TMI Blog2010 (3) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... the period covered in the proceedings, services rendered in the field of software development did not attract service tax. The appellant further contended that since the practice was adopted and because of adoption of such mode for charging the clients, it was not correct to hold the services rendered as amounting to mere ‘manpower supply’ and charge service tax accordingly. Held that- the appellant was supplying skilled manpower for which it was liable to pay service tax for supply of manpower services. Thus demand, interest and penalty u/s 76 confirmed. But penalty imposed u/s 78 is liable to be set aside. - S/173 OF 2008 AND ST/220 OF 2009 - 246 & 247 OF 2010 - Dated:- 3-3-2010 - SMT. JYOTI BALASUNDARAM, VICE PRESIDENT AND DR. CHITTARANJAN SATAPATHY, TECHNICAL MEMBER N. Venkataraman, G. Natarajan and M.S. Krishna Kumar for the Appellant. N. Rajagopalan and V.V. Hariharan for the Respondent. ORDER Dr. Chittaranjan Satapathy, Technical Member - Heard both sides. Appeal Nos. S/173/2008 and ST/220/2009 relate to the appellants M/s. Future Focus Infotech (P.) Ltd. The period involved and the amounts involved in these appeals are as given be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Clause 2 obligates the following: * To perform and deliver services under Task Orders in accordance with the milestones, delivery date, specifications and requirements as set forth in the task order. (Clause 2A). * Services to be performed only by appellant's representatives. Not to assign or sub-contract without express, prior written consent of Infosys. (Clause 2C) * Responsibility of the Appellant to maintain and manage its tasks. If services of the personnel are unacceptable to Infosys, Appellant to provide qualified replacement to ensure continuity of services. (Clause 2D). * It is expressly understood that services rendered by appellants to the customers of Infosys under the Task Orders shall be deemed to be services rendered to Infosys (Clause 2E). * It is appellant's duty to determine the particular terms conditions that are applicable to the work being provided to a specific customer (Clause 2H). * If required, to provide report on quarterly basis summarizing the work performed, the progress and target completion date for such works (Clause 2-I). (6) Clause 3 - Acceptance Testing: * Acceptance Testing means, whether relevant services c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction etc. [Clause 3(b)]. (2) Clause 4.4 * If appellants default on providing continuous support services, during the project, TCS will deduct an amount, not exceeding two months' fee relating and attributable to the default from the compensation payable to them. (3) Clause 4.6 Should TCS be involved in the selection of employee of BA to perform Services, such involvement shall not obligate TCS to accept any liability whatsoever for the work performed by said selected employees, and the obligations of performance and the liability arising therefrom, including the acceptability of Deliverables shall rest solely with B.A. In the event any work performed by a BA Employee is not accepted by TCS/Client, the concerned BA Employee shall rework the deliverable and BA shall not be entitled to charge for the number of days such BA Employee works on the re-works . 3. The learned senior counsel refers to the following extract of relevant findings from the Order-in-Originals No. 37 of 2008, dated 14-5-2008 and No. 54 of 2008, dated 17-12-2008:- * Para 6.2 - Employees of Focus perform the services at customers' premises as per the requirements and directions of IT Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining thereto, which obligates the appellants to render services of Computer Software through identified people. In such circumstances the appellants submit that the following criteria will determine as to whether the contract is for rendition of Consulting Engineer services or Manpower Supply . (a) Deliverables:-What is the ultimate deliverables under these contracts? Section 65(68) of the Finance Act, 1994 defines Manpower recruitment or supply agency means any person engaged in providing any service, directly or indirectly in any manner for recruitment or supply of manpower, temporarily or otherwise to any other person. Parliament under manpower supply obligates the ultimate deliverable to be Supply of manpower temporarily or otherwise . There is no contractual obligation for a manpower supply agency to undertake provision of any notified or specified services as a part or in addition to supply of manpower. Section 65(68) as it originally stood prior to 16-6-2005 reads as under: Manpower recruitment agency means any commercial concern engaged in providing any service, directly or indirectly, in any manner for recruitment of manpower to a client. In other words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are mobilized and supplied to the service recipient. On the other hand, in the case of the consulting engineer the accountability is in terms of the work and performance done. The measure of accountability is not a number of people or heads who work at a particular site or project. It is the turn around of the quantum and quality of work agreed upon which becomes the yardstick of accountability. The contract clauses very clearly envisage periodical review, periodical audit visits, performance evaluation and accountability in terms of the milestone and time frames in terms of the service level agreement. Such accountability cannot be defined as a Contract for supply of manpower recruitment. (Clauses 2D, 2-I, 2J, 3A, 3B, 8A(ii) of Infosys/Clauses 4.3, 4.4, 4.6 of TCS). (d) Location:-Computer software services are a high end technology service. It is a service which can be rendered or performed from any place or premises or location. There can be instances where a service provider will have all the necessary infrastructure to provide services from his own location and there may be service providers who may work using the infrastructure of the client and develop install, enhance, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 12 of Infosys/Clauses 12 and 13 of TCS) All these contracts also envisage that in the case of pre-matured or early termination the work in progress should be conveyed to the client and payments would be made for that portion of the completed services. (g) Consideration:- Its a common fact both in commerce and in law that consideration is only a measure and cannot go to identify or define