Gita Iyer (Specialist) (135 Points)
06 March 2010As per Service tax act under export of service category 'C' one part of it says that if the receiver of service has a permanent estb. in India then it will be called as export of service only if order for such service is received from the estb. located outside India.
My doubt is that is it possible to make an order from the firm located outside India to render service to its permanent estb. in India and call it as export of service??
CA Dhiraj Ramchandani
(CA, M. com)
(10823 Points)
Replied 06 March 2010
I think yes,.... its possible
CA Dhiraj Ramchandani
(CA, M. com)
(10823 Points)
Replied 06 March 2010
Hi confirmed, it can be called export of service....
CA CS Akashdeep Singh
(Practicing CA)
(1394 Points)
Replied 08 March 2010
[2009] 22 STT 201 (NEW DELHI - CESTAT)
CESTAT, NEW DELHI BENCH
Microsoft Corporation (I) (P.) Ltd.
v.
Commissioner of Service Tax, New Delhi
DR. C. SATAPATHY, TECHNICAL MEMBER
AND D.N. PANDA, JUDICIAL MEMBER
STAY ORDER NO. ST/276/2009
APPLICATION NO. ST/STAY/2721/2008
IN APPEAL NO. ST/866/2008
JULY 31, 2009
Rule 3 of the Export of Services Rules, 2005 - Export of taxable service - Stay order
- Period 19-4-2006 to 31-12-2006 - In terms of a Market Development Agreement, a
company of Singapore, i.e., MO, appointed assessee to provide various technical
support services including marketing of products in different territories and to
identify services to be provided by MO to assessee - Both MO and assessee were
wholly owned subsidiaries of a company of USA - Assessee claimed that services
provided by it in terms of aforesaid agreement fell within purview of export of
services, for which it was not liable to pay service tax - Adjudicating authority
rejecting said claim of assessee, held that it was liable to pay service tax under
category of ‘Business auxiliary services’ - Whether since end user of service being
located in India and need of such consumers being met by assessee for and on behalf
of its foreign principal, such services appeared to have been provided in India and
there appeared to be no export of service - Held, yes - Whether prima facie, assessee
had not brought out its case for total waiver of pre-deposit and, therefore, assessee
was to be directed to deposit a part of demand - Held, yes [Stay Partly granted]
[Paras 24, 32 and 33]
Circulars & Notifications : Board’s Circulars No. 111/05/2009-ST, dated 24-2-2009,
No. 70/90/03/ST, dated 17-12-2003, No. 81/02/05, dated 7-10-2005
FACTS
In terms of a market development agreement a company of Singapore, i.e., MO,
appointed the assessee to provide various technical support services including marketing
of its products in Bhutan, India, Maldives, etc., and to identify the services to be provided
by the MO to the assessee. Both MO and the assessee were wholly-owned subsidiaries of
the holding company, i.e., Microsoft Corporation of Washington ‘MSFT’. Under the said
agreement, assessee provided different types of services. Those were (i) Product support
services and consulting services, (ii) marketing of microsoft products, (iii) REG services,
and (iv) other inter-company services. The assessee claimed that the said services
provided by it fell in the category of export services for which it was not liable to pay
service tax. It also claimed that the income earned on account of maintenance and repair
of software was not chargeable to service tax in its hands. The adjudicating authority held
that as per the agreement, business support was provided by the assessee to the Singapore
concern; and that such services were provided in India and were never provided outside
India for which there was no export of services within the meaning of rule 3(1)(iii). He
further held that no doubt, for the period 1-6-2007 onwards, the criterion of providing of
services outside India being omitted from the law, the condition of services provided
from India and used outside India still remained in force and this did not grant immunity
to the assessee from taxation in respect of business auxiliary services provided by it. The
adjudicating authority, therefore, confirmed demand of service tax under the category of
‘Business auxiliary services’ during the period from 19-4-2006 to 31-12-2006. The
adjudicating authority also held that the income earned on account of maintenance and
repair of software was chargeable to service tax during the period from 9-7-2004 to 6-10-
2005 in the hands of the assessee.
On application :
HELD
The Export of Services Rules were enacted in terms of rule-making power under section
94, read with section 93, of the Finance Act, 1994. Rule 3(2) of the said Rules defines the
event of occasioning export. This sub-rule has undergone amendment from time to time.
