CESTAT, Mumbai Bench
Korean Air vs. Commissioner of Service Tax
Section 9, 66A
M.V. Ravindran, Judicial Member And C.J. Mathew, Technical Member
Order No. A/89222/17/STB
Appeal No. St/87669/2013
August 21, 2017
ORDER
CJ Mathew, Technical Member – This appeal of M/s Korean Air seeks to set aside the demand of service tax of Rs. 1,10,66,228 for the period from 18th April 2006 to 31st March 2012, along with interest thereon, besides the penalty of Rs. 30,06,087 imposed under section 78 of Finance Act, 1994. The impugned order disposed of five show cause notices for the period from April 2003 to March 2012 of which the demand in later four notices was confirmed in full and partially for the period from July 2003 to March 2008 in the first. Penalty under section 76 of Finance Act, 1994 was also imposed in relation to the non-levy for the period from April 2008 to March 2012.
2. Appellant is an airline of the Republic of Korea and has an establishment in India to provide ticketing and cargo facilities to customers besides operating through authorized agents. M/s Korean Air utilizes its own computer reservation system -TOPAZ- for direct sales and inventory management; they have also entered into agreements with operators of ‘Computer Reservation System (CRS)/Global Distribution System (GDS)’ which enables travel agents who handle ticketing for different airlines to access their ‘seat inventory’ for satisfying customer requirements. The system of M/s Korean-Air, which contain complete details of ‘seat inventory’ of the airline, is made available to travel agents through the sole interface of ‘Computer Reservation System (CRS)/Global Distribution System (GDS)’.
3.’Computer Reservation System (CRS)/Global Distribution System (GDS)’ is an ‘on-line platform’ for transactions between the travel agents and various airlines for ticketing of passengers; the details of seats, reservations, ticketing and other travel related information facilitates a two-way transaction between the agent and the air-line. The ‘real time’ availability of seats in any sector is provided to the travel agent who, in turn, upon finalisation of a sale would transmit details of reservations which would be reflected in the inventory of availability. In essence, the seat availability pattern of the airline is maintained in the network controlled by these operators which is accessed by agents for servicing customers who approached them for travel arrangements. The consideration for making this facility available to the agents is met by the airline. The impugned order has held that the appellant; operating in India is the recipient of ‘online information and database access and/or retrieval services’, as defined in section 65(75) of Finance Act 1994, which is taxable under section 65(105)(zh) of Finance Act, 1994 for which the adjudicating authority has relied upon the definition of the activity in section 65(75) of Finance Act, 1994, viz.,
‘… providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network’
The adjudicating authority has confirmed the proposal for recovery of the demand from the appellant who, being the recipient of this service, is(liable for discharge of the tax liability, in terms of section 66A of finance Act, 1994 as the service is rendered by operators who are based outside India.
4. Before proceeding further, we must point out that (unlike the cross-border movement of goods which is perceptible, specific identification of the moment of import of services is not so. It must also be noted that, unlike goods, there is no tax on import of services. The tax liability on services rendered from outside are sought to be fastened to countervail the levy that burdens a domestic transaction of like nature and to enable such taxpayer to participate in the privileges of national treatment in consequence. Owing to the peculiar complexity of cross-border transfer of service, the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 was notified for classification of the entire range of taxable services in one of three mutually exclusive categories relating to the object on which a service is rendered, the place of performance of the service or the location of the recipient of the service. It is only such activities which do not conform to any of the categories so enumerated that are exempt from tax. In the performance of ‘online information and database access and/or retrieval services’, it is the location of the recipient of the service that determines the taxability or exemption thereof.
5. The appellant contends that they are not the recipients of the service in terms of contract, functional compulsion or as payer of consideration. Also, according to the appellant, the beneficiary of the said service is not they but the travel agents. These were agitated in the adjudication proceedings. The original authority held that the ownership of the database or the source of consideration does not alter the applicability of the definition in section 65(75) of Finance Act, 1994. The adjudicating authority concluded that the ‘CRS/GDS’ operator is the provider of the said service and the consequences of section 66A of Finance Act, 1994 devolves on the Indian entity of the first party to the contract. Considering that section 66A was incorporated in Finance Act, 1994 only on 18th April 2006, the demand for the period prior to that was dropped.
