Software Reseller Not Intermediary: CESTAT Upholds ₹36.67 Crore CENVAT Refund

Principal Commissioner Vs Comparex India Pvt. Ltd. (CESTAT Delhi)

Summary: The Customs, Excise and Service Tax Appellate Tribunal, New Delhi, in Principal Commissioner Vs Comparex India Pvt. Ltd., dismissed the Revenue’s appeal challenging the allowance of six refund claims aggregating ₹36.67 crore. The central question was whether the respondent’s supply of software licences to overseas customers constituted export of services or intermediary services under the Place of Provision of Services Rules, 2012. The Tribunal held that the respondent independently purchased software from Microsoft and resold it to customers on its own account. Its activities therefore did not fall within the statutory definition of intermediary services, and the overseas transactions qualified as exports for the purpose of refund of accumulated CENVAT credit.

The respondent was engaged in supplying software to customers in India and abroad. It primarily procured software from outside India and availed CENVAT credit of service tax paid on the purchases. Because its overseas supplies were treated as exports on which service tax was not payable, substantial input credit remained unutilised. The company consequently submitted six refund applications under Rule 5 of the CENVAT Credit Rules, 2004. Five claims were sanctioned, while the sixth was rejected by another adjudicating officer, resulting in separate appellate proceedings by the Revenue and the assessee.

The Revenue contended that Comparex merely arranged or facilitated the supply of Microsoft software to overseas customers. It relied on software licence agreements and invoices identifying the end users, arguing that Microsoft remained the licensor and the overseas customers became licensees. According to the Department, Comparex was an intermediary under Rule 2(f) of the Place of Provision of Services Rules, 2012. On that basis, Rule 9(c) would place the provision of services in India, preventing the transactions from qualifying as exports. The Revenue also alleged that some services were provided to the respondent’s overseas branches, which would affect compliance with Rule 6A(1)(f) of the Service Tax Rules, 1994.

Comparex maintained that it purchased software licences and independently resold them to customers under separate commercial arrangements. It negotiated its own selling prices, received consideration directly from customers and bore the risk of non-payment. Its obligation to pay Microsoft was independent of whether the overseas customer paid Comparex. The Microsoft Channel Agreement expressly described the parties as independent contractors and excluded an agency, franchise or fiduciary relationship. Comparex also emphasised that it was not remunerated through commission and that the Department had accepted service tax on the full value of its domestic software supplies rather than treating those transactions as intermediary services.

The Tribunal examined the definition of intermediary under Rule 2(f), the general place-of-provision rule under Rule 3, the special rule for intermediary services under Rule 9 and the conditions for export under Rule 6A. It explained that an intermediary ordinarily arranges a transaction between a principal and a third party and separately provides its own facilitation service, commonly for a commission. In contrast, a person supplying the main service or goods on its own account is expressly excluded from the intermediary definition. The Tribunal also considered the Department of Revenue’s explanatory communication dated 16 March 2012 and the commercial terms governing the transactions between Microsoft and Comparex.

In determining the actual relationship, the Tribunal relied upon the Supreme Court’s decision in Gordon Woodroffe & Co. Vs M.A. Majid & Co., AIR 1967 SC 181. The principle applied was that the substance of a commercial arrangement determines whether the relationship is one of principal and agent or vendor and purchaser. Even where contractual terminology suggests an agency, a party purchasing goods at a predetermined price and reselling them independently may be acting as a purchaser rather than an agent. Applying this reasoning, the Tribunal found that Comparex controlled its resale prices, independently bore credit risk and had no agency relationship with Microsoft. The invoices and balance-sheet entries supported the existence of independent purchase and resale transactions.

The Tribunal further rejected the Revenue’s allegation that the services were supplied to overseas branches. The allegation was unsupported by specific identification of any branch, whereas the record examined in the earlier refund proceedings indicated that the overseas customers were separate entities. Since Comparex was not an intermediary, the special place-of-provision rule under Rule 9(c) did not apply. Instead, Rule 3 applied, placing the services where the overseas recipients were located. The Tribunal consequently concluded that the supplies constituted exports under Rule 6A, upheld the appellate decision allowing the refund claims and dismissed the Revenue’s appeal by order dated 9 January 2020.

Cases Discussed

1. Gordon Woodroffe & Co. Vs M.A. Majid & Co. (Supreme Court); AIR 1967 SC 181. The Tribunal relied upon the Supreme Court’s distinction between an agency arrangement and an independent vendor-purchaser relationship. The decisive consideration is the substance of the transaction, including pricing freedom, payment obligations and the allocation of commercial risk.

