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TMI Blog2009 (7) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... rtly - ST/866/2008 - ST/276/2009(PB), - Dated:- 31-7-2009 - Dr. C. Satapathy, Member (T) and Shri D.N. Panda, Member (J) S/Shri N. Venkatraman, Sr. Advocate, Muttu Venkataraman, Achin Goel, Advocates and Nikhil Suri, C.A., for the Appellant. S/Shri Prabhat Kumar, Advocate and S.K. Panda, Jt. CDR, for the Respondent. [Order per: D.N. Panda, Member (J)]. - Being aggrieved by the order of adjudication passed on 23-9-2008 by the learned Commissioner, Service Tax, New Delhi, the appellant came in Appeal to Tribunal with stay application for stay of realisation of the demand raised by that order with following consequence: (i) Service Tax amounting to Rs. 124,99,49,345/- (Rupees one hundred twenty-four crore, ninety-nine lakh, forty-nine thousand and forty-five only) out of Rs. 126,26,10,497/- was confirmed and recoverable from the appellant under the proviso to Section 73(1) read with Section 68 of the Finance Act, 1994 and Rule 6 of Service Tax Rules, 1994; (ii) Education Cess and Secondary and Higher Education Cess amounting to Rs. 3,04,18,968 /- (Rupees three crore, four lakh, eighteen thousand, nine hundred sixty-eight only) out of Rs. 3,06,42,746/- was confirme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Duties 2.2.1 Subsidiary will use its best efforts to further the interests of M.O. and to maximize the markets for product support services and consulting services in the Territory. 2.2.2 Subsidiary shall not solicit orders of agreements from outside the Territory. 2.2.3 Subsidiary may provide product support services, which may include standard Microsoft product support services for products which are generally made available to end-users and may include requests for support originating from the Territory. 2.3 MO's Duties. MO will use its best efforts to assist Subsidiary with technical matters in connection with the marketing of Microsoft Products and Services. 3. MARKETING OF MICROSOFT PRODUCTS 3.1 Marketing Subsidiary shall have a non-exclusive right to market Microsoft Products in the Territory. 3.2 Subsidiary's Duties. Subsidiary will use its best efforts to further the interests of MO and to maximize the markets for Microsoft Products in the Territory. 3.2.1 Subsidiary shall not solicit orders or agreements from outside the Territory. In soliciting orders, Subsidiary shall only be authorized to inform customers of price, payment, delivery and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall pay Subsidiary an amount equal to one hundred and ten percent (110%) of Subsidiary's actual expenses, less revenues, incurred in connection with its duties, provided such expenses comply with Subsidiary's budget, as adjusted from time to time, and provided, further, such expenses are not already covered by another section of this Agreement or covered in another agreement between Subsidiary and MO or any MO affiliate. The reimbursement and additional compensation shall be exclusive of any applicable consumption tax such as a Value Added Tax or a Goods and Services Tax, which consumption tax shall be the responsibility of MO. 6.2 Marketing of Microsoft Products. For assistance in the marketing of Microsoft Products under Article 3, MO shall pay Subsidiary one hundred and fifteen percent (115%) of Subsidiary's actual expenses, less revenues, incurred in connection with its duties as defined in Article 3, provided such expenses comply with Subsidiary's budget, as adjusted from time to time, and provided, further, such expenses are not already covered by another section of this Agreement or covered in another agreement between Subsidiary and MSFT or any MSFT affiliate. Taxes, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of Business Auxiliary services provided by the Appellant. 5.2 Ld. Adjudicating Authority formulated following 4 issues in Para 214 of the order of adjudication (at page 148 of the appeal folder) for consideration: (i) Whether the income earned on account of services claimed as export under the category of "business auxiliary services" is chargeable to service tax during the period 19-4-2006 to Dec., 2007. (ii) Whether income on account of "maintenance repair of software "is chargeable to Service Tax during the period from 9-7-2004 to 6-10-2005. (iii) Whether income on account of "seminar training fees-sponsorship received in relation to MCIPL Conferences" is chargeable to service tax under the category of "convention services" for the period 2002-03 to 2007-08 (upto Dec., 2007). (iv) Whether the income on account of "royalty" is chargeable to service tax. 5.3 The first issue was elaborately discussed by Ld. Adjudicating Authority in para 224 to 226 of the order of adjudication which reads as under: "224. The notice has tried to make out a case that under the Market Development Agreement with M/s. M.O. Singapore they were providing Marketing support se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o potential customers, commenting on any developments in the territory affecting the software industry, investigating feasibility of new markets for Microsoft retail products and providing other services of marketing nature etc. Much of this is accomplished by way of identifying the customers regarding marketing of Microsoft products, local advertising, performing other activities including dissemination of information to potential customers, commenting on any developments in the territory affecting the software industry. These services once provided, are not capable of being used in a territory other than where they have been provided. In fact most of the time provision, delivery and use is happening simultaneously. It will be naive to even conceive that the above said services provided in India can even be delivered or used in a territory other than where these have been provided. 226. It has been stated in a number of circulars issued by the Board that Service Tax levy is a destination-based tax. This understanding follows similar understanding in some parts of the world. Particularly Europe, where the tax is levied at the place where the services are finally destined or used. