By TIOL News Service

MUMBAI, OCT 15 , 2013: THE appellants are engaged in providing various services to M/s Citi Bank and allied entities in India and abroad. They undertook collection and sales services, call center services and computerized data processing services for the client.

On the collection and sales services they have been discharging service tax liability under 'Business Auxiliary Services (BAS)' w.e.f 01/07/2003 and on call center services they have been discharging service tax liability under BAS w.e.f (2009-TIOL-150-HC-MUM-ST)as the said service was exempt prior to 01/03/2006.

In respect of computerized data processing services, they have been discharging service tax under the category of 'Business Support Services' w.e.f (2009-TIOL-150-HC-MUM-ST) when the said service was brought under tax net.

On (2009-TIOL-150-HC-MUM-ST) the appellant wrote a letter to the jurisdictional R/S informing the department of the activities undertaken by them and also conveying that IT services in the nature of computerized data processing services undertaken by them are outside the purview of 'Business Auxiliary Service'. On 23/10/2008 the department issued a SCN for the period July, 2003 to March, 2004 to the appellant with respect to "computerized data processing" undertaken by them proposing to classify the same under 'Business Auxiliary Services' as defined under section 65(19)(iv) of the Finance Act, 1994 and demanded Service Tax of Rs.14,90,73,095/-.

The notice was adjudicated by the CCE, Thane-II and he confirmed the demand and imposed penalties and interest.

The Bench while granting Stay (2013-TIOL-636-CESTAT-MUM) in the matter had observed -

"5.1 The activity undertaken by the appellant in the instant case is, processing of the transactions of their client electronically. In other words, they were undertaking computerized data processing for their client using the computer systems of the client and the clients are located not only in India but all over the world. It is also a fact that the appellant is not interacting with the bank's customers for collection of any data. The data already collected by the bank in their various branches are electronically processed by the appellant. In other words, the appellant is undertaking back-office operations for the client. The Citi Bank group has entrusted the processing of banking transactions electronically to the appellant. Since computerized data processing is specifically excluded from the scope of BAS as per explanation thereof, the question of confirmation of demand under BAS prima facie does not arise. Secondly, it is seen that, bulk of data processing is done for the bank's branches situated abroad. If that be so, the activity undertaken by the appellant would amount to export of service and on that account also no service tax would be payable by the appellant. Thus, we are of the view that the appellant has made out a strong prima facie case in their favour for grant of stay against the impugned order. Accordingly, we grant unconditional waiver from pre-deposit of the dues adjudged against the appellant in the impugned order and stay recovery thereof during the pendency of the appeal."

The appeal was heard recently.

Following submissions were made by the appellant -

+ There is a variation in the allegation in the SCN and the findings of the adjudicating authority inasmuch as while the SCN alleged that the appellant's service is 'computerized data processing' which is incidental or ancillary to the customer care services undertaken by their client to their customers, in the order-in-original, a totally different ground [that the appellant is collecting raw data from the client's customers] has been taken to confirm the demand and on this ground alone the order is not sustainable in law.

+ As per the definition of 'Business Auxiliary Services' under section 69(19) of the Finance Act, 1994, in the explanation thereof, computerized data processing has been specifically excluded from the scope of BAS but neither in the SCN nor in the order there is any allegation or finding that the activity undertaken by the appellant is not computerized data processing.

+ If that be so, the question of levy of service tax on the activity undertaken by the appellant, which is nothing but computerized data processing, cannot come within the scope of BAS and hence the entire demand is unsustainable.

+ w.e.f 01/05/2006 a new category of 'Business Support Service' (BSS) was brought under tax net and accounting and processing of transactions have been specifically included thereunder and explanation to BAS has also been modified so as to exclude computerized data processing services from the said explanation for the reason that the same is included under BSS.

+ The demand is restricted to the period from July 2003 to March, 2004 and there is been no demand for the subsequent period although same transaction has been carried which also goes to show that the department has accepted the transactions undertaken by the appellant for the subsequent periods under BSS ;

+ case law of Indian National Shipowners' Association - (2009-TIOL-150-HC-MUM-ST) is relied upon wherein it was held that, when a tax is imposed under a new entry with effect from a particular date, it has to be presumed that for the period prior to that date, tax is not leviable unless the new entry has been carved out of earlier existing entry; that in the present case, BSS came into force w.e.f 01/05/2006 and it has not been carved out of BAS and hence the demand for the period prior to 01/05/2006 is not sustainable. Reliance is also placed on the decisions in Phoenix IT Solutions - (2009-TIOL-1067-CESTAT-BANG) and Gandhi & Gandhi Chartered Accountants vs. Commissioner of Central Excise - (2009-TIOL-2028-CESTAT-BANG).

+ Alternatively, since the service had been provided to foreign clients the same has to be considered as export of service and question of payment of service tax would not arise as services has been used or consumed by banks abroad. The Circular No. 56/5/2003 dated 25/04/2003 and the decisionsin SGS India Pvt. Ltd. vs. Commissioner of Service Tax - (2011-TIOL-666-CESTAT-MUM) and Paul Merchants Ltd. vs. Commissioner of Central Excise - (2012-TIOL-1877-CESTAT-DEL) are relied in support.

