By TIOL News Service

NEW DELHI, NOV 07, 2009: PLEASE read our analysis in 2009-TIOL-1325-CESTAT-DEL for details of the case wherein Tribunal ordered Microsoft to pay a pre- deposit of Rs. 70 Crores. Apparently the aggrieved Microsoft approached the Delhi High Court where also it was not successful.

The petitioner herein, namely, Microsoft Corporation (India) Private Ltd., entered into market development agreement dated 1.7.2005 with Microsoft Operations, Singapore ('MS'). Both the MS and the petitioner are the wholly owned subsidiaries of Microsoft Corporation, Washington ('Holding Company'). As per the agreement dated 1.7.2005, the petitioner was appointed to provide various technical support services, including marketing of Microsoft products in Bhutan, India, Maldives, Nepal and British Indian Ocean territory. For the services provided by the petitioner to the MS under the aforesaid agreement, the petitioner is receiving commission.

The Revenue has taken the view that the commission received on these services is amenable to service tax. After issuing show-cause notice, the Commissioner passed the order-in-original dated 23.9.2008 raising demand of more than Rs.255 crores , which included service tax amounting to Rs.124.99 crores and penalty of Rs.128.03 crores . After adding interest thereupon, the total demand is in the neighbourhood of Rs.400 Crores.

The petitioner has filed appeal against this order before the Customs, Excise and Service Tax Appellate Tribunal. This appeal is pending consideration. Along with this appeal, the petitioner also moved an application for stay. The case of the petitioner is that commission received by the petitioner under the agreement is not liable to service tax on the ground that the same is export of service, which is exempt from payment of service tax.

On this stay application, the Tribunal has passed impugned order dated 31.7.2009 [2009-TIOL-1325-CESTAT-DEL] directing the petitioner to make pre-deposit of Rs.70 crores and realization of balance demand is stayed till the disposal of the appeal. The petitioner is not satisfied with this conditional stay as it wants complete waiver of the condition of pre-deposit. Therefore, challenging that order the present petition is filed.

The High Court observed, “In the first blush, one finds that the arguments of learned counsel for the petitioner are quite attractive. Not only he has given precedents of interim orders as well as final orders passed by the Tribunals in the matter involving service tax which may appear to be similar, he has also pointed out the import of Rule 3 of the Rules and the clarification issued by the Board itself. However, at this stage, one is to look into the prima facie view of the matter. We find from the impugned order passed by the Tribunal that it has discussed this aspect in much detail though at this stage only prima facie view is taken, which it was supposed to. The Tribunal has extensively quoted from the judgment of the Supreme Court in All India Federation of Tax Practitioners . As of today, the action of the adjudicating authority is predicated on the said judgment. Whether case of the petitioner falls in third category of Rule 3 of the Rules is yet to be finally determined. The Tribunal was not oblivious to these Rules either, as reference thereto finds place in the impugned order.

The Tribunal also took note of the orders passed by the other Benches, but distinguished the same in the following words:-

“ 28. In the course of hearing, learned Counsel placed reliance on the decisions of Tribunal in case of ABC (India) Ltd - (2008-TIOL-2102-CESTAT-BANG) and Blue Star - (2008-TIOL-716-CESTAT-BANG) . Such reliance was placed to advance argument that when recipient of services is located outside India, it cannot be said that the services were delivered in India or used in India. Services are utilized only outside India and such services shall be eligible to benefit of export of services. Subsequent to hearing of the matter, learned Counsel also submitted a copy of the decision of the Tribunal in the case of Lenovo (India) Pvt. Ltd 2009-TIOL-911-CESTAT-BANG, wherein it was held that the said case was similar to case of ABC (India) Ltd and Blue Star (supra). But these decisions, prima facie, do not come to rescue of the appellant for the law laid down by Apex Court in All India Fedn . Of Tax Practitioners - (2007-TIOL-149-SC-ST) .

29. Appellant also relied on the decision of Ahmedabad Bench in 2009-TIOL-602-CESTAT-AHM. [this should be 2009-TIOL-682-CESTAT-AHM – Editor] A copy of the said decision was submitted subsequent to hearing. That decision related to interim order passed by the Ahmedabad Bench. However, while passing order, Bench had taken note of the decision in Blue Star and ABC (India) Ltd . In addition to these citations, the appellant also relied on decision of Delhi Bench in case of Gap International Sourcing (India) Pvt. Ltd . 2009-TIOL-249-CESTAT-DEL. Appellant's submission was that absolute stay was granted in identical issue of existence of recipients of services outside India shall enjoy export service benefit. Therefore, appellant's contention in present case is that when services recipients were outside India, appellant is entitled to similar benefit.”

