Export of Services - Whether mere receipt is convertible foreign exchange is sufficient to hold that service has been exported and not liable to service tax? - Part 1 (Decision of Tribunal)

7-11-2009

Contents

In the matter of M/s MICROSOFT CORPN. (I) (P) LTD. Versus COMMR. OF SERVICE TAX, NEW DELHI reported in 2009 -TMI - 34778 - CESTAT, NEW DELHI,

(A detailed and reasoned order)

while deciding the stay application, honorable tribunal observed that:

Brief facts of the case were:

In terms of a market Development Agreement dated 1-7-2005 (sample copy available in appeal folder at pages 41-46), Microsoft Operation Pvt. Ltd. of Singapore (hereinafter referred to as "MO") appointed the appellant to provide various technical support services including marketing of Microsoft products in the "territory" defined by the agreement and to identify the services to be provided by the Singapore concern to the Appellant. In the said agreement, the Appellant is referred to as the "subsidiary" and the term "territory" was defined to include Bhutan, India, Maldives, Nepal and British Indian Ocean Territory. Both "MO" i.e. Singapore concern and the "subsidiary" i.e. appellant are wholly owned subsidiaries of the holding company M/s. Microsoft Corporation of Washington (hereinafter referred to as "MSFT"). 4 (four) types of services were intended to be provided in terms of the above Agreement and those are as follows:

1. PRODUCT SUPPORT SERVICES & CONSULTING SERVICES

2. MARKETING OF MICROSOFT PRODUCTS

3. Resident Guest Employee(RGE) Services

4. OTHER INTERCOMPANY SERVICES, i.e. Services between MO and MSFT and Affiliates, Services between MO and Subsidiary.

Order of the Adjudicating Authority

Adjudicating Authority found that as per agreement dated 1-7-2005 business support was provided by the appellant to the Singapore concern. Such services were provided in India and were never provided out side India for which there was no export of services within the meaning of Rule 3(1)(iii) of Export of Services Rule 2005 for the period 19-4-2006 to 31-5-2007. Further, for the period 1-6-2007 onwards the criterion of providing of service outside India being omitted from the law, the condition of service provided from India and used outside India still remained in force. This does not grant immunity to the appellant from taxation in respect of Business Auxiliary services provided by the Appellant.

Submissions of the Appellant

Export of Services Rules 2005

Board Circular issued on 24-2-2009 vide No. 111/05/2009

According to the Appellant, above decision of Board has based on the rationale that relevant fact to decide export service is the location of the receiver and not the place of performance. Board clarified that the phrase "used outside India' appearing in above Rule is to be interpreted to mean that the benefit of the service should accrue outside India and it is possible that export of service may take place even when the relevant activities take place in India so long as the benefits of these services accrue outside India. Accordingly benefit of promotion of business of a foreign company accrues outside India, for which the appellant is not liable to tax under Finance Act, 1994

ABS India Ltd. v. CST, Bangalore [2008 -TMI - 31365 - CESTAT BANGLORE]

Blue Star v. CCE, Bangalore [2008 -TMI - 3606 - CESTAT BANGALORE]

In these two cases, tribunal 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. The services are utilized only outside India and therefore would be eligible for the benefit of export of services.

Gap International Sourcing India Pvt. Ltd. v. Commissioner of Service Tax [2009 -TMI - 34394 - CESTAT, NEW DELHI]

In this case, absolute stay has been granted

Discussions and findings

1. Position of law

During the relevant period the law relating to export was specified in the Export of Service Rules, 2005. The specified service (BAS) was covered under Rule 3(1) (iii). The law has undergone changes from time-to-time. The said sub-rule together with sub-rule 3(2) provides the following conditions for this service in order to constitute as export:

From 19-4-06 to 28-2-2007:

(i) Recipient should be located outside India.

(ii) Such service is delivered outside India and used outside India and

(iii) Payment for such services, provided outside India is received by the service provider in convertible foreign exchange.

From 1-3-2007 to 31-5-2007

While condition number (i) and (iii), as mentioned above, remained same, the condition number (ii) was revised as follows:-

Such service is provided from India and used outside India, and

From 1-6-2007 to 31-12-2007

The words "provided outside India" were omitted from the condition mentioned at (iii) above."

2. Reference to decision of apex court in the matter of All India Fedn. of Tax Practitioners v. UOI [2007 -TMI - 1556 - Supreme Court]

3. Analysis of services

It also appears that the services provided by the appellant were only to benefit the consumers of Indian Territory and that was provided for and on behalf of the holding company in USA as well as the subsidiary in Singapore. The end user of service being located in India and need of such consumers being met by the appellant for and on behalf of its foreign principal, such services appear to have been provided in India and there appears no export of service

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, losing 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.

Prima facie, the appellant has not brought out its case for total waiver of pre-deposit during pendancy of appeal

Demand was raised for Rs. 126,26,10,497/- plus cess + plus penalty + interst

Pre-deposit ordered was Rs. 70 crorers.

For full text of judgment, visit

M/s MICROSOFT CORPN. (I) (P) LTD. Versus COMMR. OF SERVICE TAX, NEW DELHI reported in 2009 -TMI - 34778 - CESTAT, NEW DELHI