2009 (7) TMI 105 - AT - Service Tax

Tribunal rules on taxability of service income: export services taxable, seminar fees and royalties not.

MICROSOFT CORPN. (I) (P) LTD. Versus COMMR. OF SERVICE TAX, NEW DELHI

The Tribunal ruled against the appellant regarding the taxability of income earned from services claimed as export under 'business auxiliary services' and ... Export of Service – Business Auxiliary Service – Foreign Principle – Amount Received from outside India – Services Provided in India – Prima Facie View - the principal 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 – held that - The benefit of service terminated in India only, without travelling abroad. The performance based service provided in India in terms of the sample agreement dated 1-7-2005 appears to have resulted with provision of service to the consumers in India. Therefore it appears that even the circular does not explain the position of law as claimed by the appellant to its advantage – No Export - stay granted partly Issues Involved:1. Taxability of income earned from services claimed as export under 'business auxiliary services.'2. Taxability of income from 'maintenance and repair of software' for the specified period.3. Taxability of income from 'seminar and training fees-sponsorship' under 'convention services.'4. Taxability of income from 'royalty.'Detailed Analysis:Issue 1: Taxability of Income from Services Claimed as Export under 'Business Auxiliary Services'The adjudicating authority denied the exemption claimed by the appellant for exporting business auxiliary services to a foreign principal, Microsoft Operations Pvt. Ltd. of Singapore (MO). It was determined that the services were provided and consumed in India, thus not qualifying as export under Rule 3(1)(iii) of Export of Services Rules, 2005. The authority emphasized that both the conditions of the user being located outside India and the use of services outside India must be satisfied independently. The services provided, such as marketing support and technical assistance, were utilized in India, making them taxable. The appellant's argument that the location of the recipient (MO in Singapore) should determine the export status was rejected. Instead, the services were considered consumed in India, and thus taxable under the Finance Act, 1994.Issue 2: Taxability of Income from 'Maintenance and Repair of Software'The adjudicating authority ruled against the appellant, holding that maintenance and repair services for software were taxable for the period from 9-7-2004 to 6-10-2005. This decision was based on the Ministry's circular No. 81/02/05 dated 7-10-2005, which clarified that such services are liable to service tax. The appellant's reliance on the earlier circular No. 70/19/03-ST dated 17-12-2003, which stated that maintenance of software was not taxable, was dismissed as this view was changed by the subsequent circular.Issue 3: Taxability of Income from 'Seminar and Training Fees-Sponsorship' under 'Convention Services'The adjudicating authority decided in favor of the appellant, ruling that the income from seminar and training fees-sponsorship received in relation to MCIPL Conferences was not chargeable to service tax under the category of 'convention services' for the period from 2002-03 to 2007-08 (up to December 2007).Issue 4: Taxability of Income from 'Royalty'The adjudicating authority also ruled in favor of the appellant, determining that the income on account of 'royalty' was not chargeable to service tax.Additional Considerations:The appellant's plea for exemption based on the Board Circular No. 111/05/2009-ST dated 24-2-2009, which clarified that the location of the service recipient is the relevant factor for determining export status, was considered but ultimately not accepted. The adjudicating authority held that the services were consumed in India, making them taxable. The Tribunal emphasized the principle that service tax is a destination-based consumption tax, as held by the Supreme Court in All India Federation of Tax Practitioners v. Union of India, 2007 (7) S.T.R. 625 (S.C.).Interim Order:The Tribunal directed the appellant to make a pre-deposit of Rs. 70 crores within four weeks, with compliance to be reported on 30-9-2009. Subject to this compliance, the realization of the balance demand would be stayed until the disposal of the appeal. The Tribunal acknowledged the appellant's arguments regarding limitation and refund claims but prioritized protecting the revenue's interest.Conclusion:The Tribunal's judgment involved a detailed analysis of the taxability of various incomes under the Finance Act, 1994, with a focus on the principles of service tax as a destination-based consumption tax. The appellant's claims for exemption based on export of services were largely rejected, except for specific incomes related to seminars, training fees, and royalties. The interim order required a significant pre-deposit to safeguard revenue interests during the appeal process.