Pradeep Jain - Chartered Accountant

Case Study

Prepared by: - CA. Pradeep Jain

Sukhvinder Kaur, LLB(FYIC)

Introduction: -

The export of services from India and import of services from India have been granted exemption from payment of service tax. For this, the Government has enacted Export of Services Rules, 2005. In these Rules different criteria has been laid down which categorizes as to what will be export of service and what will not. Certain conditions are also prescribed which are required to be fulfilled. But the concept of export of services is very complicated. Different interpretations of the provisions by the assessees and the Revenue department have resulted in a lot of litigation. In the case under study, the appellants were considered to be exporting services and later on it is contended that they are not exporting any services but it is import of services and they have to pay huge amount of Rs. 260 Crores as service tax liability.

Relevant Legal Provisions: -

Rule 3 of the Export of Services Rules, 2005: -

3. Export of taxable service. – (1) Export of taxable services shall, in relation to taxable services‚–

(i) specified in sub-clauses (d), (p), (q), (v), (zzq), (zzza), (zzzb), (zzzc), (zzzh), (zzzr), (zzzy), (zzzz) and (zzzza) of clause (105) of section 65 of the Act, be provision of such services as are provided in relation to an immovable property situated outside India;

(ii) specified in sub-clauses (a), (f), (h), (i), (j), (l), (m), (n), (o), (s), (t), (u), (w), (x), (y), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv),(zw), (zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzl), (zzm), (zzn), (zzo), (zzp), (zzs), (zzt), (zzv), (zzw), (zzx), (zzy), (zzzd), (zzze),“(zzzf), (zzzp), (zzzzg), (zzzzh) and (zzzzi) of clause (105) of section 65 of the Act, be provision of such services as are performed outside India:

Provided that where such taxable service is partly performed outside India, it shall be treated as performed outside India;

Provided further that where the taxable services referred to in sub-clauses (zzg), (zzh) and (zzi) of clause (105) of section 65 of the Act, are provided in relation to any goods or material or any immovable property, as the case may be, situated outside India at the time of provision of service, through internet or an electronic network including a computer network or any other means, then such taxable service, whether or not performed outside India, shall be treated as the taxable service performed outside India;

(iii) specified in clause (105) of section 65 of the Act, but excluding‚–

(a) sub-clauses (zzzo) and (zzzv);

(b) those specified in clause (i) of this rule except when the provision of taxable services specified in sub-clauses (d), (zzzc) and (zzzr) does not relate to immovable property; and

when provided in relation to business or commerce, be provision of such services to a recipient located outside India and when provided otherwise, be provision of such services to a recipient located outside India at the time of provision of such service:

Provided that where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located outside India.

Provided further that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is provided to a recipient located outside India, then such taxable service shall be treated as export of taxable service subject to the condition that the tangible goods supplied for use are located outside India during the period of use of such tangible goods by such recipient.

(2) The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:-

(a) such service is provided from India and used outside India; and

(b) payment for such service provided outside India is received by the service provider in convertible foreign exchange.

Explanation.- For the purposes of this rule “India” includes the designated areas in the continental shelf and Exclusive Economic Zone of India as declared by the notifications of the Government of India in the Ministry of External Affairs numbers S.O. 429(E), dated the 18th July, 1986 and S.O.643(E), dated the 19th September, 1996.’

Microsoft Corporation (I) (P.) Ltd. v/s Commissioner of Service Tax, New Delhi

[2009] 22 STT 201 (NEW DELHI - CESTAT)

Brief Facts of the Case: -

- Appellant entered into a market Development Agreement with Microsoft Operation Pvt. Ltd. of Singapore (hereinafter referred to as “MO”) in 2005. The appellant were appointed to provide various technical support services including marketing of Microsoft products in the countries Bhutan, India, Maldives, Nepal and British Indian Ocean Territory.

- Both “MO” Singapore concern and the appellant are wholly owned subsidiaries of the holding company M/s. Microsoft Corporation of Washington (hereinafter referred to as “MSFT”).

- The services to be provided were – (1) Product Support Services and Consulting Services; (2) Marketing of Microsoft products; (3) Resident Guest Employee Services (“RGE Services”); (4) Other inter-company services. The role to be played by the appellant as well as by the MO Singapore was defined in the Agreement.

- Appellants contended that the services provided by them to MO Singapore and “MSFT” were falling under the category of ‘export of services’ and therefore, there was no service tax liability on them.

- The Adjudicating Authority held that there was no export of services for which the appellant was liable to pay service tax under the Finance Act, 1994 under the category of Business Auxiliary services during the impugned period. It was held that such services were provided in India and were never provided outside India. The change in the criterion for providing service outside India did not grant immunity to the appellant as the condition of service provided from India and used outside India still remained in force.

