TMI Blog2010 (3) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... TI BALASUNDARAM, VICE PRESIDENT AND DR. CHITTARANJAN SATAPATHY, TECHNICAL MEMBER N. Venkataraman, S. Muthuvenkataraman and M.N. Bharathi for the Appellant. N. Rajagopalan and V.V. Hariharan for the Respondent. ORDER Dr. Chittaranjan Satapathy, Technical Member - Heard both sides. The period involved and the amounts involved in this appeal are as follows: Appeal No. Period ST + CESS (In Rupees) Penalties (In Rupees) ST/195/09 1-4-2005 to 31-3-2006 and 16-5-2005 to 31-3-2007 Rs. 1,48,74,481 under at and manpower recruitment services and Rs. 40,188 under commercial training services To be calculated appropriate rates under section 76 for the period of delay in payment of service tax Rs. 1,49,14,669 under section 78 of the Finance Act, 1994 2. The learned senior counsel Shri N. Venkataraman submits that the master biometrics services agreement entered into between Pfizer Pharmaceuticals (India) Private Limited and Cognizant Technology Solutions (India) Ltd. Has the following salient features: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts will provide regular updates as to the progress of the services at a frequency and in a manner designated by Pfizer in the scope of services or work order (Clause 3.6) (h) Unless otherwise specified in this agreement, the work order or Attachment-1 (scope of services), appellants, at its own expense, will provide all the equipments, tools, materials and supplies necessary to accomplish the services. (Clause 3.7). (3) Clause 4 - Time-lines Timely performance of services is required. Appellants will use its commercially reasonably efforts to initiate, conduct and complete each step of services within the time-line where specified in the work order is appropriate (Clause 4.1) (4) Clause 5 - Compensation (a) Appellant will charge Pfizer for services performed in accordance with the pricing and any discounting structure which will be specified in the applicable work orders, which may include a payment structure that is subject to Pfizer being satisfied that appropriate milestones and agreed performance requirements have been achieved. (Clause 5.1) (b) Unless otherwise specified in this Agreement or in the work order, project management, quality assurance activity, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to explain why the Study cannot be identified. A given Work Order may cover more than one study. Services may include some or all of the functions described below. Pfizer will provide the appellant with the Pfizer documents and instructions referred. (b) CRF Designs, Database Designs, Validation Procedure, Programming Validation, Coding, Data Management, Data Programming, Data Acquisition, Scanning Inducting, Statistical Support, Statistical Programming, Analysis Reporting, Serious Adverse Reconciliation, Quality Control, Medical Writing, Clinical Communications. (c) Service Standard for each of the above referred category (d) Appendix 6 to Attachment - 1 : Scope of Services - Service Level Agreements (i) Clinical Programming and Writing (CPW) Delivery Milestones and any associated service level agreements will be agreed to and documented within the works requests and task ownership matrices for each study, allocated under the FSP work order (ii) Global Clinical Data Services (GCDS) Unless otherwise specified in the work order, CRO will provide services in compliance with the SLAs relating to GCDS data flow activities as defined in Exhibit C Work Order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SP) on a project basis. Upon Appellant moving to the FSP model, the parties agree to enter into a new Work Order for FSP services. The appellant staff assigned to Pfizer projects under this Work Order in 2004 and 2005 will be located on Dev Ops India premises for the first 6 months after joining. Thereafter staff will move to the appellant's premises. Total number of staff required for 2 years retained FTE model: The total number of staff will be 86, 30 of which will be recruited during February 2005 and 56 during July 2005. Function Feb. '05 Number of Staff July '05 Numberof Staff Associate Biometrician Programming 15 25 Biostatistician 0 1 Associate Biometrician Data Management 10 22 Associate Biometrician Study Start-up 5 5 Clinical Communications Specialist 0 3 Total 30 56 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibes that Pfizer shall support appellants to recruit and train the staff that will be dedicated for Pfizer work and functional supervision will be provided by Pfizer during the period of work order. Comments Attachment-2 has been read in isolation. There is a Master Biometric Service Agreement, Attachment-1 and Work Order containing Attachments 1 to 4. A cumulative reading of the clauses would indicate the following: (a) The contract is for rendition of biometric services, in the nature of Clinical Programming Writing (CPW) and Global Clinical Data Services (GCDS) and Data Management and Biostatistics Reporting. (b) The contract, along with attachments and work order, defines