a service. It cannot form the basis to define a contractual obligation. onsideration is money or money's worth for a rendering any type of services. It gets fixed contractually either on a lump sum basis, or fixed cost basis or a time and material basis. If the service provider uses his own infrastructure it will be a contract inclusive of the time spent and the material employed. On the other hand, if a service provider is to use the infrastructure of the client for the development of computer software the consideration could be for the time spent. In both cases as long as the contract is for provision of service and the deliverables, responsibility and accountability including termination is traceable to the provision of service and not supply of manpower, such a contract of servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igate supply of people nor do these people work solely under the control of the clients. To the contrary, the clients disown the responsibility of the work to be performed by such identified people and fasten the entire responsibility and liability on the respective appellants. In such circumstances how is it open to the revenue to construe the transaction as Manpower Supply and not Consulting Engineer ? (5) To reiterate, appellants respectfully submit that testing the transactions and the contract under question on the strength of the above parameters, it would become self-evident that the transaction under questions are not for Manpower supply but only provision of Computer Software services falling under Consulting Engineer. (6) Without prejudice to the above submissions, assuming but not admitting if both the entries namely Consulting Engineer vis a vis Manpower Supply are considered to be constituting rival entries, then classification needs to be made in terms of section 65A of the Finance Act, 1994. There are three ground rules in terms of section 65A of the Act sub-clause (2)(b) of section 65A is inapplicable to the cases since they deal with composite services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 'manpower supply' which falls under sub-clause (k) to section 65(105) of the Act. (8) In short, even if rules of classification are applied, the transaction under question can only get classified under Consulting Engineer and not Manpower supply . Based on the above, it is humbly prayed that the Hon'ble Tribunal may kindly be pleased to set aside the impugned orders and thus render justice. 6. In reply Shri N. Rajagopalan, learned special counsel for the Department has submitted as follows:- In the appeals, the appellants have contested against the confirmation of the demand, interest and imposition of penalty on the following grounds:- (i) The services rendered fall in the category of 'Consulting Engineer's Services' as defined under clause (31) of section 65 of the Finance Act, 1994 (hereinafter referred to as 'the Act'), and since the service was rendered in the field of computer software engineering, such service stood exempt from service tax, vide clause (g) of section 65(105) ibid, (ii) Alternatively, the service fell under 'Business Auxiliary Service' in the field of Income-tax services and fell outside the scope o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are computer-literate by possessing any certificate of having attended a course on computer, they cannot be considered 'consulting engineers'. The Bangalore Bench of CESTAT have held in CCE C (Appeals) v. Shreus Constructions [2006] 3 STT 321, that to consider one as a consulting engineer, one has to be professionally qualified by obtaining a degree or diploma in engineering from a recognized university. A certificate holder cannot be considered as an engineer, much less, a consulting engineer. Persons holding a degree of Master of Science in Chemistry is not a qualified engineer and hence, not covered under Consulting Engineer's service. CCE v. Vishwas R. Gole [Final Order Nos. A/2807-2808 of 2008/WZB/Ahd. dated 12-12-2008]. Thus, MBAs, CAs, M.Scs. cannot be considered as professionally qualified engineers. The Bombay High Court has held in Dr. J.M. Mokashi v. CIT [1994] 207 ITR 252 that professional qualification must mean qualification which is necessary for carrying on the particular profession. Mere work experience is not sufficient. In CCE v. Daylight Electronics (P.) Ltd. [2006] 4 STT 241 (Chennai - CESTAT), it has been held that to place a person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Once the employees are placed at the disposal of the clients, the appellant has no control over them, except for payment of their salaries and other administrative matters. Definitely, on technical matters, appellant has no role to play. If the contention of the appellant is to be considered, then the terms of the agreement would be totally different. It would have laid stress on the development, design and delivery of the project within the fixed timeframe, retaining the right to test and exercise quality checks; it will not be concerned with the qualification etc., of the staff. It will not be the concern of TCS/Infosys to concentrate on staff, their qualification, compensation etc., as the responsibility will be on the appellant to deliver the goods, and they are not concerned as to how the appellant achieves the same, but the agreements are staff-specific, in that the various conditions and clauses in these agreements specify the various parameters in relation to the staff. They specify the qualification, experience, skills, the expectations from them, performance based output, confidentiality conditions, training etc. They work under the team leaders and under their guidanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se companies. This is clear from the following. Condition 4.5 of the agreement with TCS. The implementation and project Management will be done by TCS. This agreement does not obligate either to contract out any service to BA or to provide any minimum level of work to BA hereunder. Agreement with Infosys. 