2018 (4) TMI 1504 - AT - Service Tax

Classification of services - appellants herein, were providing technically qualified employees / man power to IT companies like TCS, Infosys for development of software projects - whether the activities of appellant would fall within the scope of Manpower Recruitment and Supply Agency Service or whether it can be said that they provide Information Technology (IT) service? - Held that - appellant was involved only in supply of man power to TCS, Infosys etc. Such man power may well have been technical personnel and highly qualified in information technology too. But the fact remains that such personnel were only supplied by appellant to Infosys etc. And that they were required to function under supervision of the latter and as per the work allocated by these service recipients. The facts are very much pari materia with the facts of Future Focus Infotech India (P) Ltd.Vs CST Chennai 2010 (3) TMI 190 - CESTAT, CHENNAI , wherein the Tribunal has clearly laid down that appellants therein had undertaken only supply of skilled man power. There is no infirmity in the impugned order concluding that the activity of the appellant would fall within the fold of Manpower Recruitment or Supply Agency Service under Section 65 (105) (k) of the Finance Act, 1994. Services provided outside India and to SEZ - Held that - the contentions of the appellant that services provided to SEZ units would be exempt vide Notification No.4/2004-ST have been brushed aside by the Commissioner - the matter requires reconsideration. Extended period of limitation - suppression of facts - Held that - The facts came to light only when the department conducted scrutiny of the annual reports, possibly during audit. In such circumstances, the department is fully justified in invoking the extended period of limitation of five years - while the demand has been made from 16.6.2005, for the period 1.4.2005 to 15.6.2005 the demand is erroneous since the impugned Manpower Recruitment of Supply Agency Services was made taxable only w.e.f. 16.5.2005. Penalty - Held that - benefit of doubt can be given to the appellant that they were under bonafide belief that no tax is required to be deposited by them on the services provided - penalty set aside by invoking section 80. The matter is remanded to the adjudicating authority for recalculation of tax liability, to reconsider the appellant s submissions in respect of the services provided outside India and accord benefit under the provisions of Export of Service Rules, to consider benefit under Notification No.4/2004-ST - appeal allowed in part.

Summary

Issues Involved:
1. Classification of services provided by the appellant.
2. Taxability of services provided to clients outside India and SEZ units.
3. Invocation of the extended period of limitation.
4. Eligibility for cum-tax benefit.
5. Imposition of penalties under Sections 76 & 78 of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Classification of Services Provided by the Appellant:
The primary issue was whether the appellant's activities fell under "Manpower Recruitment and Supply Agency Services" or "Information Technology (IT) services." The appellant argued that they were providing software-related services through agreements with TCS and Infosys, which should be classified under IT services. However, the Tribunal found that the agreements indicated the appellant was supplying technically qualified manpower to TCS and Infosys. The personnel provided by the appellant worked under the supervision of TCS and Infosys, and the payment was based on the number of days of services provided. This was consistent with the Tribunal's earlier decision in Future Focus Infotech India (P) Ltd. vs CST Chennai, where similar activities were classified as "Manpower Recruitment or Supply Agency Service." The Tribunal upheld the classification under Section 65 (105) (k) of the Finance Act, 1994.

2. Taxability of Services Provided to Clients Outside India and SEZ Units:
The appellant contended that services rendered to clients outside India and SEZ units should qualify as export of services and be exempt from tax. The Tribunal found merit in this contention and noted that the adjudicating authority had not adequately considered these submissions. The Tribunal directed the adjudicating authority to reconsider the appellant's claims regarding services provided outside India under the Export of Service Rules and to SEZ units under Notification No.4/2004-ST.

3. Invocation of the Extended Period of Limitation:
The appellant argued that the extended period of limitation should not be invoked as they believed their activities were IT services and hence not taxable. However, the Tribunal noted that the appellant had not disclosed the receipt of income from these services in their ST-3 returns, and the facts only came to light during departmental scrutiny. Therefore, the Tribunal upheld the invocation of the extended period of limitation but directed the adjudicating authority to exclude the period from 1.4.2005 to 15.6.2005, as the relevant services were taxable only from 16.5.2005.

4. Eligibility for Cum-Tax Benefit:
The appellant claimed that they had not collected any tax from their clients, and thus, cum-tax benefit should be extended. The Tribunal found merit in this claim and directed the adjudicating authority to grant cum-tax benefit in the recalculation of the tax liability.

5. Imposition of Penalties under Sections 76 & 78 of the Finance Act, 1994:
The appellant argued that they had a bona fide belief that their services were not taxable, supported by a clarification from TCS. The Tribunal found this to be a reasonable cause for their failure to discharge the tax liability and invoked Section 80 of the Finance Act to set aside the penalties imposed under Sections 76 & 78.

Conclusion:
The Tribunal ordered the following:
(a) The services provided by the appellant fall under "Manpower Recruitment or Supply Agency Service."
(b) The penalties imposed under Sections 76 & 78 of the Finance Act, 1994 are set aside.
(c) The matter is remanded to the adjudicating authority to:
(i) Recalculate the tax liability from 16.6.2005.
(ii) Reconsider the appellant's submissions regarding services provided outside India and extend benefits under the Export of Service Rules as admissible.
(iii) Reconsider the claim of services provided to SEZ units and extend benefits under Notification No.4/2004-ST as admissible.
(iv) Recalculate the final tax liability after extending cum-tax benefit.

The appeal was partly allowed on these terms.