By TIOL News Service

NEW DELHI, NOV 16, 2011: BEING aggrieved by the order of adjudication dated 23/09/2008, the appellant is in Appeal before the Tribunal raising the principal grievance that the service provided by the Appellant in terms of Agreement dated 01.07.2005 to the foreign principal is not 'Business Auxiliary Service' and not taxable u/s 65(105) (zzb) read with section 65 (19) of Finance Act, 1994 since such services were exported under the provisions of Export of Service Rules 2005 and immune from service tax. Further grievance was that the activity of repair and maintenance of software was not taxable prior to 07.10.2005. So also the Adjudication was time barred and the Appellant was entitled to Cum-tax benefit and Cenvat Credit. It was also agitated that the appellant was not liable to penalty. With all these grievances, prayer of the Appellant was to set aside the order of adjudication while Revenue opposes the same.

On the basis of materials on record, evidence led and pleadings made by the appellant, the Adjudicating Authority found that as per agreement dated 1-7-2005 business support was provided by the appellant to the foreign principal situated in Singapore for marketing MICROSOFT products available in India and also to provide technical support to maintain the same. Such services were provided by the Appellant in India and were not provided elsewhere for which there was no export of services made within the meaning of Rule 3(1) (iii) of Export of Services Rule 2005 for the period 19-4-2006 to 31-5-2007. Further, for the period 1-6- 2007 onwards the criterion of providing of service outside India being omitted from the law, the condition of service provided from India and used outside India still remained in force and the Appellant had not made any export of service. Such finding brought the appellant to the ambit of tax as 'Business Auxiliary service' provider.

SUBMISSIONS ON BEHALF OF APPELLANT

The services provided by the Appellant in terms of agreement dated 1-7-2005 were export services. Board Circular issued on 24-2-2009 vide No. 111/05/2009-ST in terms of Para 1 (iii) of stated that Indian agents who undertake marketing in India of goods of a foreign seller, the agent undertakes all activities within India and receives commission for his services from foreign seller in convertible foreign exchange and such services which would generally include knowledge or technique based services, which are not linked to an identifiable immovable property or whose location of performance cannot be readily identifiable (such as, Banking and Other Financial services, Business Auxiliary services and Telecom services) shall be export service.

As per Board Circular location of the receiver but not the place of performance is relevant to decide export service. The phrase "used outside India' appearing in Export of Service Rules 2005 is to be interpreted to mean that the benefit of the service should accrue outside India and it is possible that export of service may take place even when the relevant activities take place in India so long as the benefits of these services accrue outside India. Accordingly benefit of promotion of business of a foreign company accrues outside India, for which the appellant is not liable to tax under the Act.

The service recipient being located outside India and that is not being disputed by Revenue; there was export of service which shall enjoy exemption under Rule 3 of Export Service Rules, 2005. Notwithstanding the place of performance of services if the service recipient is located outside India, the phrase 'used outside India' has to be interpreted to mean that the services are used outside India. But such contention was rejected in Adjudication holding that it is not sufficient, if the user of service is located outside India.

The Commissioner in the impugned order had clearly noticed that the service recipient is located outside India and does not have an office in India and the appellants have received the payment only in foreign exchange. In view of such finding, the entire demands relating to export of service needs to be set aside.

Demand relating to repair and maintenance service was pleaded to be hit by limitation for the reason that Show Cause Notice was issued on 24 April 2008 seeking differential tax for the period 9-7-2004 to 6-10-2005 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 circular No.81/2/05-ST dated 7-10-2005 communicating 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 by the Ministry's own circular dated 17-12- 2003 which was withdrawn only with effect from 7-10-2005.

It was also pleaded on behalf of the appellant that both input credit and cum-tax benefit is available to it.

5.10 It was further submitted on behalf of the appellant that Show Cause Notice was issued on 24-4-2008 for which entire demand was time barred because Department was aware of the facts of the case of the appellant when registration application was filed on 17-10-2005 and export intimation filed on 4-10-2005. So also refund of CENVAT credit relating to the input services was granted by the Department. Periodical refund claim of export rebate was entertained and refunds for the period December 2006 and January, 2007 were sanctioned.