6. Learned Counsel for appellant contends that the decision of the Tribunal in Qatar Airways & Emirates v. Commissioner of Service [2016] 71 taxmann.com 295/57 GST 72 (Mum.-CESTAT) which relied on an earlier decision in British Airways v. Commissioner of Central Excise [Service Tax Appeal No. 166 (Delhi) of 2012, dated 23-5-2014], is squarely applicable to the facts of the case. It is further contended that the said service had never been imported into India as it is the headquarters of the appellant in Korea, a separate legal entity, that is the recipient and the appellant, another separate legal entity, is not privy to that contract and has not received any service. Reliance is placed upon the decision of the Tribunal in Paul Merchants Ltd v. CCE [2013] 30 taxmann.com 23/38 STT 702 (New Delhi-CESTAT) to assert that they not being:
‘…the person on whose instructions/orders the service is provided and who is obliged to make the payment for the same and whose need is satisfied by the provision of the service…. Just as in case of sale of goods it is the buyer who is obliged to pay for the goods purchased, in case of provision of service, it is recipient of this service who is obliged to pay for the service to the service provider and whose need is satisfied by the service order in other words is the buyer of the service.’ cannot be held to be the recipient of such service. Learned Counsel also disputes the classification of the service as the data is provided by the headquarters of the appellant to ‘CRS/GDS’ operator who, in turn, services travel agents. Reliance is placed on the decision of the Tribunal in United Telecom Ltd. v. Commissioner of Service Tax [2009] 18 STT 495 (Bang.-CESTAT) and Nestle India Ltd v. Commissioner of Central Excise [Stay Order No. ST/18/2011, (PB) dated 17-1-2011] in support of the proposition that ownership and provision of service go hand-in-hand.’
7. Learned Authorised Representative urged that the decisions of the Tribunal upholding the levy on consideration paid to ‘CRS/GDS’ operators would sustain the demand against the appellant. He assailed the reliance on the decision of the Tribunal in re British Airways on — the ground that the dispute is pending before the Hon’ble Supreme Court. Drawing our attention to the exhortation of the Hon’ble Supreme Court in Union of India. v. Paras Laminates (P.)Ltd. 1991 taxmann.com 31 that :
‘It is, however, equally true that it is vital to the administration of justice that those exercising judicial powers must have necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings printed light what is perceived by them as an erroneous decision in the earlier case. In such circumstances it is reasonable and indeed efficacious that a case is referred to Larger Bench.’
he sought to justify recourse to such mechanism in the instant dispute. According to him, the facts pertaining to the decision in re British Airways are distinguishable from the facts pertaining to the appellant who has been charged, either by the provider of the service or so attributed by the headquarters, for proportional use of the service by the agents in India. The decisions of the Tribunal in Torrent Pharmaceuticals v. Commissioner of Service Tax [Order No. A/11932 of 2014, dated 12-11-2014], 3i Infotech Ltd. v. Commissioner of Service Tax, [Appeal No. ST/520 of 2012, dated 9-12-2016] and Tech Mahindra Ltd. v. CCE [Order No. A/86474-86477/16/STB, dated 15-3-2016] were placed before us to further the contention that, notwithstanding the source of payment of consideration, the branch, as an independent entity and as the recipient of the service, should be fastened with the tax liability.
8. Having heard both sides, we note that reliance has been placed on various decisions that invariably address the Explanation in section 66A of Finance Act, 1994 in the context of various impugned demands and the arguments cited before the Tribunal. Before we proceed to ascertain the applicability of those decisions to the present dispute, it behoves us to refer to the manner in which the adjudicating authority has found it legal and proper to crystallise the demand on the appellant.
9. Following an elaborate narration of the transactions, the adjudicating Commissioner arrives at the classification of the service thus :
‘4.2.2……… It is a fact that the CRS companies do not own the data but they do involve in processing in the two way transactions of data between airlines and travel agents/passengers. They provide an electronic interface that facilitates this data processing and its retrieval/excess by the client.
4.2.3 the way, in which the transaction takes place, I find that the CRS companies provide the Noticee service in relation to access and retrieval of online data of the Noticee to their Travel agents and vice versa. I also find that any service provided by any person in relation to access and retrieval of online data is correctly classifiable under the category of ON-LINE INFORMATION AND DATABASE ACCESS AND/OR RETREIVAL SERVICES. As varied section 65 the definition of the said service is reproduced below.