+ for the period from 20/11/2003 to 31/11/2004 since the appellant had received the payments for the services rendered in convertible foreign exchange, the same was exempt vide Notification No. 21/2003-ST dated 20/11/2003.

+ The appellant was under the bona fide belief that since computerised data processing is covered in the ‘Information Technology Services', which was excluded from BAS, the appellant was not liable to any service tax; their activities were disclosed to the department on 20/10/2003 and SCN issued on 23/10/2008 is time-barred.

The Revenue representative reiterated the findings of the adjudicating authority and submitted that the conclusion of the Commissioner that the appellant was rendering service incidental or ancillary to customer care service by the bank to their customers is a plausible interpretation and, therefore, sustainable in law. Reliance is also placed on the Board Circular 62/11/03-ST and the apex Court decision in Hotel Leela Venture Ltd. - (2009-TIOL-09-SC-CUS).

The Bench recorded its observations thus -

SCN allegations & O-I-O recording of facts at variance -

+ In the show cause notice it was alleged that the customers of the bank submitted physical documents at the bank's branches and the appellant performed computerised processes on the input submitted to the bank using the bank's systems and saved the output on the bank's system, which amounted to services incidental or auxiliary to the customer care services rendered by the bank, whereas the reasoning recorded in the impugned order is that the appellant collected data from the clients' customers, and the banks during the course of providing banking services also provided customer care services, and the services rendered by the appellant to the bank would be incidental or auxiliary to the customers care services provided by the bank. Thus, there is a complete variation between the ground alleged in the show cause notice and the grounds on which the demands have been confirmed. On that ground alone the impugned order is liable is to be set aside.

Principle of Classification

The banks are providing to its customers banking and financial services and the customer care services, if any, provided by the bank would also be classifiable under the main function of ‘banking and financial services' offered by the bank since as per the principle of classification, it is the main function services which gives the essential character that has to be considered for classification. Since the banks provide essentially banking and financial services the question of appellant providing any service incidental or ancillary to any customer care service would not arise at all. The appellant is providing service in relation to banking and financial by way of computerised data processing. Since computerised data processing is included under ‘Information Technology Services' which is specifically excluded from the scope of BAS, thus the activity undertaken by the appellant stood excluded from BAS during the impugned period. The activity became taxable under BSS w.e.f 01/05/20065 since exclusion under BAS was omitted and the activity was specifically covered under BSS. Therefore, during the period of demand there was no service tax liability on the appellant on the computerised data processing undertaken by the appellant in respect of banking transactions.

The "comma" in coma [Significance of comma - Principles of Statutory Interpretation, 9 th Edition by Justice G.P.Singh].

Reliance placed by the Revenue on the Circular No. 62/11/2003 [F.No. B3/7/2003-TRU] dated 21/08/2003 is also incorrect.

"2.3….The scope of IT services is explained in the definition of Business Auxiliary Service in the Act itself as any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. The last words "primarily in relation to operation of computer systems" make the intention abundantly clear. The words "back office processing" used in the clarification dated 28-2-2003 have to be read in conjunction with the other terms used therein viz. data processing, networking, computer facility management. Thus any service of back office processing primarily in relation to operation of computer system will be covered as IT services and not taxable. Payroll-processing, accounts management etc. even by using computer programs cannot be termed as activities primarily in relation to computer systems. The use of computer in these services is secondary and the primary activity is that of business-related work. Thus these services will be taxable as Business Auxiliary Services…."

The explanation to BAS reads as follows:

"Explanation- For the removal doubts, it is hereby declared that for the purposes of this clause "information technology service" means any service in relation to designing, developing or maintaining of computer software, or computerised data processing or system networking, or any other service primarily in relation to operation of computer systems."

After the words ‘system networking', there is a ‘punctuation' mark and thereafter ‘or any other service primarily in relation to operation of computer systems' follows. In view of the punctuation mark after the words ‘system networking', the words ‘primarily in relation to operation of computer systems' applies only to "any other services" and not in respect of the services specifically delineated in the said explanation such as designing, developing, maintaining of the computer software or computerised data processing or system networking. The insertion of a ‘,' has not been taken note of while issuing the above clarification.

In view of the above, the reliance placed by the Commissioner (AR) on the Board's clarification is totally mis-placed as the said clarification itself is wrong.

Limitation

The appellant had intimated to the department as early as in October, 2003 about the activities undertaken by them vide letter dated 20/10/2003. However, the department issued the show cause notice only on 23/10/2008 i.e., after a lapse of more than five years. Thus the show cause notice is grossly time-barred and the appellant succeeds on limitation also.

Export of Service

There is merit in the argument of the appellant that since bulk of the service has been rendered to clients located abroad and the payments has been received in convertible foreign exchange, the appellant is not liable to pay service tax on the export of services undertaken by them. In any case the exemption under Notification No. 21/2003 dated 20/11/2003 would have been available to them since the consideration for the services rendered was received in foreign currency. For the period prior to 20/11/2003, Board's circular dated 24/05/2003 clarifies that no service tax would be leviable on export of services for which consideration is received in convertible foreign exchange.

Holding that the order is not sustainable, the same was set aside and the appeal was allowed.

In passing -

This morning I took out a comma and this afternoon I put it back in again.  - Oscar Wilde

(See 2013-TIOL-1518-CESTAT-MUM)