2014 (10) TMI 200 - AT - Service Tax

Business Auxiliary Services to Foreign Principal Qualify as Export Under Export of Services Rules 2005, No Service Tax

M/s. Microsoft Corporation (I) (P) Ltd. Versus CST. New Delhi.

The CESTAT New Delhi (LB) held that business auxiliary services provided by the appellant, a subsidiary company, to its foreign principal in Singapore ... Business auxiliary service (BAS) - Market promotion in India - activity of repair and maintenance of software - Entitlement to Cum-tax benefit and Cenvat Credit - Export of services or not - contravention of provisions of section 67 and section 69(1) read with section 68 and section 73 - Difference of opinion - majority order. Whether the appellant, who is subsidiary company and had entered in the market development agreement with foreign principal located at Singapore is liable to Service tax on the services so rendered by them to its principal company - Principal of equivalence between the taxation of goods and taxation of services. Held that:- Appellants is admittedly covered under the definition of business auxiliary services. The said services are being provided by the appellant to its principal company, which is located at Singapore - services provided by the agents and some agencies being delivery of money to the intended beneficiary of the customer of the western units abroad, which may be located in India and the services provided being business auxiliary services is also to the western unit who is recipient of services and consumers of services, it has to be held that services were being exported in terms of Export of Services Rule 2005 and not liable to Service Tax. Disputed service is the service being provided by the appellant to his principal located in Singapore. The marketing operations done by the appellant in India cannot be said to be at the behest of any Indian customer. The service being provided may or may not result in any sales of the product in Indian soil. The transactions and activities between the appellant and Singapore principal company are the disputed activities. As such, the services are being provided by the appellant to Singapore Recipient company and to be used by them at Singapore, may be for the purpose of the sale of their product in India, have to be held as export of services. Business auxiliary services of promotion of market in India for foreign principal made in terms of agreement dated 1.7.2005 amount to Export of Services and the Hon’ble Supreme Court decision in the case of State of Kerala and Others vs. The Cochin Coal Company Ltd.[1960 (10) TMI 57 - SUPREME COURT] as also Burmah Shell Oil Storage and Distributing Co. of India Ltd. vs. Commercial Tax Officers [1960 (9) TMI 70 - SUPREME COURT] explaining the meaning of export is not relevant inasmuch as the same deals with the export of goods and not export of services - Business Auxiliary services provided by the assessee to their Singapore parent company was delivered outside India as such was used there and is covered by the provisions of Export of Service Rules and are not liable to Service Tax. Principal of equivalence between the taxation of goods and taxation of services, as laid down by the Hon’ble Supreme Court in the case of All India Federation of Tax Practitioners [2007 (8) TMI 11 - SUPREME COURT] as also the principals of destination based consumption Tax were in the context of Constitutional Authority of levy of Service Tax on certain services and the issue of Export of Service in terms of Export of Service Rules was not the subject matter of said decision. The Export of Service Rules, 2005, being destination based consumption tax are in accordance with the declaration of law by the Hon’ble Supreme Court. Having held that services involved were export of services, the same are not liable to be sustained against the appellants - Decided in favour of assessee. Issues Involved:1. Whether the Business Auxiliary Service (BAS) provided by the appellant amounts to export of service.2. Whether the services related to repair and maintenance of software were taxable prior to 07.10.2005.3. Whether the adjudication was time-barred.4. Whether the appellant is entitled to cum-tax benefit and Cenvat Credit.5. Whether penalties imposed on the appellant were justified.Issue-Wise Detailed Analysis:1. Business Auxiliary Service (BAS) and Export of Service:The appellant contended that the BAS provided under an agreement with a foreign principal in Singapore constituted export of service and was thus immune from service tax under the Export of Service Rules, 2005. The adjudicating authority, however, found that the services were provided in India and not exported, thus falling under taxable BAS as per Section 65(105)(zzb) of the Finance Act, 1994. The Tribunal analyzed the principles of equivalence and destination-based consumption tax, referring to the Supreme Court's judgments in All India Federation of Tax Practitioners and Association of Leasing and Financial Service Companies. The Tribunal concluded that the services were indeed exported since the recipient was located outside India, and the benefit of the service accrued outside India, aligning with the Export of Service Rules, 2005.2. Taxability of Repair and Maintenance Services Prior to 07.10.2005:The appellant argued that repair and maintenance of software were not taxable before 07.10.2005, based on CBEC Circular No. 70/19/03-ST dated 17-12-2003. The Tribunal agreed, noting that the circular clarified that such services were not taxable until the issuance of Circular No. 81/02/05-ST dated 7-10-2005, which changed the taxability stance.3. Adjudication and Limitation:The appellant claimed that the adjudication was time-barred as the Show Cause Notice was issued on 24-04-2008 for the period 09.07.2004 to 06.10.2005. The Tribunal examined the records and found that the Department was aware of the appellant's activities through various communications and refund claims. It held that there was no willful suppression of facts by the appellant, and thus, the extended period of limitation could not be invoked. The demand for the normal period was, however, upheld.4. Cum-tax Benefit and Cenvat Credit:The Tribunal held that the appellant was entitled to cum-tax benefit and Cenvat credit as per the law. The adjudicating authority was directed to recompute the tax liability, granting these benefits.5. Penalties:The Tribunal found no intention to evade tax on the appellant's part, given their conduct and the Department's prior knowledge of their activities. Consequently, it held that no penalties were imposable.Separate Judgments:The judgment noted a difference of opinion between the members of the bench on whether the BAS constituted export of service. The third member, Archana Wadhwa, resolved the difference in favor of the appellant, aligning with the decision in the case of Paul Merchants Ltd., which held that services provided to a foreign principal were export services and thus not liable to service tax.Final Decision:The appeal was partly allowed, remanding the matter to the adjudicating authority to recompute the tax liability for the normal period, granting cum-tax benefit and Cenvat credit. The penalties were set aside, and the appeal was allowed in terms of export of service, exempting the appellant from service tax liability on BAS provided to the foreign principal.