SUBMISSIONS OF REVENUE

The Appellant rendered market promotion service to its foreign principal in terms of agreement dated 01/07/2005 identifying potential consumers in India and thereby invited liability to service tax under section 65(105)(zzb) of the Act. Market was explored in India on behalf of foreign principal to serve the target group of customers in this defined territory. The appellant was under an obligation to achieve object of the agreement without frustrating the same for which it was remunerated by the principal.

Adjudication was never time barred for the intentional evasion made by the Appellant suppressing material facts. Therefore tax and penalty was rightly imposed with interest to follow. Microsoft USA, products came to India due to promotion of market by the appellant for its foreign principal situated abroad. There was no export of service at all made by the appellant as has been rightly held by ld. Commissioner. Activity of the Appellant occasioned entry of MICROSOFT products into the territory of India and technical support was provided to the customers in Indian Territory as concomitant to the supply of above products. Therefore by no innovative argument, the service provided in India can be converted into export of service.

When no service has gone out of India for consumption abroad, the Export of Service Rules, 2005 by no means approves export of service plea of appellant. The Rules envisaged that services have to flow abroad for consumption thereat to uphold the same to be export of service. That is not the case of the Appellant. Neither the Rules nor the circulars permit the appellant to plead that there was export of services made by it. Latest circular dated 13.05.2001 removed the anomaly barring the plea of 'export' in absence of real export of service made by the appellant. Therefore plea of export made by the appellant has no basis under law.

It is neither entitled to cum-tax benefit nor Cenvat credit and refunds if any granted shall not be basis to plead export of service. If refund was granted under error of law it is open to the Department to always pass appropriate order and direct the Appellant to pay back the same to the Treasury.

FINDINGS OF MEMBER(J)

PRINCIPLE OF EQUIVALENCE APPLICABLE TO LEVY OF SERVICE TAX

Law relating to service tax has been laid down by Apex Court in All India Federation of Tax Practitioners - (2007-TIOL-149-SC-ST). Applying the principle of equivalence as has been laid down by Apex Court, which is inbuilt into the concept of service tax under the Finance Act, 1994, there is no difference between manufacture of marketable excisable goods and providing of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It follows that service tax being a tax on an activity is also destination based value added tax. There is no ambiguity that taxable service provided in India is meant to be taxed under the provisions of Finance Act, 1994. Through different clauses, number of taxable service entries are spread over section 65(105) of the said Act. Terms and expressions used in these clauses are defined by various subsections of section 65 of that Act.

MEANING OF "EXPORT" PRESUPPOSES TAKING OUT OF INDIA TO A PLACE OUT SIDE INDIA

Material facts, Agreements and recorded statement as well as modus operandi of the appellant suggest that element of agency was implicit in the contract between the parties as was reduced in writing by agreement dated 01.07.2005. Foreign principal of the Appellant situated in Singapore intended the Appellant to be provider of market promotion service. Targeted consumers were required to be identified and served according to the terms of contract. Entry of MICROSOFT products and technical support for maintenance thereof to the territory of India was outcome of market promotion and foreign principal was under an obligation to cater to such need.

Article 286 (1) (b) of the Constitution explains what "export" means. Such concept was incorporated into Customs Act, 1962 in term of section 2(18) thereof. The activity of "taking out of India to a place outside India" is recognized test to hold an activity to be export. Activity relating to goods being equal to the activity relating to service, following "Principles of Equivalence", meaning of the term "export" recognized by Constitutional provision and tested by law relating to Central Sales Tax, Customs, Central Excise and Export and Import Policy of the government leaves no doubt to construe meaning of the said term in the context of export of service under the provisions of Finance Act, 1994 read with Export of Service Rules, 2005. There should be two termini for export of service. Service generated in one termini if travels outside that termini for ending thereat, export can be said to have been made. The activity of promotion of market ended in India upon identification of customers and nothing travelled abroad to end there.

