By TIOL News Service

BANGALORE, APRIL 12, 2013: THE appellants are engaged in marketing and licensing of the popular software known as "my SAP" along with other related software products of software firm based in Germany. They do software licensing, maintenance, consulting and training services. There is an agreement between the appellant and their principals in Germany. Subject to the terms of the agreement, the principals granted to the appellant a non-exclusive license to use, market, sub-license the software, documentation, 3 rd party data base and 3 rd party software to end users in the territory as assigned to the appellants which area is predominantly in India. In consideration of the above licenses and permissions, the appellant was required to make certain payments to the principals in Germany which was mostly from consideration received from the clients to whom the software was marketed. In this proceeding, Revenue is seeking to tax such payments made under provisions of Section 66A of Finance Act, 1994 on the basis that the appellant was receiving franchisee service from their principals in Germany. A demand of Rs.79,07,67,027/- for the period April 2006 to March 2008 was confirmed against the appellants.

For the same services received by the appellants, the Department had earlier issued demands under the category of "Management Consultant Service". The adjudication order in the matter was set aside by Tribunal by Final Order No. 261/2007 dated 23-02-07 - (2007-TIOL-772-CESTAT-BANG). Later demands proposing classification of the service under ‘Maintenance and Repair Service' was issued and the demand was finally dropped by the Tribunal in order reported at - (2010-TIOL-1569-CESTAT-BANG). The department ventured yet another round of litigation against the appellant for the subsequent period and this time the Revenue has come up with proposal to classify the service in a third category, that is, as ‘Franchisee Service'.

While disposing the stay application filed by the appellants against the demand of Rs.79,07,67,027/- under franchisee service, the CESTAT did not agree with the authorized representative's plea to put to some terms of pre-deposit for admission of the appeal and grated full waiver of pre-deposit observing thus-

++ It is prima facie clear that payments under the first two relate to licensing of software and for continued support for updates. The third payment does not involve any service to the clients of the appellant to consider it as franchisee service. We are prima facie in agreement with the argument that for the first two services the classification of service received by the appellants from their principals abroad and that rendered by the appellant to clients in India has to be the same because the nature of activities is the same.

++ It is not in dispute that a new entry specifically covering the impugned services from 16/05/2008 came into force when the entry for taxing 'information technology service' was introduced in Finance Act, 1994. The question whether service tax was leviable on this activity done by the appellant prior to the said date under another heading viz., Management, Maintenance and Repair Service, was before the Tribunal earlier and the decision was given in favor of the appellant specifically observing that in view of the new taxable service it has to be considered that the service was not taxable earlier. Now Revenue has come up with their case under yet another old entry for the period prior to the date of introduction of the new entry. This old entry also is not one where the activity was specifically covered. In fact the old entry now proposed appears to be less suited to cover the activity as compared to "Management, Maintenance and Repair". So the principle adopted in the said decision should apply to the present case also. Further as argued by the appellants, if a person is simply selling a product manufactured by another or licensing a software developed by another, he cannot prima facie be considered as a franchisee.

++ The Appellant is doing consultation and advisory services for business process re-engineering that is required for implementation of software and also customizing of the software to suit the business environment of each client. The appellant has submitted that they have paying service tax on such activities as service provider and no part of remuneration received for such services is remitted to the principal in Germany. In the facts of the case, prima facie, at this stage, it is difficult to agree with the argument of the Revenue that the appellant was receiving franchisee services. Therefore, at this prima facie stage, we find no reason to ask for any pre-deposit of the dues arising from the impugned order for admission of the appeal. Therefore, waiver of pre-deposit is granted for admission of appeal and collection of dues is stayed during the pendency of the appeal.

(See 2013-TIOL-595-CESTAT-BANG)