the scope of work, performance of services, project management and quality assurance, obligation to update services performed, timeline in which services to be performed, (SLA) as defined in Exhibit C, delivery of work products, defect liabilities, and payments upon early termination of the work orders. (c) A cumulative analysis of the contracts, attachments and work orders, would go to show that there is an obligation on the appellant to deliver and render defined services. (d) The rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. (b) Further, the order concedes that the payment is not mere salary but includes rentals, and various other administrative costs. This only goes to prove and vindicate the stand of the appellant that the contract is not for manpower supply but deliverables in the nature of services. (4) The order refers to Attachment-4 does not dispute the same and gives no finding. Comments As clearly conceded, Attachment-4 deals with Task Ownership Matrix. The task of delivering the service vests wholly with the appellants and it should be delivered in line with international congress of harmonization good clinical practice guideline or applicable local Governmental regulations. (5) Para 17 of the order - Appellant is a contractual employer of the staff supplied to Pfizer. Such staff work under a Project Manager, who is identified by the appellant and approved by Pfizer and who, in turn, is assisted by Key Personnel of the appellant as well as the Pfizer Management Team. Thus, the Project Manager is also supplied by appellant to Pfizer whose salary is also collected from Pfizer and for purposes of work order, it ceased to be appellant's employee but only Pfizer employee. Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the definition initially was made applicable only for recruitment. Later with effect from 16-6-2005 it got amended as Manpower recruitment or supply agency . The purpose of the legislation should be inferred from the expressions used namely recruitment , supply . Both in the case of recruitment and in the case of supply of manpower, the obligation of the service provider would end once people are recruited or people are supplied. The definition does not obligate any other requirement to provide any other specified services to fall under the category of Manpower recruitment or supply agency . Consequently, once the contract of service envisages deliverables in the nature of provision of services more specifically provision of a computer software service, such a provision of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a manpower supply agency , on the other hand if the responsibility is to render technical assistance while providing computer software services , the same has to get classified only under Consulting Engineer . Relevant portion of the contract are extracted hereunder: (i) Appellant is responsible for all project management and quality assurance activities necessary to fulfil its obligation under this agreement and work orders (Clause 3.5) (ii) Appellant will provide regular updates as to the progress of the services at a frequency and in a manner designated by Pfizer in the scope of services or work order (Clause 3.6) (iii) Appellant to comply with Pfizer provided standards and requirements for validation of regulated computer systems used in performance of services and ensure that any electronic records and electronic signatures are subject to Food and Administration regulation [Clause 3.3 ] (iv) Appellant to perform services consistent with, to the extent applicable to each project, the general and specific standards in Attachment 1 - scope of services [Clause 3.3(a)] (v) Appellant to maintain all applicable licences, accreditations, certifications, permit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or provision or rendition of computer software services. The transaction would merit classification only under Consulting Engineer and will not become manpower supply. When a computer software service is rendered from the service provider's own premises or location using his own infrastructure, the presumption if any, should go in favour of such service providers, classifying the services as Consulting Engineer . Relevant clauses in the contract on record are as below: (i) Appellant will provide a standard work environment in its office following a period of 3 to 6 months when appellant employees will be trained in Pfizer premises in Mumbai (Clause 3.8) (ii) The appellant staff assigned to Pfizer projects under the Work Order will be located in Dev Ops India premises for first six months. Thereafter, staff will move to Appellant premises (Clause 1) (e) Defect Liability - The agreements on record very clearly evidence the fact that the end obligation is to provide computer software services. Failure to provide such a service or ineffective or defective provision of such a service, would contractually allow the service recipient to demand from the appellants, re-wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in good faith, pending resolution of such