4.2.4 ……….I find the ownership of the data is immaterial here. As per the definition, taxable service is any service provided ought to be provided to any person, by any person, in relation to on-line information and database access retrieval or both in electronic form through computer network, in any manner. Reading the definition would show that the definition is verified so as to cover all types of activities which are provided IN RELATION TO On Line Information and Data base Access or Retrieval. Further the use of the word IN ANY MANNER at the end of the definition further expands the scope of the service as CRS companies carries out the work of real-time processing of data received from airlines as Willis from travel agents and involved in the two-way transmissions of data between airlines on one hand and travel agents and passengers on the other hand. This service is definitely in relation to On Line Information and Data base Access or Retrieval. Even if it is accepted that the data do not belong to the CRS companies but as the definition of OLIDAR covers the activity of providing data or information, therefore the actor facilitating of providing data of the airline companies to the travel agents and vice versa is clearly covered in the definition of OLIDAR ‘
10. It is clear from the above that the adjudicating authority/has transposed the transactions onto a portion of the definition in section 65(75) and section 65(105)(zh) of Finance Act, 1994 without any discussion to identify the appellant as the recipient of the service and in accordance with the special provisions of section 66A, the deemed provider of the service for liability to tax. This is an essential requirement considering the manner in which section 66A has been enacted as a deviation from the general norm in section 66 of Finance Act, 1994. It would appear to us that the tenor of the various decisions handed down by the Tribunal, and cited by the rival sides, have not been appreciated for the valorous attempts to clarify this much- misinterpreted provision of Finance Act, 1994. It, therefore, devolves upon to enlighten both disputants and, at the same time, provide ourselves with that steady and unwavering beam within which we will find the resolution to this dispute.
11. After a futile attempt, through a provision in the Service Tax Rules, 1994, to accord a national treatment to services received from abroad that should, in equity, be subject to the same tax that a provider and receiver situated within the domestic territory is, legislative sanction to incorporate section 66A in Finance Act, 1994 was accorded with effect from 18th April 2006. The key expression authorising the collection of tax dues from the recipient of the service as a deviation from the norm of placing the burden on the provider :
‘……is and such taxable service shall be treated as if the recipient had himself provided this service in India, and accordingly all the provisions of this Chapter shall apply:’
12. It is apparent that legislative wisdom considered it necessary to discard for this purpose the use of the expression ‘person liable to tax’ that applies to ‘reverse charge’ in a domestic situation and to substitute it with the legal fiction of the recipient being deemed to be the provider of the service and, thereby, subject not only to the tax but also all other obligations and privileges ensconced in the Chapter. It is not the force of administrative convenience that prompted the alteration but the dilemma of having to collect a tax from a nebulous entity that could not be identifiable as the corporeal ‘person’ referred to in the various enumerations in section 65 (105) of Finance Act, 1994 and the apparent lack of jurisdiction over the overseas entity. Conversely the recipient of the particular service who is to be so subjected to tax must necessarily be associated with the service in some manner, it was to give effect to such intention that the Taxation of Service (Provided from Outside India and Received in India) Rules, 2006 was framed. This, again, is apparent from the content of the Rules and the authority under which the Rules are framed these Rules do not flow from section 66A but invoke the general rule-making powers, as well as the power to exempt, conferred in Finance Act, 1994. These Rules enable the identification of the person in receipt of the service in the context of the specific taxable service. We, therefore, come to the conclusion that, where section 66A of Finance Act, 1994 is sought to be invoked, the classification of the service must necessarily be dealt with in concatenation with identification of the recipient . The impugned order has failed to so and is liable to be set aside on that count itself.
13. Nevertheless-, we must also address the larger issue of the intention of the sovereign legislature in placing the burden of tax on the recipient of the service. The economic reality of cross-border commercial transfer of goods has been grafted in to the tax laws of most countries in near-perfect visualisation of the flows and has evolved as a nearly universal code. The intangibility of services, unfortunately, does not easily lend itself to such a clear perception.
Such transnational engagement in services take multifarious forms which are not readily amenable to straitjacketing as ‘one rule fits all; hence, the selective culling of judicial interpretations in a vain attempt to persuade us to adopt respective points of view. Most disputes have stemmed from the single-minded determination to tax by relying upon the Explanation in section 66A that disaggregates units within the same commercial entity and the refuge sought by assessees in this disaggregation to claim exclusion from taxability. Ignoring these expectations, an analysis of the various decisions points to the convergence of thinking apparent in the judicial interpretations.
14. In re British Airways, the tax authorities sought to subject the consideration earned by ‘CRS/GDS’ operators on the rendering of a facility to IATA agents in India from a contract between two overseas entities; the rationale for such a proposal was the residential status of the agents combined with the existence in India of a branch of the overseas entity that entered into a contract with ‘CRS/GDS’ operators. Convinced that tax liability under section 65(105)(zh) of Finance Act, 1994 did arise, and confronted by the impossibility of collecting it from agents by recourse to section 66A of Finance Act, 1994, the suggestion that British Airways (India), vicariously for British Airways (UK), should be deemed to be the recipient in India was not found acceptable because the Indian entity was held to be distinguishable from its overseas parent in view of the legislated disaggregation. Learned Counsel has seized that lifeline.