2. Ex parte White, In re Nevill (Court of Appeal in Chancery); (1871) 6 Ch. 397. Discussed in the Supreme Court judgment reproduced by the Tribunal. It illustrates that a person receiving goods and reselling them on independently determined terms may act as a purchaser rather than an agent.

3. W. T. Lamb and Sons Vs Goring Brick Company Ltd. (Court of Appeal); [1932] 1 KB 710. Discussed in the reproduced Supreme Court judgment. The contractual description of a party as a selling agent does not conclusively determine the relationship when the substance of the arrangement is purchase and resale.

4. Ex parte Bright, In re Smith; (1879) 10 Ch. Div. 566. Referred to in the passage from Blackwood Wright’s Principal and Agent reproduced in the Supreme Court judgment quoted by the Tribunal.

Relevant Statutory Framework: Rule 5 of the CENVAT Credit Rules, 2004 and Notification No. 27/2012-CE (NT); Rule 6A of the Service Tax Rules, 1994; and Rules 2(f), 3 and 9 of the Place of Provision of Services Rules, 2012.

FULL TEXT OF THE ORDER OF CESTAT NEW DELHI

This Appeal has been filed by the Principal Commissioner, CGST, Delhi South Commissionerate, New Delhi to assail the order dated 18 March 2019 passed by the Commissioner of Central Tax, (Appeals-II), Delhi. This order has decided Appeal No. 137 of 2018 filed by the assessee (respondent in this appeal) as also the two appeals bearing No’s. 233 of 2017 and 240 of 2017 filed by the Revenue. The Appeal filed by the assessee has been allowed, while the two appeals filed by the Revenue have been dismissed.

2. The dispute in this Appeal relates to six similar claims filed by M/s Comparex India Limited, New Delhi(the respondent) amounting to Rs.36.67 crores for refund of the unutilized CENVAT Credit of input services used for output services. Out of the aforesaid six refund claims, five refund claims were allowed by the Assistant Commissioner, Service Tax, New Delhi, by five separate orders passed by a particular officer, but the sixth refund claim was rejected by a separate order passed by a different officer. The Revenue felt aggrieved by the five orders allowing the refund claims and filed two appeals bearing No’s. 233 of 2017 and 240 of 2017. These two appeals were dismissed by order dated 11 January 2018 bearing no. 118 passed by the Commissioner (Appeals). The respondent also filed an appeal to assail the sixth order passed by the Assistant Commissioner rejecting the refund claim. This Appeal was allowed by the Commissioner by order dated 19 September 2018 bearing no. 265. Feeling aggrieved by the aforesaid two orders, the Revenue filed two appeals before this Tribunal, being Appeal No. 51144 of 2018 (against the order dated 19 September 2018 bearing No. 265) and Appeal No. 51279 of 2018 (against the order dated 11 January 2018 bearing no. 118). Both the Appeals were decided by the Tribunal by a common order dated 8 February 2019. The grievance of the Revenue before the Tribunal was that they had not been properly heard by the Commissioner (Appeals). The Tribunal, in the interest of justice, set aside the impugned orders and allowed the Appeals with a direction to the Commissioner (Appeals) to pass a reasoned order in accordance with law. The Commissioner (Appeals) then decided the two appeals filed by the Revenue and the appeal filed by the respondent by a common order dated 12 March 2019. The two Appeals filed by the Revenue were dismissed, while the appeal filed by the respondent as allowed. It is against this order dated 12 March 2019 passed by the Commissioner (Appeals) that the Revenue has filed this appeal contending that all the six refunds claimed by the respondent should have been rejected.

3. The Respondent is engaged in the business of supply of software to customers outside India as well as in India. The software so supplied by the respondent to its customers is, mainly, procured from outside India. On purchase of the software, the respondent paid service tax and the same was claimed at CENVAT Credit. The respondent had made substantial amount of export during this period and consequently, as no service tax was required to be paid on exports, substantial amount of CENVAT Credit remained unutilized. It is the refund of this unutilized CENVAT Credit, that gave rise to the six applications filed by the respondent before the Assistant Commissioner. The following chart will briefly indicate the details of the refund claim and the orders passed on the six applications:

Sl No	Period	Refund Amount involved	Date of Order Passed by the Commissioner	Result
1.	April 2014 to June 2014	Rs.3.28 Cr	01.05.2017	Allowed
2.	July 2014 to Sept 2014	Rs. 2.99 Cr	01.05.2017	Allowed
3.	Jan 2015 to March 2015	Rs. 2.90 Cr	24.05.2017	Allowed
4.	Oct 2014 to Dec 2014	Rs. 2.89 Cr	24.05.2017	Allowed
5.	Jan 2016 to March 2016	Rs. 5.01 Cr	09.06.2017	Allowed
6.	July 2016 to June 2017	Rs.19.60 Cr	26.07.2018	Rejected
Total		Rs.36.67 crores

4. As noticed above, the Revenue had filed one appeal to assail the orders at serial no’s. 1,2,3 and 4 of the aforesaid chart and one appeal to assail the order at serial no. 5 of the aforesaid chart. The respondent had filed an appeal to assail the order of serial no. 6.

5. It would be appropriate to note the reasons given by the Assistant Commissioner for allowing the five refund claims filed by the respondent and the reasons for disallowing the sixth refund claim of the respondent.

6. REASONS FOR ALLOWING THE FIVE REFUND CLAIMS:

(i) The assessee had filed the quarterly refund claims under Rule 5 of CENVAT Credit Rules 2004 read with the notification dated 18 June 2012 within time and before the correct jurisdictional authority;

(ii) The assessee had procured the software through input service and paid service tax. As the assessee had made substantial amount of exports, CENVAT Credit remained unutilized since service tax is not required to be paid on exports. It is this unutilized CENVAT Credit for which the refund has been claimed;

(iii) The assessee purchased the software from the Microsoft and sold it to customers on the basis of purchase orders received from them;

(iv) The assessee sells software and software licenses which would be a declared service under section 66E (d) of the Finance Act 1994. For sale of software licenses to customers located outside India, the assessee received consideration in convertible foreign exchange. The services provided by the assessee would, therefore, qualify as “export service” in terms of the Place of Provision of Services Rules 2012;

(v) The assessee has claimed refund on input services such as Information Technology and Software, Management and Business Consultancy, Chartered Accountant, Renting of Immovable Property, Telephone and Internet Communication, Security Agency and Courier. The purchase/ import of software (input service) has a direct relationship with output service of sales of software to the customers. Thus, purchase of software becomes an input service for providing the output service and would be eligible for CENVAT Credit. The main component of CENVAT Credit pertains to purchase of software. The remaining services relating to Renting of Immovable property, Chartered Accountant, Security Agency, Courier, Management and Business, Telephone and Internet Communication also qualify as ‘input services’ for ‘export services’;

(vi) In all the cases, the recipients of service are located outside India and so the provisions of Rule 6A (1) of the Service Tax Rules 1994 stands satisfied in the case of the assessee and the service provided by the assessee would be “export service”; and

(vii) The party is, therefore, entitled to refund of CENVAT Credit.

REASONS FOR REJECTING THE SIXTH CLAIM:

(i) The Assessee is procuring branded/ packaged and customized software as per the requirements and purchase orders received from overseas customers. The nature of the provision of service in arranging and facilitating procurement of main services and transporting the same to the overseas domestic clients is, therefore, “intermediary” as defined in Rule 2(f) of the 2012 Rules;

(ii) The sale of software is usually coupled with a condition of acceptance of software license agreement, which gives the buyer the “right to use” the software, subject to certain terms and conditions contained in the agreement. Thus, on purchasing the software, the buyer becomes the licensee and not the owner of the software and Microsoft becomes the licensor;

(iii) Most of the software purchased by the assessee are licensed to end customers which is evident from the invoices issued by M/s Microsoft India Pvt Ltd. to M/s Comparex, wherein end user is also mentioned separately besides M/s Comparex India Ltd;

(iv) The nature of provision of service would, therefore, be “intermediary” and the place of provision of service would the place of service provider, which is in India. The service would, therefore, not qualify as ‘export’ of service;

(v) The assessee is also providing the service to its own overseas branch offices. The branches are in a non-taxable territory, while the office of the assessee is in a taxable territory. For this reason also, the services provided are not ‘export’ of service;

(vi) In regard to the orders passed on the previous refund claims filed by the assessee, the Department has filed an appeal before the Tribunal; and

(vii) The refund claim, therefore, deserves to be rejected.

7. The Commissioner (Appeals) has dismissed the two appeals filed by the Revenue and allowed the Appeal filed by the respondent by order dated 12 March 2019 for the following reasons:

(i) The short issue to be decided is whether the service provided by the assessee qualifies as ‘export service’ or not. The Revenue has based their contentions on two premises namely, (a) the service provided by the assessee is an ‘intermediary’ service and as such, under Rule 9 of the 2012 Rules the place of provision of service is in India; (b) the assessee has failed to fulfil condition (f) of Rule 6A (1) of the 1994 Rules.

