In Paul Merchants Ltd vs CCE (2012-TIOL-1877-CESTAT-DEL) a three-member bench of the Tribunal by majority held that the services provided by the Indian agents and sub-agents of the Western Union Network Limited, Ireland (WU) qualify as export of services. The question here was who the "recipient" of the services was? Was it WU located outside India, who was paying for the services or the people who were receiving money transfers in India? The Tribunal observed that service tax is a consumption based tax and the beneficiary of the money transfer services of WU's agents in India is WU located abroad. The destination has to be decided on the place of consumption and not the place of performance of the service.
The Tribunal also held that since the WU and its customers are located abroad therefore the reimbursement of advertisement expenses incurred by agents/sub-agents in India in relation to services provided by WU would also qualify as export of services.
The decision has been hailed by both the judiciary as well as trade and industry as it brings to an end the long pending litigation matters at various level of adjudication. The department has, however, not accepted the ruling and apparently challenged the decision in high court.
The arrangement of this kind, where the beneficiary of services is different from the one paying for the services is not very unusual or abnormal. Take for example the call centre services for a credit card company. In this case the credit card company is the recipient liable to pay for the call centre services, whereas the actual beneficiary of services would be the subscriber of the credit card. Now, whether the call center is managed by a third party service provider or a group entity of the credit card company, the Cenvat credit would be available to the recipient of the service who is actually paying for the services as opposed to the beneficiary of the services. Similarly, in case of export of services the same should be available as refund/rebate to the service provider.
Keeping in with the above it is not very constructive on the part of the department to appeal against the Tribunal's decision. This would simply prolong the final settlement of the issue for considerable period of time. One wishes that the department looked at the big picture rather than tried to appeal on every decision.
A different issue under customs valuation rules has been the subject of much litigation over the years. The Customs Valuation Rules provide that all payments made by the buyer as a condition of sale of the imported goods should be added to the transaction value for purposes of customs valuation. Accordingly, charges such as royalties and licence fees if paid by the buyer as a condition of sale would be added to the import price. Beginning with the landmark judgment by the Apex court in Collector of Customs (Prev.), Ahmedabad vs Essar Gujarat Ltd in 1996 to date the different courts including the Apex court itself have issued contradictory rulings on this issue, under similar sets of facts.
In a recent judgment, in Max Atotech Ltd v CC (2013-TIOL-893-MUM) the Tribunal held that since the cost of technical know-how or the payment of royalty has no nexus with the working of the imported goods such payments should not be included in the price of imported goods. The point of argument was also that the running royalty was calculated as a percentage of the net sale price of the manufactured goods in India after excluding the cost of imported as well as indigenously sourced inputs.
The final decision of not including the royalty amount in the cost of imported goods though, seems to be based on the manner in which the royalty is calculated rather than whether the know-how payments are a disguised payment for the imported goods.
Royalty can be calculated at the rate of 5 per cent (as an example) on the total sale price or 10 per cent of the net sale price after excluding the imported inputs. The amount of royalty payable would be the same in both cases. However, the calculation of royalty would have very little bearing on whether the royalty payments are made as a condition of sale of the imported goods.
What is relevant is the technology for which the royalty has been paid. If the sourced technology is towards the manufacturing process of the final goods, say for example know-how in relation to manufacturing process of a car, in this case even if any or all the inputs are imported from the supplier of technical know-how the royalty payment should not be included in the cost of imports. On the other hand, if the technology pertains to the manufacturing of the inputs or traded goods imported as such and technology for which royalty is payable would effectively, be not re-used post import, the same should be appropriated to the cost of imports.
Supported by Tajinder Singh
The author is leader, Indirect Tax Practice , PwC India
pwctls.nd@in.pwc.com
The author is leader, Indirect Tax Practice , PwC India
pwctls.nd@in.pwc.com