15. We take note of pendency of the appeal of Revenue before the highest court in the land but, in the absence of any stay of the order of the Tribunal, we have no choice but to remain on the path already trodden by this Tribunal. In the light of our discussions supra on the necessity of a harmonious construction of section 66A and the Rules framed for its implementation, we do not merely rely upon the precedent of the decision in re British Airways but also find that the impugned order has not established the appellant before us to be the recipient of the service provided by ‘CRS/GDS’ operators. We also take note that the impugned order has, while recording the submission of the appellant that establishments of ‘CRS/GDS’ operators did exist within the country, failed to accord further consideration to that aspect; in all probability, the lack thereof in the show cause notice precluded a foray in that direction. The decision of the Tribunal in the identical set of facts in re British Airways also resolves the appeal in favour of M/s Korean Air.
16. The decision of the Tribunal in re Paul Merchants Ltd, though delivered in resolving a dispute of taxability of a service purportedly rendered within India vis-a-vis exclusion claimed as exporter of service, emphasised that taxability arises not merely from conformity with the descriptions in section 65(105) of Finance Act, 1994 but also with reference to the identification of recipient of the service. The authorities sought to tax the commission received by entities in India from M/s Western Union, who had engaged to handle remittances from abroad to persons in India through these entities, as consideration for ‘business auxiliary service’ rendered within India. Considering the nature of the service envisaged in section 65 (19) of Finance Act, 1994 and the scheme of Export of Service Rules, 2005, it was held that such service had been rendered to the remitters abroad and, therefore, outside the scope of taxability under section 66 of Finance Act, 1994. Though the setting was one of export of services, the principle that was espoused, viz., the identification of recipient of the service being crucial to taxability, is the fulcrum of the decision in re Paul Merchants Ltd.
17. In re Torrent Pharmaceuticals Ltd, relied upon by Learned Authorised Representative, the Tribunal had held that, the Explanation in section 66A notwithstanding, the indivisibility of branches and head office precluded the crystallisation of a tax liability on payments effected between them. The decisions in re 3i Infotech Ltd and in re Tech Mahindra Ltd to relieve the payment flows between the Indian headquarters and their overseas branches, which had been established to function as convenient intermediaries, was also founded on this same indivisibility. These decisions took note of the legal fiction of disaggregation as having been intended to forestall any attempt to use branch transactions as a cover to blur the identification of recipient of service. This does not further the case put forth by Learned Authorised Representative that the decision in re British Airways may have had a different outcome had the benefit of the later decisions been available. On the contrary, all the decisions flow from the essential requirement to pinpoint the service, the provider of the service and the recipient of the service for the consideration to be taxable under Finance Act, 1994.
18. From these decisions, (the common thread that makes itself visible may be stated thus:
(a) service tax is leviable only when recipient and providers are identifiable and identified;
(b)unlike domestic transactions, the identity of the provider/recipient are not distinct in cross-border service agreement
(c)in the context of exclusion of tax from the value of services that are exported, the Export of Service Rules, 2005 provide the framework for such blurring of the recipient in the context of services rendered
(d)such blurring or lack of administrative jurisdiction over provider cannot be allowed to stand in the way of taxing services that are sourced from a provider outside India
(e) to overcome such blurring and to provide the mechanism for collection, section 66A deems it sufficient to identify the recipient which is, however, a sine qua non for fastening liability.
(f)the legal fiction of disaggregation does not waive the obligation to identify the recipient in the context of the service but is intended to preclude taking refuge under the umbrella of corporate identity when the Indian headquarter is the recipient of a service within the meaning of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.
19. The attempt in the present dispute was to hold the Indian branch of a foreign entity liable to tax on consideration paid to an overseas entity arising from contractual relationship of the foreign headquarters of the appellant with ‘CRS/GDS’ operators outside the country. The thread of provider-recipient relationship as interpreted by Tribunal in the several decisions is unwavering and constant. The decision of the Tribunal in re Jet Airways would also not be contrary to the decision in re British Airways as the crystallisation of liability in the former was grounded in the identification of the Indian headquarters as the recipient of the service. Consequently, the reference to the decision of the Hon’ble Supreme Court in re Paras Laminates (P.) Ltd. in the submissions of Learned Authorised representative for consideration of the present dispute by a Larger Bench does not appear to be of relevance.
20. In view of our findings above, we allows the appeal of M/s Korean Air and set aside the impugned order.