(ii) The assessee is registered for providing inter alia, Information Technology Software Service since the year 2009. Some of the services are exported whereas the remaining service is provided in India. It has discharged the service tax liability on the said service on full value of service. The Revenue has never objected the payment of Service Tax on the said service under particular category. If they are ‘intermediary’, the service tax payable by them would be much less, as in that case they are liable to pay the service tax only on the margin (sale price of software less purchase price of software) retained by them. The Revenue is not justified in contending that at the time of levy of service tax, full service tax is payable on the invoice value, whereas when the question of refund arises, the assessee is not eligible for refund as it has provided “intermediary” service.

(iii) Even otherwise as per Rule 2(f) of the 2012 Rules, “intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account. In the instant case, the assessee himself purchases the software from Microsoft and sells it tailor made, or in a customized condition to customers. This fact is also evident from one of the audited Balance Sheets of the assessee wherein it has mentioned that it had purchased the softwares valuing Rs. 383.10 Crores and sold the softwares at Rs. 416.47 Crores. These figures, as well as other figures mentioned in the Balance Sheet, prove beyond any doubt that the assessee has first, purchased the software from Microsoft and then re-sold it as per the requirements of customers. Thus, it has provided the service on its own account and will not fall under the definition of ‘intermediary’.

(iv) In the agreement entered into by the assessee with Microsoft, there is nothing which may indicate that the assessee has provided any service to Microsoft as an ‘intermediary’. Instead, a perusal of the agreement reveals that it has provided service on its own account. The payment to Microsoft in respect of said service is made by it, and the same is not relatable to the receipt of payment from customers.

(v) In the light of these findings, it is evident that the service provided by the assessee does not fall under ‘intermediary’ category service and so, the place of provision of service under Rule 3 of 2012 Rules would be out of India.

(vi) Regarding the second issue, it has been observed that there is nothing in the Order which shows that service receivers are the Branch Offices of the assessee. A perusal of the list of service receivers annexed by the assessee with the appeal memo, shows that all the companies mentioned therein are separate legal entities and none of them is a Branch Office of the assessee. Thus, the Service receivers of the assessee are not Branch Offices and the rejection of refund claim on this ground is based merely on presumptions.

8. Shri Vivek Pandey, learned Authorised Representative of the Department has made the following submissions to assail the order dated 12 March 2019 passed by the Commissioner (Appeals):

(i) The order dated 12 March 2019 passed by the Commissioner (Appeals) is a non-speaking order as it does not take into consideration the two submissions namely:

(a) The sale of software is coupled with a condition of acceptance of a software license agreement that gives the buyer the right to use the software. The buyer becomes a licensee and not the owner of the software and Microsoft India becomes the licensor; and

(b) The invoices issued by Microsoft India reveal that it mentions the name of the overseas customers and, therefore, the main transaction is between Microsoft India and the end customers;

(ii) The respondent is only an ‘intermediary’ for the reason that the nature of business of the respondent is arranging, facilitating and transmitting the main services from Microsoft India to the overseas clients and therefore, the said services cannot be treated as “export service” and so the respondent would not be entitled to refund of CENVAT Credit; and

(iii) The order of the Commissioner (Appeals) records that the contention of the Revenue is based on the premise that the assessee had acted as an ‘intermediary’ without adverting to the license agreement and the invoices which were two crucial evidences to examine this issue.

9. Shri Priyojeet Chatterjee, learned Counsel appearing for the respondent has, however, defended the impugned order and has made the following submissions:

(i) The respondent is engaged in the business of supply of software on a principal to principal basis. Software is supplied to customers located within India as well as outside India. Revenue has not disputed the transaction of supply of software to customers in India on which the respondent has paid service tax under the taxable category of “Information Technology Service”. The dispute is only with regard to the classification of services rendered by the respondent to foreign customers. The respondent cannot be termed as an “intermediary” since in purchase and sale of software licenses it is providing services on its own account. It is neither a broker or an agent of Microsoft India and nor does it work on commission basis. It independently negotiates the sale price with the overseas customers, which price is not controlled by Microsoft India. In fact, it takes substantial risks as payment made to Microsoft India is independent of the payment made to the respondent by the overseas customers. The service rendered by the respondent qualifies as “export” of service;

(ii) The Commissioner (Appeals) has taken into consideration the contentions advanced by the Revenue and it is incorrect to suggest that the contentions/ evidence have not been taken into consideration; and

(iii) The respondent do not have any Branch Office or other establishment outside India, which fact has been duly recorded by the Assistant Commissioner after examination of the record. No evidence, whatsoever, has been produced by the Revenue to substantiate its claim that the respondent has any Branch Office or other establishment outside India.

