Engineering services to foreign recipients remain exports; incidental on-site inspection does not trigger Rule 4.

M/s. Xomox Sanmar Ltd. rendered engineering-related services to M/s. Xomox International GmbH & Co., Germany (“Xomox Germany”), concerning goods manufactured by M/s. Sanmar Foundries Ltd.

The services included drawing-related assistance, casting and pattern development, technical clarification, material specifications, quality coordination, inspection-related activities, packing and dispatch assistance.

The appellant received USD 2,000 per month in convertible foreign exchange and treated the receipts as export of services.

The Department alleged that the appellant was providing Technical Inspection and Certification Service, including inspection and examination of castings at the premises of Sanmar Foundries.

For the period April 2009 to March 2014, service tax of ₹6,91,329, along with interest and penalties, was confirmed by the adjudicating authority and upheld in appeal.

For April 2014 to March 2015, a further demand of ₹14,476, with interest and penalties, was confirmed and upheld.

1. Whether the services rendered by the appellant were classifiable as Consulting Engineer Service or as Technical Inspection and Certification Service?

2. Whether the services qualified as export of services during the relevant periods and, consequently, whether the demands of service tax, interest, limitation and penalties were sustainable?

The Tribunal applied Section 65A of the Finance Act, 1994, which required classification to be determined by the substance of the service, preferring the more specific description and, in the case of a composite service, the service giving it its essential character.

For the pre-negative-list period, the relevant provisions were Section 65(105)(g) read with Section 65(31), concerning Consulting Engineer Service, and Section 65(105)(zzi) read with Section 65(108), concerning Technical Inspection and Certification Service.

Export treatment for the earlier period was governed by Rule 3 of the Export of Services Rules, 2005; following the amendment effective 27 February 2010, the requirement that services be “provided from India and used outside India” was omitted, as recognised in Commissioner of Service Tax-III, Mumbai v. Vodafone India Ltd., 2025 INSC 914.

From 1 July 2012, Rule 6A of the Service Tax Rules, 1994 and the Place of Provision of Services Rules, 2012 applied: Rule 3 prescribed the recipient-location rule, while Rule 4 operated as an exception only where the goods were required to be physically made available for providing the service.

The Tribunal also applied the principles in Anand Nishikawa Co. Ltd. v. CCE, 2005 (188) E.L.T. 149 (S.C.); Pahwa Chemicals Pvt. Ltd. v. CCE, 2005 (189) E.L.T. 257 (S.C.); and Continental Foundation Joint Venture v. CCE, 2007 (216) E.L.T. 177 (S.C.), that extended limitation requires wilful suppression, misstatement or contravention with intent to evade tax.

The Tribunal examined the assignment as a whole rather than isolating its inspection-related components.

The contemporaneous job description divided the work into Engineering, Development, Quality and Dispatch, covering drawing release and correction, technical clarification, casting and pattern development, material specifications, inspection plans, corrective-action reporting, packing and dispatch assistance.

The correspondence, the 2007 debit note describing the consideration as “Service Engineer Charges,” and Xomox Germany’s 2009 confirmation of payment for engineering services supported the appellant’s position that the engagement was a broader engineering assignment, not an independent inspection or certification service.

Accordingly, inspection and quality-control activities were treated as incidental components and not as the essential character of the service; SGS India was distinguished on facts because it concerned a service whose essential character was inspection and certification.

For the period from 27 February 2010 to 30 June 2012, the Tribunal held that the omitted “provided from India and used outside India” requirement could not be reintroduced merely because some work was physically performed at Sanmar Foundries.

Xomox Germany was the contractual recipient and paid the consideration in convertible foreign exchange.

For April 2009 to 26 February 2010, although the earlier rule required use outside India, the Department failed to establish that Sanmar Foundries was the recipient or user of the service.

The contractual documents showed that the service was rendered for Xomox Germany’s engineering requirements, and Sanmar Foundries neither contracted for nor paid for it.

For the period from 1 July 2012 onwards, the conditions under Rule 6A were satisfied: the provider was in India, the recipient was outside India, consideration was received in convertible foreign exchange, the service was not covered by Section 66D, and the parties were not merely establishments of the same person.

Rule 4 of the Place of Provision of Services Rules was held inapplicable because the Department did not prove that physical availability of the castings was necessary for providing the engineering service as a whole.

The mere performance of some activities at Sanmar Foundries’ premises did not displace the general recipient-location rule under Rule 3.

Since the demands failed on merits, interest and penalties also failed.

Further, the extended limitation period was unsustainable because the appellant had disclosed the arrangement to the Department in 2008 and there was no evidence of deliberate suppression with intent to evade tax.

The services qualified as exports during all periods in dispute: April 2009 to 26 February 2010, 27 February 2010 to 30 June 2012, and 1 July 2012 to March 2015.

The service-tax demands of ₹6,91,329 and ₹14,476, together with interest and penalties, were set aside.

The extended limitation invoked for the first demand was also held impermissible.

Both impugned Orders-in-Appeal were set aside, and both appeals were allowed with consequential relief in accordance with law.