[Para 17]
In essence, there is no ambiguity that the Legislature intended that service is said to have
been exported if the same is consumed outside India. Definition of the term ‘export’ is
nothing new to the fiscal legislation. The well-tested and experienced Customs Act, 1962
has defined such term by section 2(18) thereof to mean “taking out of India to a place
outside India”. Therefore, in no uncertain terms ‘export of service’ shall mean that
outcome of service should have been consumed outside India. However, in the instant
case, it did not seem to be so as the consumers of services provided were in India only
and even the contents of the agreement established in substance that ultimate
consumption of service was in India and the assessee was an intermediary to connect its
foreign principal to the end user of service who were consumers in India. [Para 18]
The Supreme Court in the case of All India Federation of Tax Practitioners v. Union of
India [2007] 10 STT 166 held that Economics hold the view that there is no distinction
between the consumption of goods and consumption of services as both satisfy the human
needs. [Para 19]
Record revealed that the assessee as well as MO were subsidiaries of Microsoft
Corporation, USA. The assessee for the first time informed the authority vide letter dated
7-2-2009, that the recipient of service provided by it was ‘MO’ and no such information
was given to the authority prior to that date. All the letters submitted by the assessee to
the revenue showed that services were provided by the assessee to Microsoft
Corporation, USA. But no such agreement was brought on record by the assessee in the
course of hearing. Services provided by the assessee established nexus of services
provided with the recipient consumers/clients/customers in India, all along, and the
assessee facilitated and ensured as well as established destination of service to be in
India. [Para 22]
Prima facie, it was evident that the ultimate outcome of provision of services reached to
the consumers in India and that were ultimately meant to be consumed in India.
Accordingly, destination based consumption of service ended with performance of service
in India and that satisfied the performance based service tax concept as held by the Apex
Court in All India Federation of Tax Practitioners’ case (supra). In the said judgment, the
Supreme Court has held that services fall into two categories, namely, property based
services and performance based services. Such fundamental concept brings the service
performed in India to the fold of law relating to service tax under the Act. Therefore,
place of performance of service is decisive for determining event of taxability as well as
incidence of tax. The assessee had performed service in India for ultimate consumption
thereof in India by its clients/customers in India. The service was destined to exhaust in
India and extinct soon after performance thereof. Post performance liability only
remained to be discharged by foreign principal through the assessee in India. Thus, the
beneficiaries of services were located in India for ultimate consumption of the service
provided in India. Accordingly, prima facie, the interpretation of law by the CBEC in its
circulars dated 24-2-2009, ran counter to the ratio laid down by the Apex Court in All
India Federation of Tax Practitioners’ case (supra). Further, service tax is a VAT which,
in turn, is destination based consumption tax. [Para 23]
In the instant case, the services provided by the assessee were only to the benefit of the
consumers of Indian territory and the same were provided for and on behalf of the
holding company in USA as well as the subsidiary company in Singapore. The end user
of service being located in India and need of such consumers being met by the assessee
for and on behalf of its foreign principal, such services appeared to have been provided
in India and there appeared to be no export of service. The foreign principal acted
through its agent, i.e., assessee. The principal was not the beneficiary. A service provider
acting directly or indirectly through its agent is not the beneficiary of service so provided
while providing of service is its contractual obligation under terms of contract with
clients/customers. Therefore, in the instant case, no service had occasioned to move out
of India to a place outside India following well tested meaning of the term ‘export’ under
section 2(18) of the Customs Act. Remuneration for the service provided by the assessee
was linked with expenses incurred in terms of articles of the sample agreement. Further
to provide service, expenses were incurred in India in terms of the agreement for which
the assessee got reimbursements and a percentage thereof was paid to it as its
remuneration. Thus, expenditure met in India had generated service potentiality in India.
[Para 24]
A reading of the letters filed by the assessee and also a reading of the agreement showed
that the assessee was acting on behalf of the foreign principal in India as subsidiary of
the foreign holding company. It had acted as an agent of the foreign principal to result in
provision of services in India with the technical assistance of the holding-company and
the subsidiary-company abroad. The service provided in India was consumed without
reverting back to foreign principals for consumption abroad. Ultimate outcome of service
having been exhausted in India, there was no export of such services since efforts in India
generated service recipients in India only. The foreign principals discharged post service
contractual obligations. Even the assessee’s plea that the Board’s circular dated 24-2-
2009, clarified that the benefits of the service accrued outside India, did not appear to be
of any help to the assessee since benefit of the services had accrued to the consumers in
India for the service provided to the consumers thereat to fulfil contractual obligation of
the foreign holding company as well as the subsidiary-company of Singapore. The benefit
of service terminated in India only, without travelling abroad. The performance based
service provided in India in terms of the agreement dated 1-7-2005 had resulted in
provision of service to the consumers in India. Therefore, even the circular did not
explain the position of law as claimed by the assessee to its advantage. [Para 25]
The circular holds that location of service receiver is a relevant factor to decide export of
service under rule 3(1)(iii). 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 assessee was
inconceivable. [Para 26]
The Business auxiliary service provided by a service provider in terms of section
65(105)(zzb) is taxable for the rationale that the principal to whom the marketing
support is given by the service provider, ultimately makes available goods or services to
the consumers in India. Similarly, marketing support provided to the foreign principal as
an agent thereof also results in either ultimate supply of goods or provision of services to
the consumers of India only and service reaches its destination in India to the intended
consumer of the goods or services. Therefore, whether service is directly provided by a
foreign principal in India or foreign principal providing service in India through its
agents in India makes no difference under service tax law when service tax is a VAT and
that too destination based consumption tax as per the Apex Court judgment in All India
Federation of Tax Practitioners’ case (supra). Had the service been provided to the
foreign principal not resulting in 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 instant case was a
departure to that principle. The assessee was an intermediary meant to provide welldefined
services to its clients/customers in India with the technical assistance of foreign
principal. To provide service in India, the assessee was supported by technical assistance
of the foreign principal and the assessee as well as the Singapore concern were
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. [Para 27]
In respect of maintenance contract, the assessee relied on Circular Nos. 70/90/03/ST,
dated 17-12-2003 and 81/02/05 dated 7-10-2005. According to the assessee, these
circulars clarified what is maintenance/repairs of computer software. When the software
does not fall within purview of goods, maintenance thereof cannot be said to be repair
and maintenance. But such view survived for limited period from 17-12-2003 to 6-10-
2005 when Circular No. 81/02/05 was issued. By Circular No. 81/02/05, software was
made liable to service tax. The assessee’s plea was that it was eligible to the benefit of
circulars during relevant period before issuance of show-cause notice. Therefore, there
could not be any realization of the demand so far as maintenance and repair service of
software was concerned. This aspect had received due consideration of the Tribunal in
the course of hearing of stay application to work out interim modality. [Para 30]
The adjudicating authority had examined the issues by a reasoned and speaking order.
