtherance of the main contract.

Invoice, Payment of Local Taxes & Contract b/w branch office and client

ASSESSEE• The invoices were raised by the branch

office and the VAT/GST liability was also discharged by it. Therefore, the question of subjecting the same transaction to service tax in India at the hands of the head office would not arise at all [Tata Technologies Ltd. v. CCEx, Pune-I (2013)]

• When the invoice is raised on the branch office for service rendered and contract is entered into between the branch office and the service provider, it cannot be said that such contract has been entered into by the company located in India [M/s Infosys Ltd. v. CST (2014)]

• Payment of local VAT abroad will mean that the service is received and consumed outside India.

• If the services rendered abroad have been subject to local taxation, the question of service tax on the same transaction won’t arise [KPIT Cummins Ltd. v. CCEx (2013)]

REVENUE

• The notion of avoidance of double taxation is nowhere in the Service Tax Act, 1994.

• If the payment of local taxes abroad is made a criterion to determine whether service tax liability would arise in India or not, it may lead to tax evasion merely by changing the flow of consideration.

• A branch is an entity distinguishable from its head

office.• A branch in another country is deemed to be a

separate establishment for the purposes of determining the receipt of service.

• Only because the branch has contributed to the head office in fulfilling its contractual obligations, the head office in the taxable territory won’t become a recipient of business auxiliary services.

• Any gross outflow or netted inflow would be reimbursements and not taxable.

Milind Kulkarni v. CCEx (2016)

• The judgment hasn’t stressed upon the fact that there

was an employment contract entered into between the head office and the employees working in the branch.

• No mention of a sub-contract between the branches and the client. If the contract was there, then branch could be considered the service provider and not the appellant.

• No mention about the payment of the local taxes (VAT/GST). If the local taxes are paid in the country where the service is provided and hence received then, that will act as an evidence to show the consumption of the services in a non-taxable territory. Thus, the Indian authorities won’t have any jurisdiction to tax that transaction.

Milind Kulkarni v. CCEx (2016)

• CBEC Education Guide: Service recipient/provider: In the case of multiple

establishments of a person, it will be the establishment that actually provides, or receives (i.e. uses or consumes), a service that would be treated as ‘directly concerned’ with the provision of service , notwithstanding the contractual position, or invoicing or payment. (5.2.7)

• Therefore, if the services have been used/consumed or provided by branch office, then even though the contract is between the head office and the client for the provision of service; branch office will be considered as the service provider.

• The philosophy of the POPS, as set out in the Education Guide, is that a service should be taxed in the jurisdiction of its consumption (5.1.3)

• Rule 3 of POPS Rules, 2012 states that the place of provision of a service shall be the location of the service recipient (who is the service consumer) [British Airways v. CCEx (2014)]

Post 2012

• Reimbursements: CBEC Education Guide (5.2.6)

defines “fixed establishment” and indubitably “branch” can be called one.

• Interestingly, it doesn’t talk about monetary independence of a fixed establishment which evidently shows that it is upon the head office to suffice the monetary needs of the branch in the usual course of business and that can’t be called a consideration for any services rendered by the branch to the head office..

• However, Section 67 of the Finance Act, 1994 has been amended from 14 May, 2015 to provide that the definition of consideration includes any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service.

Post 2012

• Sec. 66A (b) Proviso 2- Where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

‘Directly concerned’ hadn’t been defined under the Act and thus gave scope for various interpretations.

• Explanation 1 of Section 66A (2)- A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.

Flaw- A branch can’t be called a business establishment as per the CBEC Education Guide-5.2.5.

Pre-2012: Questions unanswered?

• EXPORT Rule 6A (1) (f) of Service Tax Rules, 1994 states that

when a service is provided from a business establishment of a person in India to other business establishment of the same person outside India, it won’t be considered as export of service.

Is there a contradiction between Explanation 4 of Section 65B (44) and Rule 6A (1) (f)?

Post 2012: Questions to be asked?

• As per erstwhile Sec. 66A and also the present Sec. 65B (44), head office and branch office are separate establishments and distinct legal persons. Though the situation is clearer now.

• After POPS Rules, revenue now can’t carry out a differential treatment of considering branch office as a separate person for the purpose of levy of service tax on the head office and simultaneously, treating the same as part of the head office for determining as to who has received the service.

• It should be kept in mind that the economic survival of the branch is entirely depended on the finances provided by the head office. Therefore, internal monetary transactions can’t be taxed.

Inference

Thank you