10. The submissions advanced by the learned Authorised Representative of the Department and the learned counsel appearing for the respondent have been considered.

11. The dispute relates to the refund claims made by the respondent under Rule 5 of the CENVAT Rules 2004. The respondent is in the business of software trading. To meet the demand, it purchases software, mainly through imports on which it pays service tax on reverse charge mechanism and the same is claimed as CENVAT Credit. The purchase of software, according to the respondent, becomes an input service for providing output service and therefore, eligible for CENVAT Credit. The main component of CENVAT Credit in the present case relates to purchase of software. The respondent had filed an application under Rule 5 of the CENVAT Credit Rules 2004. The relevant portion Rule 5 is reproduced below:

“5. Refund of CENVAT Credit:

A manufacturer who clears a final product or an intermediate product for export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT credit as determined by the following formula subject to procedure, safeguards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette:

Refund amount=(Export turnover of goods+ Export turnover of services) x Net CENVAT credit
Total turnover

Xxxxx xxxxx xxxx

Explanation 1: For the purpose of this rule,-

(1) “export service” means a service which is provided as per rule 6A of the Service Tax Rules, 1994.”

12. Since “export service” means a service which is provided as per rule 6A of the 1994 Rules, the said rule is reproduced:

“6A. Export of services.-

(1) The provision of any service provided or agreed to be provided shall be treated as export of service when,-

(a) the provider of service is located in the taxable territory,

(b) the recipient of service is located outside India,

(c) the service is not a service specified in the section 66D of the Act,

(d) the place of provision of the service is outside India,

(e) the payment for such service has been received by the provider of service in convertible foreign exchange, and

(f) the provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 3 of clause (44) of section 65B of the Act

(2) Where any service is exported, the Central Government may, by notification, grant rebate of service tax or duty paid on input services or inputs, as the case may be, used in providing such service and the rebate shall be allowed subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification.”

13. Item (b) of Explanation 3 of clause (44) of Section 65B of the Act is reproduced below:

“(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.”

14. As noticed above Rule 6A of the 1994 Rules deals with export of services and sub-clause (d) of Rule (1) provides that the place of provision of service should be outside India. The place of provision of service is determined under the 2012 Rules. Rule 3 deals with provision of place generally. It is as follows:

“3. Place of provision generally.-

The place of provision of a service shall be the location of the recipient of service:

Provided that in case of services other than online information and database access or retrieval services, where the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the provider of service.”

15. Rule 9, however, deals with place of provision of specified services and is as follows:

“9. Place of provision of specified services.-

The place of provision of following services shall be the location of the service provider:-

(a) Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders;

(b) online information and database access or retrieval services;

(c) Intermediary services;

(d) Service consisting of hiring of all means of transport other than, –

(i) aircrafts, and

(ii) vessels except yachts,
upto a period of one month.”

16. ‘Intermediary’ has been defined in Rule 2(f) as follows:

“2(f) ‘intermediary’ means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account.”

17. Thus, the place of provision of services for an ‘intermediary’ would be the location of the service provider. According to the Revenue, since the service provider is located in India, the provision of service by the respondent would not be “export of services”. It is, therefore, necessary to determine whether the respondent provides an ‘intermediary’ service.

18. The concept of “intermediary” was introduced in the 2012 Rules. The communication dated 16 March 2012 by the Department of Revenue (Tax Research Unit) dealing with the Union Budget 2012 deals with ‘intermediary’ services and is as follows:

“3.7.7 What are “Intermediary Services”?

An “intermediary” is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing. Thus, an ‘intermediary’ is involved with two supplies at any one time:

i) the supply between the principal and the third party; and

ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

For the purpose of this rule, an ‘intermediary’ in respect of goods (commission agent i.e a buying or selling agent) is excluded by definition.

In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered:-

Nature and value: An ‘intermediary’ cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the ‘intermediary’ to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the ‘intermediary’ obtains must be passed back to the principal.

Separation of value: The value of an intermediary’s service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as “commission”.

Identity and title: The service provided by the intermediary on behalf of the principal are clearly identifiable.

