ST - SCN suffers from an incurable deficiency with respect to calculation of tax liability - proceedings are vitiated-no useful purpose would be served upon remand: CESTAT
By TIOL News Service
CHENNAI, JAN 11, 2019: PURSUANT to audit, it emerged that the appellants, in certain cases, did not charge service tax on supply of Manpower to their clients, which are IT companies.
The Department noted that for rendering these services, appellants are paid a professional/service fee by M/s. Infosys/other clients as agreed upon in terms of the agreement.
The Department also took the view that in such cases, the appellants are not engaged in development of any software on their own but are only providing Manpower which is utilized by the software companies for development, implementation and maintenance of software projects.
It also appeared that appellants had availed and utilized ineligible CENVAT Credit of tax paid on services like Staff Insurance, Travels and Catering Services.
Accordingly, a SCN dated 05.06.2009 was issued to the appellants inter alia proposing demand of service tax liability of Rs.95,68,100/- towards Manpower Supply Service and Rs. 2,01,732/- towards the alleged ineligible CENVAT credit.
The Commissioner confirmed the demands with interest and equal penalties.
The CESTAT considered the submissions and observed that the appellant had supplied personnel to M/s. Infosys and other clients as per requirements of the latter;that these personnel were utilized for development, enhancement, implementation and maintenance of software projects; that such development, enhancement, etc., of software is not assigned to the appellants themselves, but is done only by M/s. Infosys and the other clients; that notwithstanding the fact that the personnel so supplied may be qualified software personnel, they had to function under the overall supervision, control and management of the client and, therefore,the appellant is providing services of Manpower Supply. [ M/s. Future Focus Infotech India Pvt. Ltd. - 2018-TIOL-1375-CESTAT-MAD relied upon]
Therefore, the Bench held that on merits, there is no case in favour of the appellant.
Nonetheless, the Tribunal also observed that in M/s. Cognizant Tech Solutions - 2010-TIOL-698-CESTAT-MAD , the Tribunal had held that such activities of supply of qualified personnel would not amount to Manpower Recruitment and Supply Services and, therefore, the appellant were under the bona fide belief that the activity did not fall under the taxable category,for which reason that they were not collecting service tax.
Moreover, the issue being an interpretational one, the invocation of extended period is unsustainable, the Bench added. Accordingly, the demand raised invoking the extended period was set aside.
Insofar as the computation of the service tax demand is concerned, the Tribunal also noted that there is merit in the contention of the appellant that there is no clarity or break-up in respect of the quantification of the tax demand.
Adverting to the Stay order dated 05.02.2014, the CESTAT remarked that the ‘quantification' issue was a vexed matter even at the stage of hearing of the Stay Petition inasmuch as it was not disputedthat the income of the appellant comes from various streams such as sale of software directly to end clients, export of services to overseas clients and other professional services. Furthermore, it was not clarified in the SCN or even at the stage of the stay petition whether the value taken for working out the tax liability included all these streams of income and, therefore, there was merit in the contention of the appellants that the adjudicating authority had confirmed the demand on the value of Rs. 8,08,32,487/- with a cursory examination of contracts for a value of Rs. 2,74,05,187/- only mechanically, without examining the factual position and without appreciating the argument conveyed by the appellants about the lack of clarity in working out the tax liability. And, although the Revenue was given enough opportunity to ascertain the basis on which the taxable turnover was quantified for determination of service tax, they have not been able to put forth any details.
The Bench, therefore, concluded -
"12. We are then of the considered opinion that the Show Cause Notice itself suffers from an incurable deficiency with respect to the calculation of tax liability proposed therein. We have also noted that the Revenue, even at the Tribunal stage, has not been able to throw any further light in the matter. This being so, we find that not only the proceedings are vitiated by the said defect, but also we do not foresee any useful purpose for remanding the matter for re-consideration de novo by the adjudicating authority."
In fine, the demand of Rs. 95,68,100/- with interest thereon in respect of alleged Manpower Supply Services for the period June 2005 to 15.05.2008 was held as unsustainable even for the normal period and was set aside along with the consequential penalty imposed u/s 78 of the FA, 1994.
The CENVAT credit availed on services relating to Staff Insurance, Travels and Catering Services was held to be admissible since the period involved was from June 2005 to May 2008 when the definition of input services had a wide ambit as it included the words ‘activities relating to business'.
The appeal was allowed.
(see 2019-TIOL-122-CESTAT-MAD)