There is no ambiguity that legislature in terms of Export of Service Rules 2005 intended that service consumed outside India shall be export. In the present case when market was promoted by the Appellant to bring MICROSOFT products and technical support into India in terms of the Agreement dated 1-7-2005, ultimate consumption of service was made in India and the appellant as agent of the foreign principal acted on its behalf in India. The circulars issued by CBE&C subscribe to the concept of "export" as is stated in the Constitution and finds support from aforesaid decisions of Apex Court on the subject of export. It appears that Board has clear perception of such term having gained vast experience from law of Customs and Central Excise as well as Export & Import Policy. Identification of customers in India brings an end to the promotion of market handicapping such promotion to travel abroad. Circulars do not appear to have made any approach contrary to such proposition.

It may also be stated that a Circular is not law by itself to bind a Court as has been held by five judges Bench of Apex Court in the case of CCE, Bolpur V. Ratan Melting & Wire Industries - (2008-TIOL-194-SC-CX-CB). Courts have to declare what particular provision of statute says and not the Executive Circular contrary to statutory provisions and law laid down by Apex Court. Further, Circular contrary to statutory provisions has no existence in law. This is the reason why CBE&C vide Circular No.141/10/2011-TRU dated 13.5.2011 removed the anomaly of Circular No.111/05/2009 dated 24.02.2009 and there is no element of bias.

SOFTWARE MAINTENANCE CONTRACT

In respect of maintenance contract, appellant relied on various circulars i.e. 70/19/03/ST dated 17-12-2003 and 81/02/05 dated 7-10-2005. According to appellant, these circulars clarified that software was not considered to be goods for which maintenance thereof was not repair and maintenance for taxability. Such view survived for limited period from 17-12-2003 to 6-10-2005 when Circular No. 81/02/05 was issued to the contrary. 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 is not assailable and there shall not be liability to service tax on such service for the period prior to 7.10.2005.

TIME BAR

So far as pleading of bar of limitation is concerned, it may be stated that imitation is counted in reverse order from the date of noticing of the fact of willful evasion, by the Taxing Authority. Facts of each case are tested on the touch stone of law and material facts of the case.

When Revenue invokes extended period of limitation under Section 73 of the Finance Act, 1994, the burden is on it to prove suppression of fact. An incorrect statement cannot be equated with a willful mis-statement. The latter implies making of an incorrect statement with the knowledge that the statement was not correct. As far as fraud and collusion are concerned, it is evident that the intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word 'willful', preceding the words "mis-statement or suppression of facts" which means with intent to evade duty. The next set of words "contraventions of any of the provisions of this Act or Rules' are again qualified by the immediately following words "with intent to evade payment of duty.' Therefore, there cannot be suppression or mis-statement of fact, which is not willful and yet constitute a permissible ground for the purpose of the proviso to Section 73. A mis-statement of fact must be willful to hold evasion of tax and adjudication for the extended period shall not be time barred in such event.

In the circumstances where it is difficult to hold that there has been conscious or deliberate withholding of information by the assessee it can be said that there has been no willful misstatement much less any deliberate and willful suppression of facts. To invoke the proviso to Section 73 of the Finance Act, 1994 a mere misstatement is not enough but such misstatement or suppression of facts must be willful to evade tax.

The Department did not lead any evidence to demonstrate that there was willful misstatement or suppression of facts with intent to evade payment of service tax by the Appellant. Therefore extended period cannot be invoked in the present case while adjudication for the normal period if any, is permissible.

The Appellant is entitled to cum-tax benefit and cenvat credit in accordance with law.

On the aforesaid backdrop of law and facts, there was no export of service made by the Appellant for which immunity from service tax claimed is deniable. The appellant is liable to service tax for the normal period in respect of 'Business auxiliary service' provided without being liable for the extended period and no penalty is imposable for no intention to evade being patent from the conduct of the Appellant. Interest as per law on service tax demand shall follow.

In the result, Appeal is partly allowed and remanded to the learned adjudicating Authority to recompute the tax liability as well as interest for the normal period granting cum-tax benefit and Cenvat credit in accordance with law.

