This Tax Alert gives an update on the decision of the CESTAT, Mumbai which deals with the issue on applicability of Service tax under reverse charge mechanism on the salary and other expenses reimbursed to the overseas branch by its Indian head office (‘HO’).
Section 66A of the Finance Act, 1994 provides for discharge of Service tax liability on reverse charge mechanism. It further provides that establishments of a person in India and outside India, shall be treated as separate persons.
CESTAT held that Service tax is not leviable on salary and other expenses (in relation to its employees), remitted to overseas branch on the following grounds:
The legal fiction of branches being distinct from HO is not applicable to exporters who operate through branches. Taxing such transactions would mean collecting taxes merely for refunding it subsequently.
Existence as a branch for the overall promotion of the objectives of HO in India does not render the transaction taxable under section 66A.
When a service to be rendered in India by HO is deliberately routed through an overseas branch, only then the legal fiction under section 66A will come into play.
The transfer of funds by gross or net outflow are nothing but reimbursements and taxing of such reimbursements would amount to taxing of transfer of funds which is not contemplated by the Finance Act, 1994 whether before 2012 or after.
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