dispute. [Clause 16.8(a)] (ii) This agreement and the associated work orders are governed by the laws of India without giving effect to conflict of laws provisions. The parties irrevocably agree that any legal action, suit or proceeding arising out of this Agreement must be brought solely and exclusively in the Courts of Mumbai. (Clause 17.11) (g) Consideration - It is 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. Consideration 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, responsibilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... studies performing activities detailed in Attachment-1 of the Agreement Attachment-2 to the scope of service at page 193 also defines management staff. Cognizant will appoint a Project Manager who will be dedicated supporting Pfizer under this Work Order. This individual will act as the single point of contract and will be responsible for the overall management of the project. Pfizer shall also identify an appropriate person to act as single point of contract from Pfizer to facilitate seamless communication between the two organizations relating to this Work Order. Cognizant Finance/Human Resources staff will provide support for general administration, salary administration and invoicing. A close scrutiny of these two clauses in the case of the respective appellant's goes to clearly show that the entire contract is for provision of work and at the highest identifies people. It does not obligate 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consulting engineer. Section 65 of the Finance Act, 1994 is a definition clause, defining various notified services. There are several services which are identified and specifically noted, which are performed through human agency. To name a few are: (i) Section 65(105)(h) - Custom house agent (ii) Section 65(105)(j) - Clearing and forwarding agent. (iii) Section 65(105)(q) - Interior decorator (iv) Section 65(105)(w) - Security agency The appellants also placed on record services rendered by human agency in the form of advise, consultancy or technical assistance. These have been identified as specific services under: (i) section 65(105)(g) - Consulting engineer (ii) Section 65(105)(r) - Management or business consultant (iii) Section 65(105)(v) - Real estate agent (iv) Section 65(105)(za) - Scientific or technical consultancy (v) Section 65(105)(zzzze) - Information Technology Software Services. In the light of the above, in terms of section 65A(2)(a) specific description namely 'Consulting Engineer' should be preferred over general description 'Manpower Supply'. In the alternative even should revenue test the transaction under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rendered by the appellant it is necessary to look into the various clauses in the agreement between the appellant and Pfizer. A careful look at the agreement will reveal that there are two components - one for undertaking the clinical data management, and the other for supply of manpower. (1) whenever Pfizer wanted data management to be undertaken by the appellant on Pfizer sponsored projects, the work order categorically described the study, the nature of work, the Budget allocation, time frame etc. and (2) where Pfizer wanted only manpower, work order issued will specify the number required to undertake unspecified projects. In both cases, separate work orders would be issued. The relevant clauses in the agreement are referred herein to bring forth the differences between the two. (3) The appellant has entered into an agreement with Pfizer, known as Master Biometrics Service Agreement effective from 1-12-2004. This agreement will remain in force up to 1-2-2010 (Clause 16). This agreement sets forth only the general terms under which, the appellant was required to provide Pfizer with certain biometrics services, in connection with Pfizer sponsored clinical studies on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project basis. Upon COGNIZANT moving to the FSP model, the parties agree to enter into a new Work Order for FSP services. [Emphasis supplied]. (6) Further, this attachment specifies the number of staff and the discipline in which required. Totally, 30 numbers were required to be recruited in the month of Feb. 2005 and 56 in the month of July 2005. The functional descriptions are Associate Biometrician Programming, Associate Biometrician Data Management, Associate Biometrician Study Start-up, Clinical Communications Specialist Pfizer will procure all required hardware and software for the staff of the appellant to carry out activities for Pfizer. By Change Order 1 dated 27-12-2005, 31 additional staff was to be recruited. Another Change Order effective from 1-2-2006 placed order for recruitment of additional staff. Thus the activity undertaken as per this Work Order read with amendments confined to recruit and supply manpower to Pfizer. Since the hardware and software were also supplied by Pfizer, it is not correct to say that the services rendered fell in the category of IT Services. Further, the main objective was to undertake clinical