The Customs, Excise and Service Tax Appellate Tribunal has clarified a critical boundary in service tax jurisprudence: a service performed entirely within India may still qualify as an export if its benefit accrues abroad. This ruling resolves long-standing ambiguity for Indian R&D firms providing technical services to international clients, affirming that physical performance location is not the sole determinant of export status under the Export of Service Rules, 2005.
Background & Facts
The Dispute
M/s Sipra Labs Ltd, a Hyderabad-based research and development entity, conducts bioequivalence and bioavailability (BE/BA) studies for domestic and overseas pharmaceutical clients. These studies compare a test drug with a reference drug to determine therapeutic equivalence, using validated statistical tools and laboratory analysis. All testing activities occurred within India. The department assessed service tax on these services, classifying them as 'Technical Testing and Analysis Service' (TTAS) under Section 65(106) of the Finance Act, 1994, and rejected the appellant’s claim that the services constituted exports.
Procedural History
- 2013: Commissioner of Central Excise & Service Tax, Hyderabad-II, issued an Order-in-Original imposing service tax demand and penalty.
- 2013: Appellant filed appeal before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad.
- 2026: Tribunal delivered final order allowing the appeal.
Relief Sought
The appellant sought cancellation of the tax demand and penalty, arguing that BE/BA studies provided to overseas clients qualified as export of service under Rule 3(1)(ii) of the Export of Service Rules, 2005, since the results were delivered to clients abroad, used abroad, and paid for in convertible foreign exchange.
The Legal Issue
The central question was whether a taxable service performed entirely within India can be treated as an export of service under Rule 3(2) of the Export of Service Rules, 2005, if the benefit of the service accrues outside India, even in the absence of any physical activity abroad.
Arguments Presented
For the Appellant
The appellant relied on CST, Ahmedabad v. BA Research India Ltd and SGS India Pvt Ltd v. CST, Mumbai-II, both of which held that delivery of test reports and data to foreign clients, coupled with their use abroad, constitutes part-performance outside India. It further cited CBIC Circulars 141/10/2011 and 111/5/2009, which clarify that 'used outside India' means the benefit of the service accrues abroad. The appellant emphasized that the service was commissioned, paid for, and utilized exclusively overseas, satisfying all conditions under Rule 3(2).
For the Respondent
The department contended that the 2008 amendment to Rule 3(1)(ii) required goods or materials to be located outside India at the time of service provision for export benefit. Since the reference and test drugs were physically present in India during testing, the service could not qualify as export. It argued that the term 'performed outside India' must be interpreted strictly as physical performance, not benefit accrual.
The Court's Analysis
The Tribunal undertook a purposive interpretation of Rule 3(2), which states that a service shall be deemed performed outside India if it is 'partly' performed outside. The Court rejected the department’s narrow reading of 'performance' as limited to physical acts. Instead, it held that the delivery of analytical reports and scientific data to clients abroad, their subsequent use in regulatory submissions, and the receipt of payment in foreign exchange collectively constituted part-performance outside India.
"The term 'used outside India' has to be interpreted to mean that the benefit of service should accrue outside India even when all the relevant activities have taken place in India, so long as the benefit of these services accrues outside India."
The Tribunal distinguished the 2008 proviso, which applies only when services are provided through internet or electronic network to goods located abroad. Since Sipra Labs delivered reports via courier and online platforms - not as part of a real-time electronic service - the 2008 proviso did not apply. The first proviso under Rule 3(2), which covers services where benefit accrues abroad, remained fully operative.
The Court also noted that the department had audited the appellant’s accounts and raised no objection to the classification at the time, undermining any claim of suppression. The change in classification was therefore a mere change of opinion, not a discovery of new facts.
The Verdict
The appellant won. The Tribunal held that BE/BA studies provided to overseas clients, where the benefit accrues abroad and payment is received in convertible foreign exchange, qualify as export of service under Rule 3(2), even if all testing occurs in India. The demand and penalty were set aside.
What This Means For Similar Cases
Benefit Accrual Trumps Physical Performance
- Practitioners must now argue that the economic and functional use of a service abroad, not just physical execution, determines export status.
- R&D firms, clinical trial agencies, and technical consultants should document how their deliverables are used by foreign clients to establish benefit accrual.
Export of Service Rules Are Not Limited to Digital Delivery
- The 2008 amendment does not override the broader scope of Rule 3(2). Physical delivery of reports, data, or samples abroad still qualifies.
- Firms using courier, email, or cloud-based platforms to transmit results to overseas clients can claim export benefits without relying on real-time digital interfaces.
Audit History Can Preclude Retrospective Reassessment
- If a taxpayer’s classification has been audited and accepted by the department without objection, subsequent reclassification based on 'change of opinion' is legally unsustainable.
- Practitioners should preserve audit reports and correspondence to rebut allegations of suppression or misclassification.