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice received exactly in the manner service provided proposes to. But non-action or taking an action other than what naturally seems to flow from the service provided does not take away the fact that service has been used. I consider relevant to mention that a distinction must be drawn amongst the words "user", "beneficiary" and "buyer" of a service. While many a times they are same, they may not be so in all the cases. The benefits in this case would definitely flow to Microsoft Singapore but that does not mean that services have been used outside India. "228. The Noticee has also given example of Call Centres/B.P.Os. where, according to the Noticee, the services are being considered as export on the ground that these are being provided to the recipients located abroad. The Noticee has, however, failed to cite any decided case law or adduce any other evidence, which could form the basis of coming to the conclusion that either the services of Call Centres/B.P.O.s are comparable to the services rendered by them or whether, if such a practice at all exists at some level, it has attained legal finality or precedential value for the determination of this case. Likewise, comparison mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services made by the appellant and held that there was no export of services for which the appellant was liable to pay service tax under Finance Act, 1994, under the category of Business Auxiliary services provided during the impugned period. Second issue in relation to repair and maintenance whether liable to service tax for the period 9-7-04 to 6-10-05 was decided by the Authority against the appellant with the reason of his decision appearing in Para 237 of the impugned order. Issue No. 3 and 4 were decided in favour of the appellant. Point of limitation raised by the appellant was negatived by the learned adjudicating authority holding that the proceeding was not time barred for the reasons stated in Para 254 and 255 of the impugned order. Accordingly, service tax liability was determined by the ld. Commissioner with consequences of law to follow. 6. Ld. Sr. Counsel appearing for the appellant on 16-2-09 reiterated the stand of the appellant that services provided in terms of agreement dated 1-7-2005 were export services and sale of Microsoft products were done in terms of wholesale distribution agreement. But he did not have copy of such agreement on that day for which he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax under Finance Act, 1994. 9. Ld. Counsel for the appellant further submitted that while conveying above decision, the Board has also directed the authorities below to apply aforesaid circular to all pending cases for disposal accordingly. It may be stated that, a Circular is binding on the authorities below but not on the Tribunal. Order in Original in this case was issued on 23-9-2008 for which present appeal is awaiting decision in accordance with the law laid down by Apex Court in the case of All India Fedn. of Tax Practitioners v. Union of India reported in 2007 (7) S.T.R. 625 (S.C.). 10. According to Ld. Sr. Counsel, Board has explained in the above Circular that it is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation. Keeping this principle in view, the meaning of the term 'used outside India' has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under Architect service (a Category I service [Rule 3(1)(i)]), even if an Indian architect prepares a design sitting in India for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in the following manner: "Indian Agents to undertake marketing in India of the goods of a foreign seller. In this case, the Agent undertakes the activities within India and receives commission for his services from the foreign seller in convertible foreign exchange." (d) In the concluding para, (Para 3 of the circular) the Ministry is pleased to clarify as follows: "In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company" (e) Thus, the issue is no longer resintegra and has been set at rest through the Ministry's clarification dated 24-2-2009. (f) Even before the Ministry had proceeded to issue the present circular, the Hon'ble South Zonal Bench of the Tribunal at Bangalore in the case of ABS India Ltd. v. CST, Bangalore, 2009 (13) S.T.R. 65 (T) and Blue Star v. CCE, Bangalore - 2008 (11) S.T.R. 23 had also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e merits of the matter for a prima facie view, entire demand being barred by limitation there should be no pre-deposit direction during pendancy of appeal. So far as maintenance and repair activity carried out by the appellant is concerned, plea of the appellant is that Show Cause Notice was issued on 24 April 2008 seeking differential tax for the period 9-7-2004 to 6-10-2005 and the proceedings are hit by limitation on the following grounds: (a) The Central Board of Excise Customs vide circular No. 70/19/03-ST dated 17-12-2003 was pleased to clarify that maintenance/repair service of computer software was not liable to tax since software are not goods. (b) The Ministry changed its stand vide its circular No. 81/2/05-ST dated 7-10-2005 by holding that maintenance or repair or servicing of computer software is liable to service tax under section 65(105)(zzg) read with sec. 65(64) of the Finance Act 1994. (c) Consequently, for the period 9-7-2004 to 6-10-2005 the appellants were guided through the Ministry's own circular dated 17-12-2003 which was withdrawn only with effect from 7-10-2005. 