MEMBER (T) DID NOT AGREE: HIS FINDINGS

This matter in relation to Business Auxiliary Service has come up before the same bench earlier in the appeal filed by Paul Merchants Ltd [ 2011-TIOL-1448-CESTAT-DEL ]and there was difference between the same two Members.

The Member (T) agreed with the Member(J) on the following:

(i) that no liability for service tax on account of Maintenance of Repair of software prior to 07-10-2005 can be enforced against the appellants;

(ii) that in the case of Maintenance and Repair Services, the services cannot be considered to be exported (This issue is not disputed by Appellants either);

(iii) that the extended period of limitation for demanding tax cannot be invoked in this case.

It is possible that no demand may survive if normal period of limitation for issue of notice is taken into account but the matter has to be decided by verifying the relevant date.

What constitutes export of services is an issue where there are reasons for different understanding in the matter. This is an issue where the government has been changing the criteria from time to time outside the period relevant for this case and during the period relevant for this case. This is an area where CBEC has issued a few circulars with changing perspectives. This is an issue which has come up before the Tribunal in a few other cases in the past. This issue is of a recurring nature. So it is extremely necessary to achieve a harmonious, predictable, easily understandable legal position on this issue which should preferably be available to the public in condensed legal Act or Rules. It will be desirable to avoid a situation where the public has to read too many decisions of the courts and clarifications issued by CBEC for understanding the matter.

It is seen that the officers of the department and the public get confused about these Rules quite often and giving an outline of the concept of the Rules will help in easy understanding of the Rules.

The impugned Business Auxiliary Service is that of promotion of sales in India of products of Microsoft Operations PTE Ltd, a Singapore corporation. The person availing the service and paying for the service is located in Singapore. The activities for promotion and the sales consequent to the promotion take place substantially in India. Thus activity is subjected to tax under section 65 (105) (zzb) and this is covered by Category-III. On these facts and legal position, there is no dispute.

Since the promotion activity was of products belonging to a person resident abroad it is to be considered that the impugned service was delivered outside India.

The clarification issued on 13-05-2011 gives the impression that the matter is to be decided with reference to "the accrual of benefit ". This expression is not used in the Rules though it was used in the earlier circular dated 24-02-2009. The meaning of the expression itself can be disputed. For example in the case, is the benefit accruing in Singapore or India? The circular does not give any clarity to the issue. If the Rules are not giving the intent that the government desires, the proper course in this sort of inherently complicated matter, is to amend the Rules rather than achieve it through circulars.

If a person does market promotion for a manufacturer located outside India for selling the goods in India after its import, the goods will be considered to be imported but the marketing services will be considered to be exported. It may prima facie appear to be contradictory. But this is the outcome of the Rules as it exists now and this was the position clarified by CBEC vide Circular No.111/05/2009-ST dated 24-02-2009 (see para (iii) and para 3 of the Circular).

In the matter of interpreting Rules on a subject like this where the law is evolving, it is necessary that an interpretation consistent with the direction of evolution has to be adopted.

There can be other possible arguments that in this case the company receiving services is located in Singapore whereas the actual development of the software might have been elsewhere, even possibly in India itself because Microsoft Corporation may have development centers in India (routing issue). There can also be a concern that the company in India providing service and the company in Singapore receiving services are inter-related companies (see para 4 CBEC circular dated 13-05-2011). There can be another concern that category-II services, performed in India, used as input services may also be getting the benefit of export because the output service gets classified as Category-III. These are not issues contested at any stage in these proceedings but only mentioned to illustrate how complicated things can become in the matter of deciding export of services.

Though there is equivalence between goods and services in certain aspects for taxing the two, there is a fundamental difference between them in the matter that the former is tangible while the latter is not tangible in most cases though its effect or outcome may be tangible. It is difficult to conceive of taking the service and crossing the border, be it the services of an architect residing in India designing building located outside India (though the tangible outcome namely designs can be carried outside) or be it the activity of a person organizing a business exhibition outside India or be it maintenance of medical records.