study on the molecules as per the protoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Budget allocation under this head is a total amount and it cannot be vivisected and the tax has to be paid on the full amount. Since this amount spent on providing infrastructure is in relation to providing the requisite ambience for the staff, this is integrally connected with the manpower supply. Hence, there is no merit in this argument. (11) Being a hi-tech corporate, it is expected of them to abide by the law. Being in the field of providing consultancy, software solutions, design, development of software, the appellant cannot plead ignorance. Other than anybody else, the appellant ought to have known that the services rendered as per the work order in question, did not amount to providing software related work. Further IT Software services came under service tax net only from 16-5-2008, and hence they could not have anticipated this earlier. Whereas, manpower recruitment service was in force from 7-7-1997. When the Work Order specifically required only supply of manpower and when Pfizer volunteered to help the appellant in recruitment the appellant ought to have registered under this service and discharged the tax liability. When there is no scope for any confusion, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Work Order effective from 1-12-2004 (Page 189), entered into under MSA, the appellant was to recruit and retain a defined number of employees as part of the retained work force. Service description is given in Attachment 1 to the Work Order. The appellant will provide the number of Full Time Equivalent staff as defined in Attachment-2 to the Work Order. Attachment-2 to the Work Order very clearly states that for the first 2 years of service under this work Order, the retained Fit model will be employed. Appellant will recruit and retain a defined number of persons, and Pfizer will assist the appellant in recruitment and Pfizer will also train the staff. Pfizer will also provide the functional supervision in such a manner that at the termination date of this Work Order, the appellant will be in a position to move to the second stage, namely, FSP model. The number of persons to be recruited and the functional description of the staff is also given in this Attachment. Once the appellant is ready to move to FSP model, another Work Order will be executed. Pfizer will provide the hardware and software to carry out the activities. Attachment-3 to the Work Order, contains the Budget and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rol of the Project Manager of the appellant it is pointed out that even he is approved by Pfizer and paid by Pfizer. (6) The Work Order has a separate Budget for providing the staff and the payment is 'per seat cost'. This includes fixed and variable costs such as space rental, utilities etc. Management costs towards management recruitment and administrative costs are also included in the Budget. Thus Pfizer provides for the entire costs, including creation of infrastructure, management and administration. Therefore, the argument that the staff were retained and worked under the control of the appellant loses significance and relevance, when everything is paid for by Pfizer. The physical location of the staff is not material, so long as they were paid for by Pfizer, and worked for Pfizer in theft projects and when they were trained and functional supervision was exercised by Pfizer. The role of the appellant was restricted to recruit the staff, and exercise supervision only on administrative matters. (7) To sum up: (i) The nature of service rendered is to be decided in terms of the Work Order dated 21-3-2005 along with its attachments, and further changes to the Work Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently the demand of Rs. 40,188 on that count also will not survive. 8. We find that the Department's case against the appellants is primarily based on the fact that the appellants have recruited the entire staff only on the basis of requirement of Pfizer. The learned special counsel for the Department also highlights that Pfizer assisted in recruitment and training of the staff, computer hardware and software were provided by Pfizer, the work order is covered by a separate Budget which is made on 'per seat cost' including creation of infrastructure facilities. The learned special counsel for the Department also refers to the work order and the attachments and states that the appellants would have to provide service under FSP model in the subsequent period when there will be functional responsibilities on them but not so under the FTE model in the initial period. According to him, the appellants only recruited and provided the staff to Pfizer. 9. However, the learned senior counsel appearing for the appellants has very forcefully argued that even during the initial period under the FTE model, the manpower recruited by the appellants under contract with Pfizer have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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