In accordance with the above guiding principles, services provided by the following persons will qualify as ‘intermediary services:-

i) Travel Agent (any mode of travel)

ii) Tour Operator

iii) Stockbroker

iv) Commission agent [an agent for buying or selling of goods is excluded

v) Recovery Agent

Even in other cases, wherever a provider of any service acts as an agent for another person, as identified by the guiding principles outlined above, this rule will apply.

19. Rule 2(f) of the 2012 Rules defines an “intermediary” to mean a broker, an agent or any other person, by whatever name called, who arranges or facilitate a provision of a service to be called the main service or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his own account. The communication dated 16 March 2012 referred to above, also clarifies that an intermediary service is involved with two supplies at any one time namely:

(i) the supply between principal and the third party;

(ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

It also provides that in order to determine whether a person is acting as an intermediary or not, three factors namely nature and value, suppression of value and identity and title have to be examined. In regard to the “nature and value”, it provides that an intermediary cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Regarding “suppression of value”, it provides that the value of a service provided by an intermediary is invariably identifiable from the main supply of service that he is arranging. Generally, the amount charged by an agent from his principal is referred to as “Commission”. In regard to “identity and title”, it provides that the service provided by the intermediary on behalf of the principal are clearly identifiable and example of a travel agent, a tour operator, stock broker, commission agent and a recovery agent have been given.

20. The Microsoft Channel Agreement between Comparex India Pvt Ltd (the respondent) and the Microsoft Corporation (India) Ltd has therefore to be examined to determine whether the service provided by the respondent would fall in the category “intermediary” service. The respondent is referred to as the ‘company’ in the said agreement and the relevant portion is reproduced below:

“Microsoft Channel Agreement
Framework Terms and Conditions for Resellers

1. Scope. This Agreement gives Company the non-exclusive right to participate in certain licensing programs and provide certain Licensed Software Service, Documentation Components and Software Assurance to Customers. Company is entering into this Agreement for business purposes only.

—–

4. Program Designation Forms, Customer Orders and Limitations, Generally.

——

b. Customer Order and Territory. Company is only authorized to resell, distribute, market, or otherwise dispose of Licensed Offerings within its designated Territory. Company may not collect orders or receive payments for Licensed Offerings from any Customer located outside of the Territory. Company may, however, collect orders and receive payments for Licensed Offerings from a Customer’s Affiliates who are located outside the Territory provided that a) those Affiliates are purchasing as an Affiliate of the Customer located in the Territory, and b) the Affiliates order their Licensed Offerings with the correct usage country identified on a Customer’s Agreement. For the purposes of this section, the term “located” when used in relation to a Customer or its Affiliates, requires that an entity have a legal presence (e.g. by incorporation or other registrațion with applicable authorities), and be actively engaged in business, in the applicable Territory.

Additionally, Company must only accept orders and receive payment directly from the Customer or Customer’s affiliates. Company may not accept orders, invoice or receive payments from any third party (including Company’s own Affiliates). Each Customer will designate a reseller for itself and its affiliates on a Customer Agreement. Company may submit revision to its Customer orders. Microsoft may require detailed back-up for any order revision. Additional details regarding order revisions are outlined in the applicable Program Guide.

——–

d. Non-exclusive. This Agreement is non-exclusive. Company is free to license, use, recommend, or support non-Microsoft software or services. Microsoft can provide any Licensed Offerings directly to Customers. Microsoft also can authorize other companies to do so. Microsoft may provide Licensed Offerings under different licensing programs. Microsoft may withdraw at any time any licensing program, including the channel programs described in any Program Designation Form or Program Guide.

——-

6 Ordering, Reporting and Fulfilment.

——-

e. Credit Worthiness and Collection Guidelines. Company will decide whether or not to extend credit to its Customers. Company will use commercially reasonable efforts to ensure each Customer is credit worthy before it submits a Customer Agreement to Microsoft, such as by collecting and reviewing financial statements and credit reports. Company must periodically monitor each Customer’s continued credit worthiness throughout the Customer Agreement term. A Customer’s failure to pay Company will not relieve Company of its payment Obligations to Microsoft.

7. Other Rights and Obligations.

a. Company’s Representations and Warranties. Company represents and warrants that it will: (i) have current access to all of Microsoft’s online tools necessary to perform its obligations; (ii) use commercially reasonable efforts to service and support its Customers; (iii) inform Microsoft of any difficulties it encounters in servicing its Customers and; (iv) promptly tell Microsoft about any known or suspected violations of the terms and conditions of a Customer Agreement by a Customer.

b. Negotiation of Pricing and Payment Terms with Customers. Company has complete discretion to negotiate and set pricing and payment terms and conditions with its Customers. Company’s negotiation of those terms will not be subject to Microsoft’s review or approval in any way.