- It was further held that the income on account of “maintenance and repair of software” was chargeable to Service Tax during the period from 06.07.04 to 06.10.05. The other issues were held in favour of the appellant. Accordingly, service tax liability was determined and demand was confirmed.

- Appellant has filed appeal before the Tribunal against the orders passed by the Lower Authorities.

Question for Consideration: -

The question for consideration before the Tribunal was that:

“Whether the services provided by the appellant provided to Microsoft Corporation USA and MO, Singapore were classifiable as export of services”.

“Whether the appellants had established that their case, to require waiver of pre-deposit of service tax demanded and penalty imposed by the lower authorities.”

Appellant’s Contentions: -

Appellant contended that the services provided by them were utilised only outside India and therefore, they would be eligible for the benefit of export of services.

Appellant relied upon Board Circular No. 111/05/2009-ST, dated 24-2-2009 and contended that the benefit of promotion of business of a foreign company had accrued outside India, for which the appellant was not liable to tax under the Finance Act, 1994. It was contended that the Board Circular had clarified that the relevant factor for Category-III [(Rule 3(1)(iii)] is the “the location of the services recipient” and not the “place of performance”. The phrase ‘used outside India’ is to be interpreted to mean that the benefit of the service should accrue outside India.

Appellant relied upon the judgment delivered in the case of ABS India Ltd. v. CST {[2008] 17 STT 223} and Blue Star Ltd. v. CCE {[2009] 18 STT 34} in which it was held that as long as the recipient of service is located outside India, it cannot be said that the service is delivered in India or used in India.

Appellant has further relied upon the decision of the Delhi Tribunal in the case of Gap International Sourcing India (P.) Ltd. v. CST [Appeal No. ST/819 of 2008 dated 21-1-2009] in which the Tribunal had granted absolute stay of tax demands on an identical issue on the ground that service recipient is located outside India. Accordingly, it was argued that absolute stay should be granted to them.

Appellant further contended that they are fulfilling all the conditions prescribed in the Export of Services Rules, 2000. The service recipient was located outside India and did not have an office in India and the appellants had received the payment only in foreign exchange.

For the liability of service tax on maintenance & repair service, appellant has contended that the entire demand was barred by limitation as the show cause notice was issued on 24.04.08 when the period involved was from 09.07.04 to 06.10.05. Reliance was placed on the Board Circular No. 70/19/03-ST, dated 17-12-2003, 81/2/05-ST, dated 7-10-2005 and Ministry’s Circular dated 17-12-2003.

Appellant contended that no pre-deposit be insisted upon during pendency of appeal. For this reliance was placed on the decisions given in ABS India Ltd.’s case, Blue Star Ltd.’s case, Shilpa Color Lab v. CCE [Stay Order No. 870/2006, dated 25-8-2006], Excel Fin Cap Ltd. v. CCE [Stay Order No. 389/2007, dated 1-5-2007] and Polar Industries Ltd. v. CCE 1999 (114) ELT 783 (SC).

Respondent’s Contentions: -

Revenue has contended that the appellant had performed the entire service in India and clients/customers availing such services were in India for which liability to service tax arose in India. Further, Microsoft USA, products were sold in India with the help of the appellant. There was no export of service at all made for the appellant. It was contended that the location of the principal was immaterial since ultimate beneficiary of services were in India to avail benefit of service. It was contended that when ultimate target group of customers were in India, they were provided end product of service in India. It was further contended that Revenue’s interest shall be prejudiced if pre-deposit of the demand raised by order of adjudication is not ordered to be paid during pendency of appeal.

Judgment of the Tribunal: -

v The Tribunal considered the definition of “export’ and held that in case of appellant, it does not seem to be export of service as the consumers of services provided were in India only. Even the contents of sample agreement dated 1-7-2005 establish in substance that ultimate consumption of service was in India and the appellant was an intermediary to connect its foreign principal to the end user of service who are consumers in India.

v Reliance was placed on the judgment of the Apex Court in the case of All India Federation of Tax Practitioners to understand the meaning of service tax. In the said judgment it was held that “service tax is VAT which in turn is both a general tax as well as destination based consumption tax leviable on services provided within the country”.

v Reliance was placed on the judgment of the Apex Court in the case of All India Federation of Tax Practitioners in which it was held that place of performance of service is decisive for determining event of taxability as well as incidence of tax.