After discussing all these aspects, the Tribunal exercised its discretion in directing the petitioner to make pre-deposit of Rs.70 crores and granting stay of the balance demand, which by all means is no less as the amounts covered by the stay order comes to more than Rs.300 crores . While adopting this approach, the Tribunal has taken into consideration various judgments of the Supreme Court laying down the principles which are to be kept in mind for dealing with the application of stay :-

“32. Prima facie, the appellant has not brought out its case for total waiver of pre-deposit during pendency of appeal since appeal is a conditional right granted by law as held in the case of Vijoy D. Meheta – 1988 (4) SCC 402 : 1989 (39) ELT 178 (SC). Balance of convenience does not tilt in favour of the appellant. There was no case made out to show that irreparable injury or undue hardship shall be caused to the appellant if no full waiver is granted. So also, neither materials were produced nor was financial hardship pleaded in the course of hearing. Rather, Revenue appears to be prejudiced if realization of demand is stayed following decision of Apex Court in Benera Valve's case 2006 (204) ELT 513 (SC). The applicable principles have also been set out succinctly in Silliguri Municipality and Ors. v . Amalendu Das and Ors. (AIR 1984 SC 653), M/s. Samarias Trading Co. Pvt. Ltd. v. S. Samuel and Ors. (AIR 1985 SC 61) and Assistant Collector of Central Excise v. Dunlop India Ltd. (AIR 1985 SC 330) = (2002-TIOL-156-SC-CX ) . While arriving at the above conclusion, we were conscious of decision of Apex Court in Ravi Jain's case – 2009 (237) ELT 3 (SC). The Hon'ble Supreme Court in para 10 of the judgment held as under : -

“10. It is true that on merely establishing a prima facie case, interim order of protection should not be passed. But if on a cursory glance it appears that the demand raised has no leg to stand, it would be undesirable to require the assessee to pay full or substantive part of the demand. Petitions for stay-should not be disposed of in a routine matter unmindful of the consequences flowing from the order requiring the assessee to deposit full or part of the demand. There can be no rule of universal application in such matters and the order has to be passed keeping in view the factual scenario involved. Merely because this Court has indicated the principles that does not give a license to the forum/authority to pass an order which cannot be sustained on the touchstone of fairness, legality and public interest. Where denial of interim relief may lead to public mischief, grave irreparable private injury or shake a citizen's faith in the impartiality of public administration, interim relief can be given.”

33. Having given due considerations to various aspects as aforesaid and to the limitation aspect pleaded by the appellant involving Rs.30.00 crores and refund plea to the extent of Rs.20.00 crores raised on behalf of the appellant in the course of hearing, as an interim measure to work out the modality for protection of interest of revenue, following decision of Apex Court in Dunlop India's case – 1985 (19) ELT 22 (SC) = (2002-TIOL-156-SC-CX) , we direct the appellant to make pre deposit of Rs.70.00 crores (Rupees seventy crores only) within 4 (four) weeks of receipt of this order and make compliance on 30.09.2009. Subject to such compliance, realization of balance demand shall be stayed till disposal of appeal.”

In Ravi Gupta, referred to by the senior counsel for the petitioner, the Apex Court reiterated the principle, firmly approved by series of judgments, that merely on showing a prima facie case, interim order of protection should not be passed. Such a course of action is to be taken only “if on a cursory glance it appears that the demand raised has no leg to stand”.

The High Court concluded, “We are afraid, the petitioner cannot pitch its case to that level as there are various thronging issues which are settled and cobwebs cleared. As per the respondents, in view of their submissions taken note of above, the case at hand is not that of plain and simple import of goods. The agreement makes it clear that MS provides services to the petitioner and the petitioner provides services to MS. The consumers are based in India, both destination and consumption is in India. Indian consumers pay for services which go out to the owners, namely, the Holding Company and part of it comes back to India in the shape of commission. Economic and commercial activities also take place in India. On the basis of these features, it is the argument of the respondent that entire performance is existed and becomes extinct in India. It is not the province of this Court, in these proceedings, to finally pronounce on these aspects and once we take the view that both sides have arguable case and final determination of these issues is to be done in the first instance by the Tribunal only, it would not be even wise to venture into that exercise. Insofar as the Tribunal is concerned, it has kept in mind all necessary parameters which are required to be gone into for deciding such applications for stay/waiver of pre-deposit and has passed an equitable order.”

In exercise of our jurisdiction under Article 226 of the Constitution, it is not a fit case where one should interfere with the said order. This writ petition is, accordingly, dismissed. However, the High Court granted four weeks time to the petitioner to make deposit of the amount as directed by the Tribunal for compliance. The parties shall appear before the Tribunal on 1st December 2009.

Now this is not a case that will affect Microsoft alone – there are hundreds of units in the STPI , who believe that they are exporting services and suddenly their activity may turn into import of services and be liable to service tax. The CBEC should not stand on ego and quickly decide as to what export is and what import is – Lots of litigation and wasteful expenditure can be avoided if a quick decision is taken. As the issue involves our trade with foreign countries, we should soon take a firm decision, lest we should be seen as a laughing stock in international trade!

(See 2009-TIOL-601-HC-DEL-ST in 'Service Tax')