Court’s decision
The CESTAT (Customs, Excise and Service Tax Appellate Tribunal, Mumbai), allowed a batch of appeals filed by a hospitality company and its senior executives and set aside the entire service tax demand confirmed by the adjudicating authority. The Tribunal held that services provided by the Indian entity to its foreign group company qualified as export of services under the Export of Service Rules, 2005.
The Tribunal further held that the impugned services did not fall within the scope of Business Auxiliary Service and that reimbursement of costs could not be artificially treated as taxable consideration. Penalties imposed on the company as well as its Director and Area Vice President were also quashed, holding that extended limitation was not invokable.
Facts
The Appellant company is part of an international hospitality group engaged in managing and operating branded hotels in India. Under its business model, different group entities entered into distinct agreements with hotel owners for licensing, marketing, technology, training, and operations.
Separately, the Appellant entered into an inter-company commercial services agreement with a foreign group entity, under which it provided business development, marketing, and operational support services for the Asia-Pacific region. The Appellant received consideration on a cost-plus basis in convertible foreign exchange. The Department alleged that these services were taxable in India and issued a show cause notice covering multiple heads of demand.
Issues
The primary issue before the Tribunal was whether services provided by the Indian entity to its foreign group company constituted export of services and were therefore not liable to service tax.
Connected issues included whether such services could be classified as Business Auxiliary Service, whether reimbursements and employee costs could be added to the taxable value, whether the Appellant acted as an intermediary, and whether penalties and extended limitation under the Finance Act, 1994 were sustainable.
Petitioner’s Arguments
The Appellant contended that the services were rendered exclusively to the foreign group entity and that consideration was received in convertible foreign exchange, satisfying all conditions for export of services. It was argued that the location of ultimate beneficiaries or hotels in India was irrelevant for determining export status.
It was further submitted that the agreements clearly established an independent contractor relationship and that the Appellant did not act on behalf of Indian hotel owners under the inter-company agreement. The Appellant relied on binding precedent, including Larger Bench decisions, to contend that accrual of benefit outside India was determinative.
Respondent’s Arguments
The Department argued that although consideration was received from a foreign entity, the services were effectively used in India for promoting and supporting hotels operating within India. It was contended that the Appellant’s activities were incidental to running hotels in India and therefore could not be treated as export of services.
The Department further alleged suppression of facts and justified invocation of the extended period of limitation. It was also argued that reimbursements and employee costs formed part of taxable value and that penalties on senior officials were warranted.
Analysis of the law
The Tribunal examined the Export of Service Rules, 2005, particularly Rule 3 as it stood during different periods. It reiterated that after 01.03.2010, the decisive requirement for export was receipt of consideration in convertible foreign exchange.
The Tribunal also analysed CBEC circulars clarifying that “use outside India” refers to accrual of benefit and effective enjoyment of services, particularly in cases involving intangible services. It emphasised that service tax is a destination-based consumption tax and that services consumed outside India fall outside the tax net.
Precedent Analysis
The Tribunal relied heavily on the Larger Bench decision in Arcelor Mittal Stainless India, which conclusively held that services rendered by an Indian entity to a foreign principal, even if connected to Indian markets, qualify as export when the recipient is located abroad and payment is received in foreign exchange.
The Tribunal also followed High Court decisions holding that the location of the service recipient is determinative and that services provided to foreign clients cannot be taxed merely because downstream business activity occurs in India.
Court’s Reasoning
The Tribunal found that the Appellant provided services only to its foreign group entity under a distinct inter-company agreement and that there was no privity of contract between the Appellant and Indian hotel owners for those services. It rejected the Department’s attempt to conflate different agreements and service streams.
The Tribunal held that reimbursements were mere cost allocations and could not be treated as consideration for a taxable service. It also found no evidence of suppression or intent to evade tax, rendering extended limitation and penalties unsustainable.
Conclusion
The CESTAT Mumbai allowed all appeals and set aside the service tax demands, interest, and penalties in their entirety. It held that the impugned services qualified as export of services and were not liable to service tax under the Finance Act, 1994.
The Tribunal also set aside penalties imposed on senior executives, reaffirming that personal liability cannot be fastened in the absence of deliberate contravention or mens rea.
Implications
This judgment provides significant clarity for multinational service providers operating under group structures, particularly in the hospitality and services sector. It reinforces the principle that export of services depends on the location of the recipient and accrual of benefit, not on where downstream business activity takes place.
The ruling also limits aggressive valuation practices by tax authorities and strengthens taxpayer protection against extended limitation and personal penalties in interpretational disputes.