v From the records, it appears that appellants had informed the department in 2005 that they were providing marketing services to Microsoft Corporation USA, which was located outside India. In 2007, for the first time the appellants intimated the Department that the recipient of marketing services provided by the appellant was the Singapore subsidiary of Microsoft USA and this subsidiary is referred to as “MO” in the agreement dated 1-7-2005.

v The appellant appears to have performed service in India for ultimate consumption thereof in India by its clients/customers in India. The service is destined to exhaust in India and extinct soon after performance thereof. Post performance liability only remains to be discharged by foreign principal through the appellant in India. Thus the beneficiaries of services were located in India for ultimate consumption of the service provided in India. The appellant were providing service for and on behalf of the holding company in USA as well as the subsidiary in Singapore. There appears no export of service. No service has occasioned to move out of India to a place outside India.

v Prima facie, it appears that interpretation of law by the CBEC in its circulars dated 24-2-2009 runs counter to the ratio laid down by Apex Court in All India Federation of Tax Practitioners’ case.

v Reliance placed by the appellant’s on the Board Circular dated 24-2-2009 which clarifies that the benefits of the service accrue outside India, does not appear to be of any help to the appellant since benefit of the services has accrued to the consumers in India for the service provided to the consumers thereat to fulfill contractual obligation of the foreign holding company as well as subsidiary company of Singapore. It appears that even the circular does not explain the position of law as claimed by the appellant to its advantage.

The circulars hold that location of service receiver is relevant factor to decide export of service under Rule 3(1)(iii) of Export of Services Rules, 2005. This does not rule out that when ultimate outcome of service is consumed in India, the service exhausts or extinct thereat without being capable of exported, loosing its utility. Performance of service being decisive for taxation and to decide taxable event and incidence of tax, export of service pleaded by the appellant is inconceivable.

v The Tribunal held that had the service been provided to the foreign principal not resulting with ultimate supply of goods or provision of service to the consumer in India, such services might have assumed the character or nature of export of service following tested principles of customs law in India. But in appellant’s case there is a departure to that principle. The appellant is an intermediary meant to provide well defined services to clients/customers in India with the technical assistance of foreign principal to provide service in India, the appellant was supported by technical assistance by the foreign principals and the appellant as well as Singapore concern are subsidiaries of the holding company in USA being centrally governed. Service tax law does not appear to have brought any anomalous situation to the concept of service provided in India for its ultimate consumption thereat.

v The decisions relied upon by the appellant, prima facie, do not help him in view of the law laid down by the Apex Court in All India Federation of Tax Practitioners’ case.

v With regard to taxability of maintenance/repairs of service of computer software, it was held that the explanation given by the Circulars relied upon by the appellant, that “software was not goods and maintenance thereof was not repair and maintenance” was applicable for limited period from 17-12-2003 to 6-10-2005 when circular 81/02/05 was issued. By circular 81/02/05 software was made liable to service tax. Appellant’s plea was that it was eligible to the benefit of circulars during relevant period before issuance of show-cause notice. Therefore, there cannot be any realization of the demand so far as maintenance and repair service of software is concerned. This aspect has received our due consideration in the course of hearing of stay application to work out interim modality.

v With regard to grant of blanket stay, the Tribunal held that decision of High Court of Bombay in Wardha Coal Transport (P.) Ltd. v. Union of India [Writ petition No. 390 of 2009 dated 14-1-2009] relied upon by the appellant was of no assistance to them. The relied upon case was an interim order and in view of decision of Apex Court in Empire Industries Ltd. v. Union of India [1985 (20) ELT 179] it was stated that interim orders cannot be precedent decisions.

v The Tribunal held that prima facie, a case for total waiver of pre-deposit during pendency of appeal was not established by the appellants. Balance of convenience did not tilt in favour of the appellant. Financial hardship was not pleaded. No case made out to show that irreparable injury or undue hardship shall be caused to the appellant if no full waiver is granted. However, revenue appears to be prejudiced if realisation of demand was stayed.

Decision of the Tribunal: -

The tribunal directed appellant to make pre-deposit of Rs. 70 Crores by following the decision of the Apex Court in Dunlop India Ltd.’s Case. Realisation of balance demand shall be stayed till disposal of appeal.

Comments & Conclusion: -

Thus, the Tribunal prima facie held that the appellant was not exporting service as the ultimate consumer of the services provided by him were utilized within India. However, this is only the stay application. It is yet to be seen that the service provided by the appellant to MSFT and MO Singapore falls constitutes as export of services.

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PJ/CASE STUDY/2009-10/015
24 October 2009

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PJ/CASE STUDY/2009-10/015 24 October 2009

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PJ/CASE STUDY/2009-10/015
24 October 2009