2E. It is expressly understood and agreed that notwithstanding any service rendered by Consultant to Customers under any Task Orders such services rendered shall always deemed to be rendered to Infosys only. Thus, no service has been rendered on behalf of the client by the appellant. Thus, the service does not come within the purview of Business Auxiliary Service. Point (iii) Appellant has not stated under which of the items, he has rendered service under this category. The service should be one of IT Software for use by the client it is unthinkable that IT majors like TCS/Infosys would have requested the appellant to develop a software for them. In any case, so long as the definition of the Manpower recruitment or supply agency service is not changed, the service rendered would fall only under the category of manpower supply agency services. Further, the CESTAT have - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven placing men on loan basis is held to be covered under the definition of 'manpower recruitment or supply agency' in the judgment reported in Sanjivani (Takli) SSK Ltd. v. CC CE [2008] 14 STT 3 (Mum. - CESTAT). The appellant admits to have paid service tax under this category for the men supplied to IBM, and Cap Gemini. That being the case, there is no reason why they should not have discharged the liability on supply of manpower to TCS/Infosys. Since there is no ambiguity, there is no need to resort to section 65A(2)(a) for classification. Point (iv) Value for purposes of the service tax is the gross value charged, as per section 67(1)(i) of the Act. Even rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 states so. All the expenditure and costs incurred for rendering the service are liable to be included in the value. The illustrations cited by the appellant do not apply to this service. Point (v) Time-bar. The contention is not tenable. Since the returns have been filed, the time limit runs from the date on which the returns have been filed, vide section 73(6)(i)(a). Hence, the demand is not barred by time. Further, under proviso to section 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction between the obligations borne by a manpower supply agency and those rendering technical assistance was also highlighted. (2) In reply, the learned special counsel pointed out that nowhere in the agreements between the appellant and TCS/INFOSYS, there is any reference or assignment of any project or issue or any problem allocated or even identified, requiring the appellant to render any technical assistance in the field of software design, programme, maintenance etc. Without any idea of the project, the appellant could not have rendered technical assistance in the field of software. Attention of the Hon'ble Bench was drawn to clause 3(a) in the agreement with TCS, wherein, it is mentioned that the project to be allocated. Similarly, in respect of the agreement with Infosys, as per clause 1(g), the Task Order will only define the scope of service assigned to the appellant. Only a blank Task Order has been filed in the appeal paper book. Hence, on the dates agreement was entered, no specific task in the field of software has been assigned to the appellant. (3) However, during the re-hearing on 7-1-2010, the counsel for the appellant submitted a copy of the Task Order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the control, guidance, and overall supervision of TCS/INFOSYS Team Leaders. (6) The department has not concluded that the service rendered fell under the category of 'manpower supply' because of the mode of charging for the services rendered. With reference to the argument that the appellant was responsible for the 'deliverables', a condition not found in mere manpower supply, it was submitted that the 'deliverables' in this context meant, supply of skilled manpower. As per clause 4.6 of the agreement with TCS, the employee is responsible for rectifying any defects. Similarly, the clauses (vii) and (viii) in the Task Order of Infosys state that the 'deliverables' will apply only to projects. Since no project has been assigned to the appellant, the conditions relating to 'deliverables' do not apply. (7) Service Tax is on the service rendered. The service rendered by the appellant was confined to supply of skilled manpower. It is immaterial as to what the men thus supplied ultimately turn out, at the hands of and in association with the receiver of the manpower. As per the definition of 'man power recruitment or supply agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cific software to the appellants. He states that there is also no clause to this effect in the two impugned agreements. He argues that without even knowing what project the appellants have to work on, they cannot develop any software. 10. According to the learned special counsel for the Department, the appellants have only supplied skilled manpower for which payment terms have been settled on man-hour basis under the impugned agreements. He states that the impugned agreements are staff specific instead of specifying any particular software project. The agreements also put the responsibility for work on the individual employees concerned and not on the appellants. The agreements also indicate that the appellants will only provide assistance and there is no indication they will execute any software project. 11. The learned special counsel further points out that the manpower supplied have to work under the guidance and control of TCS and Infosys. The appellants have no mandate to execute any work independently as normally a consulting engineer would do. He also brings it to our notice that if a person leaves, the appellants are required to provide suitable substitute. This indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts which require the appellants to replace personnel who leave the job by suitably trained personnel as substitutes. Such provisions in the contract go to show that the number of skilled persons supplied is important from the point of view of TCS and Infosys. If the appellants were actually to deliver the software projects, TCS and Infosys would have nothing to say about how many personnel the appellants engage to complete the project or who they employ. 15. Looking at all aspects of the case and taking into account all the arguments made before us, we come to the conclusion that the appellants are only supplying skilled manpower for which they are liable to pay service tax for supply of manpower services. We note that for similar activities of the appellants in respect of two other clients namely IBM and CAP GEMINI, the appellants have paid service tax under the category 'manpower supply service' and their clients in turn took credit of such service tax paid by the appellants. 16. In view of our finding as above, we confirm the demand of service tax, cess and interest and imposition of penalty under section 76 in respect of both the appeals. As regards Appeal No. S/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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