The appellant has established a network of branches and subsidiary companies at different locations outside the country. The branches of the appellant act as salary disbursers of the staff deputed from India to client locations besides carrying out other assigned activities. The salaries so disbursed, as well as other expenses of the running the branch, are met from the coffers of the appellant. Payments made by customers are also received in branches and transmitted to the head office after netting the expenses incurred by the branch. Revenue initiated proceedings and also confirmed the demand service tax on the payments made by the appellant to branch by entertaining a view that the branches are rendering services to its head office in India.
On appeal the Tribunal set aside the demand of service tax on the basis of the following findings:
- Section 66A(2) which provides that the branch outside India is permanent establishment in such territory, cannot be interpreted to mean the branch and the head office as two commercial entities;
- A branch, by its very nature, cannot survive without resources assigned by the head office. The activity of the head office and branch are thus inextricably enmeshed. The employees of the branch are without doubt, the employees of the company;
- Merely because there is a branch and that branch has, in some way, contributed to the activities of the appellant-assessee in discharging its conractual obligations, the definiton of 'business auxiliary service' in section 65(19) of Finance Act, 1994 may not apply; and
- Transfer of funds to the branch is nothing but reimbursement and taxing of transfer of funds which is not contemplated by Finance Act, 1994.