13. Ld. Sr. Counsel placed reliance on the following decisions in support of afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to, or rebate of service tax paid on, taxable services which are exported out of India. Accordingly Export of Services Rules, 2005 was enacted in terms of Rule making power u/s 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 as depicted by learned adjudicating authority in Para 218 of the order of adjudication. The same is reproduced below for convenience of reference: "218 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has evolved on account of Service Industry becoming a major contributor to the GDP of an economy, particularly knowledge-based economy. With the enactment of Finance Act, 1994, the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of Article 268A in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also introduced in the Union List for the levy of service tax. As stated above, as an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003. Further, it is important to note, that "service tax" is a value added tax which in turn is a general tax which applies to all commercial activities involving production of goods and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... common parlance or to the commercial community for purposes of buying and selling. Since the solution that was produced could not be used as such without any further processing or application of heat or pressure, it could not be considered as goods on which any excise duty could be levied." Therefore, even if an item is manufactured or produced, it will not fall in the concept of goods till the test of marketability is satisfied. In the case of Moti Laminates (supra) the "solution" was an intermediate product produced in the course of manufacture of laminated sheets. It had a short shelf life. It was not marketable, therefore, this Court took the view that the solution was not "goods" and, therefore, not dutiable. 19. The importance of the above judgment of this Court is twofold. Firstly, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of market able/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is in-built into the concept of service tax, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant informed the Department as above with additional information, stating recipient of marketing services provided by the appellant was the Singapore subsidiary of Microsoft USA and this subsidiary is referred to as "MO" in the agreement dated 1-7-2005. It was further informed that the USA concern has no EOU and not required to submit quarterly return to the licensing authority for an EOU. The appellant was sanctioned Cenvat credit refunds relating to inputs in terms of pages 82 to 95 of Paper Book. 22. Record reveals that the Appellant as well as Singapore concern under agreement dated 1-7-2005 were subsidiaries of Microsoft Corporation, USA. The appellant for the first time informed the Authority vide letter dated 7-2-2009 that recipient of service provided by the appellant was Singapore concern i.e., "MO" and no such information was given to the authority prior to that date. All the letters submitted by the Appellant to Revenue show that services were provided by the Appellant to Microsoft Corporation, USA. But no such agreement was brought to record by the Appellant in the course of hearing. Services provided by the appellant established nexus of services provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h services appear to have been provided in India and there appears no export of service. The foreign principal acted through its appellant Agent. 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 present case of the appellant no service has occasioned to move out of India to a place out side India following well tested meaning of the term "export" under Section 2(18) of the Customs Act, 1962. Such a view is also very clear when object of Article 2.1, 2.2.1, 2.2.3, 2.3, 3.1, 3.2.1, 3.2.2, 3.3.1 and 3.3.1 of the sample agreement dated 1-7-2005, which has been extracted hereinbefore, is read. Remuneration for the service provided by the appellant was linked with expenses incurred in terms of Article 6.1 and 6.2 of the sample agreement dated 1-7-2005. It may be appreciated that to provide service, expenses were incurred in India in terms of the sample agreement for which the appellant got reimbursement of such expenses and a percentage thereof is paid to it as its r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to whom the marketing support is given by the service provider, ultimately makes available of goods or services to the consumers in India. Similarly marketing support provided to the foreign principal as agent thereof also results with 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 Apex Court Judgment in All India Fedn. of Tax Practitioners (supra). Had the service been provided to the foreign principal not resulting with 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 present case is a departure to that principle. The appellant is an intermediary meant to provide well defined services to clients/customers in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant, these circulars clarified what are maintenance/repairs of service of computer software. When the software was not goods, maintenance thereof is not repair and maintenance. But such view survived for limited period from 17-12-2003 to 6-10-2005 when circular 81/02/05 was issued. By circular 81/02/05 software was made liable to service tax. Appellant's plea was that it was eligible to the benefit of circulars during relevant period before issuance of show cause notice. Therefore, there cannot any realization of the demand so far as maintenance and repair service of software is concerned. This aspect has received our due consideration in the course of hearing of stay application to work out interim modality. 31. Learned Adjudicating Authority appears to have thread bare examined the issue by a reasoned and speaking order in different paragraphs depicted aforesaid. There were no materials brought out by the appellant to distinguish its case as export. The Appellant relied on the decision of Hon'ble High Court of Bombay in the case of Wardha Coal Transport Pvt. Ltd., Chandrapur v. UOI - 2009 (13) S.T.R. 490 (Bom.) = 2009-TIOL-79-HC-Mum-ST. to plead for stay of realisa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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