8. Payment. Each Program Guide specifies the reporting and payment requirements for the Licensed Offerings.

a. Payment Due Date. Payments are due on the date and in the currency stated in the applicable Program Guide. If Company does not receive an invoice within ten (10) days after placing its order, it must promptly notify Microsoft and Microsoft will promptly send a new invoice. Company must manage its own credit risk. Company’s payment to Microsoft is not dependent on receipt of payments from Customers even in the case of Customers insolvency.

——

20. General

——

e. Relationship Between Company and Microsoft. Even though Company and Microsoft may call each other a ‘partner’. Company and Microsoft are independent contractors for all purposes regarding this Agreement. Company does not have the power to bind Microsoft. Company does not have the power to change any terms, conditions, warranties or covenants made by Microsoft. Company does not have the power to give any person any rights that Microsoft has not previously authorized in writing. Company and Microsoft are not a partnership (as the term is used in applicable partnership laws to refer to a legal partnership entity) or joint venture. Company and Microsoft do not have any agency, franchise or fiduciary relationship. For this section, “Microsoft” includes Microsoft’s Affiliates.

[emphasis supplied]

21. It would be seen from the Channel Agreement that the respondent has been granted a right to resell Microsoft license to its customers. The respondent can collect orders and receive payments from its customers. Clause 7(b) provides that the respondent would have complete discretion to negotiate and set pricing and payment terms and conditions with its customers and that the negotiations of such terms will not subject to review or approval by Microsoft in any way. Clause 8 (a) provides that payment by the respondent to Microsoft is not dependent on receipt of payments from the customers even if a customer is insolvent and that if the respondent fails to make payment by due date, Microsoft can take action specified in the said clause. Clause 20 (e) provides that the respondent and Microsoft are not a partnership or joint venture and that the respondent and the Microsoft do not have any agency, franchise or fiduciary relationship.

22. Thus, the respondent purchases the software from Microsoft and thereafter, sells it either in the same condition or customized condition to the customers. For this purpose, reliance has been placed on the balance sheet that indicates that the respondent has purchased the software and has also sold the software to customers. Service Tax invoice of Microsoft also shows that it has been billed to Comparex India and the name of the Indian affiliate of the end customer is shown to be Pune, India. The export invoice of Comparex India Pvt Ltd also shows that it is to a customer situated in Neitherlands. It also needs to be noticed that no commission was paid by Microsoft to the respondent and in fact the respondent independently sold the license to the overseas customers, after purchasing them from Microsoft. Thus, the goods were supplied on its own account.

23. In this connection it may be pertain to refer to the decision of the Supreme Court in Gordon Woodroffe & Co. Vs. M.A Majid & Co. AIR 1967 SC 181. In this case both the parties may have considered their business as an agency, but in fact N did not sell the goods as an agent of T & Co., but on his own account and the money he received was, therefore, his own money which T& Co. had no right to follow. It was held that the agreement was one of vendor and purchaser and not one of principal and agent. The term ‘agent’ was used in the agreement, but the substance of the transaction was that the manufacturer sold the bricks to the so-called agent who in turn sold them on their responsibility to the customer. The manufacturer had no concern at what rate the goods were sold by the agent. There was, therefore, no privity of contract between the manufacturer and the ultimate purchaser. It was further held that even if a person called an “agent” is permitted to alter the goods and sell them at any price that he thinks fit but is still only liable to pay for them at a price fixed beforehand, without any reference to the price at which he sold them, it would not be possible to say that the produce of the goods so sold was the money of the consignor or that the relationship of principal and agent existed. The relevant observations are as follows:

“10. It is well-established that even an agent can become a purchaser when an agent pays the price to the principal on his own responsibility. In Ex parte White, In re Nevil(1871)6 Ch.397 T and Co. were in the habit of sending goods for sale to N who was a partner in the firm of N & Co., but received these goods on his private account. The course of dealing between T & Co. and N was that the goods were accompanied by a price list. N sold the goods on what terms he pleased, and each month sent to T & Co., an account of the goods he had sold, debiting himself with the prices named for them in the price list, and at the expiration of another month he paid the amount in cash without any regard to the prices at which he had sold the goods, or the length of credit he had given. On these facts it was held by the Court of Appeal in Chancery that though both the parties might look upon the business as an agency, N did not, in fact, sell the goods as agent of T & Co., but on his own account, upon the terms of his paying T & Co. for them at a fixed rate if he sold them, and the moneys he received for them were therefore his own moneys, which T & Co., had no right to follow.

