2016 (2) TMI 475 - AT - Service Tax

Export of services - taxability of management, maintenance or repair service rendered by the respondent prior to the amendment of Export of Service Rules, 2005 - Assessee submitted that 97% of their services are rendered to foreign clients and are provided by accessing the server/system of the client located outside India through internet and that, to the extent that these services have the effect of making the software functional at the client s end, at least a part of the service is performed outside India. - Held that - When there is a specific deeming of exports in a particular circumstances that squarely fits the activities of the respondent, reference to the meaning of a specific phrase in the general provision is irrelevant. Whether it is technical testing and analysis or management, maintenance or repair that is performed on software of the clients of the respondent, it is accepted that expert employees sitting in India have to access the servers/computer networks abroad. The performance of these operations is manifested in the efficient and smooth working of the software in the operations of the client. The location of the client cannot be uncoupled from the performance of the service. And as at least some portion of the service is, thereby, rendered outside the country and hence the renders these services outside the ambit of taxation even before 1 st March 2008. Demand of service tax set aside - Decided in favor of assessee.

Summary

Issues:
- Tax demand confirmation for technical testing and analysis service and maintenance or repair service.
- Applicability of Export of Service Rules, 2005.
- Taxability of services rendered to foreign clients.
- Interpretation of service tax laws and circulars.
- Application of precedent judgments.

Analysis:

1. Tax Demand Confirmation: The appeal by Revenue concerns the confirmation of tax demand for technical testing and analysis service and maintenance or repair service. The impugned order dropped a portion of the demand related to technical testing and analysis while confirming the demand for maintenance or repair service. Revenue sought quashing of the dropped demands and challenged the recourse to section 80 of the Finance Act, 1994. The respondent filed a cross-objection under section 86(4) of the Finance Act, 1994, which was considered as an appeal by the assessee.

2. Export of Service Rules, 2005: The case involved the application of the Export of Service Rules, 2005, which refined the concept of export of services beyond consideration in convertible foreign currency. Show cause notices were issued for demands under technical testing and analysis service and maintenance or repair service. Revenue contended that services performed partly outside India are taxable, while the respondent argued that a significant portion of services was rendered to foreign clients, justifying non-taxability.

3. Taxability of Services to Foreign Clients: The respondent asserted that a substantial portion of their services was provided to foreign clients through servers/systems located outside India. They argued that the services contributed to making software functional at the client's end, with some operations performed outside India. The location of the client was deemed crucial in determining tax liability, especially before a specific amendment date.

4. Interpretation of Service Tax Laws: The Tribunal analyzed the findings of the adjudicating authority regarding technical testing and analysis service and maintenance or repair service post the specified amendment date. The incorporation of information technology software in the statutory provision was deemed significant, impacting the taxability of services. The Tribunal endorsed the deeming provision of exports under specific circumstances, emphasizing the irrelevance of general provisions in such cases.

5. Application of Precedent Judgments: The Tribunal referred to various decisions, including those of the Hon'ble High Court of Bombay and previous Tribunal rulings, to support its analysis. The judgments highlighted the export of services by testing and transmitting reports to foreign clients, emphasizing the delivery of services abroad as a crucial factor in determining tax liability.

6. Conclusion: The Tribunal rejected the appeal by Revenue and allowed that of the assessee, concluding that the truncated tax demand did not survive. The decision was based on the principles of non-taxability of exports and the application of relevant laws and precedents. Penalties were deemed unnecessary in this context, leading to the final judgment in favor of the assessee.