There were no materials brought out by the assessee to distinguish its case as export.
[Para 31]
Prima facie, the assessee had not brought out its case for total waiver of pre-deposit
during pendency of appeal. The balance of convenience did not tilt in favour of the
assessee. There was no case made out to show that irreparable injury or undue hardship
would be caused to the assessee if no full waiver was granted. Neither materials were
produced nor was financial hardship pleaded in the course of hearing. Rather, the
revenue would be prejudiced if realization of demand was stayed. [Para 32]
Therefore, taking into consideration the various aspects and also the limitation aspect
pleaded by the assessee involving Rs. 30 crores and refund plea to the extent of Rs. 20
crores raised in the course of hearing, as an interim measure to work out the modality for
protection of interest of revenue, following decision of the Apex Court in Asstt. Collector
of Central Excise v. Dunlop India Ltd. AIR 1985 SC 330, the assessee was to be directed
to make pre-deposit of a part of the demand. Subject to such compliance, realisation of
balance demand would be stayed till disposal of appeal. [Para 33]
CASE REVIEW
All India Federation of Tax Practitioners v. Union of India [2007] 10 STT 166 (SC)
(para 19) and Asstt. Collector of Central Excise v. Dunlop India Ltd. AIR 1985 SC 330
(para 33) followed.
CASES REFERRED TO
All India Federation of Tax Practitioners v. Union of India [2007] 10 STT 166 (SC)
(para 9), ABS India Ltd. v. CST [2008] 17 STT 223 (Bang. - CESTAT) (para 11), Blue
Star Ltd. v. CCE [2009] 18 STT 34 (Bang. - CESTAT) (para 11), Gap International
Sourcing India (P.) Ltd. v. CST [Appeal No. ST/819 of 2008, dated 21-1-2009] (para
11), Shilpa Color Lab v. CCE [Stay Order No. 870/2006, dated 25-8-2006] (para
13), Excel Fin Cap Ltd. v. CCE [Stay Order No. 389/2007 dated 1-5-2007] (para
13), Polar Industries Ltd. v. CCE 1999 (114) ELT 783 (SC) (para 13), Lenovo (India)
(P.) Ltd. v. CCE (Appeals-II) [2009] 21 STT 134 (Bang. - CESTAT) (para 28), Wardha
Coal Transport (P.) Ltd. v. Union of India [Writ Petition No. 390 of 2009, dated 14-1-
2009] (para 31), Empire Industries Ltd. v. Union of India 1985 (20) ELT 179 (SC) (para
31), Vijay Prakash D. Mehta v. Collector of Customs (Preventive) [1988] 4 SCC 402
(para 32), Benara Valves Ltd. v.CCE 2006 (204) ELT 513 (SC) (para 32), Silliguri
Municipality v. Amalendu Das AIR 1984 SC 653 (para 32), Samarias Trading Co. (P.)
Ltd. v. S. Samuel AIR 1985 SC 61 (para 32), Asstt. Collector of Central Excise v. Dunlop
India Ltd. AIR 1985 SC 330 (para 32) and Ravi Gupta v. Commissioner of Sales
Tax 2009 (237) ELT 3 (SC) (para 32).
Gita Iyer
(Specialist)
(135 Points)
Replied 08 March 2010
Dear Akashdeep,
u hav stated abt the status of the subsidiary co. in its rendering of service..............
my doubt is..........
Say, XYZ Co. (indian domestic) renders service to S Co. (a subsidiary of PS Co. which is U.K's domestic Co.) .To perform dis service the order was received from PS Co.
Can XYZ Co. treat dis as export of service???
CA CS Akashdeep Singh
(Practicing CA)
(1394 Points)
Replied 08 March 2010
[2009] 22 STT 201 (NEW DELHI - CESTAT)
CESTAT, NEW DELHI BENCH
Microsoft Corporation (I) (P.) Ltd.
v.
Commissioner of Service Tax, New Delhi
CA CS Akashdeep Singh
(Practicing CA)
(1394 Points)
Replied 08 March 2010
Yes, it can be treated as export of service if receiver of service is located outside India. As per circular, it is also necessary that benefit of such service should accrue outside India.
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