The word "export" in Article 286 in the Constitution is used with reference to goods. So is the case with definition of "export" in section 2 (18) of the Customs Act, 1962. It will obviously need some dovetailing in the context of export of service which issue has come up only after 1994. It is this dovetailing that is being achieved through Export of Service Rules, 2005 and the criteria laid down in the Rules are neither arbitrary nor inconsistent with the any provision in the Constitution. The issue being dealt with in the Rules is that whether taking out of India should be decided with reference to the situs of the property or the situs of the activity or the situs of the person receiving the service. The Rules choose to deal differently with different services and this cannot be considered as arbitrary. Further in a proceeding before this Tribunal there is no scope for deciding on the vires of Rules framed by Government of India under section 94 of Finance Act, 1994.

The actual issue in this case is to determine the consumer of the service. The consumer of the service is the person paying for the service and not any person who may also benefit from the activity.

36. In the matter of theory of equivalence decided by the Apex Court first in the case of All India Federation of Tax Practitioners and later referred to by the Court in the case of Association of Leasing and Financial Service Companies the observation is made while answering the question whether Union of India has power to levy service tax on the services in question and the decision cannot be interpreted to mean that goods and services are exactly equivalent in all matters relating to taxation. Already there are a few differences in practices followed for levy of excise duty and levy of service tax as in the case of point of taxation, taxability of services rendered free of cost, taxability of activity for the benefit of the person doing the activity which would have constituted service if another person did the activity for the benefit of the such person (corresponding to excise duty levied on captive consumption), etc. It is not possible to achieve exact equivalence between taxation on goods and services and especially so in the matter of criteria for deciding the question whether service is exported. The Apex Court has not ruled in the above decisions that tax on services and duties on goods are on identical footing in all respects.

Therefore, he was of the view that the impugned Business Auxiliary Services were exported as per the provisions of Export of Service Rules, 2005 as in force during the relevant period and in this respect he differed with the Member(J)

Considering the two different views of the Members of the bench of the Tribunal which heard the matter as coming out from the orders drafted by each Member the following points of difference are to be decided by a Third Member of the Tribunal,

Points of difference:

(i) Whether the impugned Business Auxiliary Service of promotion of market in India for foreign principal made in terms of Article 2 and 3 of the Agreement dated 01/07/2005 amounts to export of service considering Article 286 (1) (b) of the Constitution of India read with Apex decisions in the case of State of Kerala and Others Vs. The Cochin Coal Company Ltd. - (1961) 12 STC 1 (SC) , Burmah Shell Oil Storage and Distributing Co, of India Ltd. and Other Vs. Commercial Tax Officers and Others - (1960) 11 STC 764 (SC) and the provisions of Export Service Rules, 2005 as well as Circular No. 141/10/2011 - TRU dated 13.05.2011 issued by CBE & C?

(ii) Whether the impugned Business Auxiliary Service of promotion of market in India for foreign principal made in terms of Article 2 and 3 of the Agreement dated 01/07/2005 was delivered outside India and used thereat and is immune from levy of service tax as export of service in terms of the provisions of Export Service Rules, 2005 read with circulars issued by CBE & C excluding Circular No.141/10/2011 - TRU dated 13.05.2011?

(iii) Whether the impugned Business Auxiliary Service provided in terms of Agreement dated 01/07/2005 is governed by the principles of equivalence and destination based consumption tax as well as law laid down by Apex Court in All India Federation of Tax Practitioners (2007-TIOL-149-SC-ST) and Association of Leasing and Financial Services Companies Vs. UOI (2010-TIOL-87-SC-ST-LB).

(iv) The Appeal in Appeal No. ST-828/2010 without being argued by both sides whether can be said to have involved the issue that output service was exported or conclusion is to be arrived at upon hearing both sides?

(v) Whether demand for the normal period sustains subject to grant of cum-tax benefit and CENVAT Credit?

No Finality yet. The Mega case will now depend on who the Third Member is.

(See 2011-TIOL-1508-CESTAT-DEL in 'Service Tax')