11. A similar principle has been expressed in W. T. Lamb and Sons v. Goring Brick Company, Ltd. [1932] 1 K.B. 710. In that case, certain manufacturers of bricks and other building materials, by an agreement in writing, appointed a firm of builders’ merchants as “sole selling agents of all bricks and other materials manufactured at their works”. The agreement was expressed to be for three years and afterwards continuous subject to twelve months’ notice by either party. While the agreement was in force the manufacturers informed the merchants that they intended in the future to sell their goods themselves without the intervention of any agent, and thereafter they effected sales to customers directly. An action was then brought by the merchants for breach of the agreement. It was hold by the Court of Appeal that the effect of the agreement was to confer on the plaintiffs the sole right of selling the goods manufactured by the defendants at their works, so that neither the defendants themselves nor any agent appointed by them, other than the plaintiffs, should have the right of selling such goods. It was also held that the agreement was one of vendor and purchaser and not one of principal and agent. Though the term ‘agent’ was used in the agreement, the Court of Appeal considered that the substance of the transaction was that the manufacturers sold their bricks to the so-called agent who in turn sold them on their own responsibility to customers. The price charged by the manufacturers to the sole selling agents was the ruling market price and the sole selling agents were allowed a deduction of 10 per cent by way of commission on that price. The manufacturers had no concern at what rate the sole selling agents sold the goods to customers. It was clear from these facts that the sale by the selling agents to customers was a transaction in which the manufacturers were not interested and there was no privity of contract between the manufacturers and the ultimate purchasers. Reference may be made, in this connection to the following passage from Blackwood Wright, ‘Principal and Agent’. Second Edn. page 5:

“In commercial matters, where the real relationship is that of vendor and purchaser, persons are sometimes called agents when, as a matter of fact, their relations are not those of principal and agent at all, but those of vendor and purchaser. If the person called an ‘agent’ is entitled to alter the goods, manipulate them, to sell them at any price that he thinks fit after they have been so manipulated, and is still only liable to pay for them at a price fixed beforehand, without any reference to the price at which he sold them, it is impossible to say that the produce of the goods so sold was the money of the consignors, or that the relation of principal and agent exists-Ex parte White, In re Nevill (1871). 6 Ch. 397-A purchaser has not to account to his vendor-; his only duty is to pay him; and all the other rights and duties which exist between principal, and agent do not exist between vendor and purchaser-Ex parte Bright, In re Smith (1879) 10 Ch. Div. 566; Ex parte White, In re Nevill-(1871) 6 Ch. 397-.

12. For the reasons already given we are of the opinion that the defendants were purchasers of the plaintiffs goods under the several contracts and not his agents for sale and the view taken by the High Court on this aspect of the case is not correct and must be overruled.”

[emphasis supplied]

24. In the present case, not only does the agreement specifically mentions that there is no relationship of principal and an agent between Microsoft and the respondent but it is also clear from the agreement that the respondent is free to sell the product at any price to the customer, though the price to be paid by the respondent to Microsoft is fixed. The agreement also provides that payment has to be made to Microsoft even if the customer does not pay the respondent. This is, therefore, a case where the respondent provides the service or supplies the good on his own account.

25. The Commissioner (Appeals) has also recorded a categorical finding that the respondent had purchased the software from Microsoft and sold it either in the same condition or in a customized condition to the customers, which fact was also evident from the balance sheet and so the respondent has provided service on its own account and would not be an “intermediary” as defined in Rule 2(f) of the 2012 Rules. The Commissioner (Appeals) has also recorded a finding that even the Channel Agreement with Microsoft would reveal that the respondent had provided services on its own account since payment to Microsoft was made by the respondent and it was not relatable to the payment received from the customer.

26. The Assistant Commissioner, while rejecting the refund claim, of the respondent has, however, observed that nature of provision of service of the repondent is arranging and facilitating procuring main services and transmitting the same to their overseas customers and so it would be in the nature of “intermediary” service. In coming to this conclusion, the Assistant Commissioner noticed that the purchase orders received by the respondent from the overseas customers were being passed on to the Microsoft and that the invoices issued by the Microsoft reveal that they have mentioned the name of the end-user customer in the specific column provided for the purpose.

27. The conclusions drawn by the Assistant Commissioner are not correct. It cannot be doubted that two separate transactions had taken place. On the basis of the purchase orders placed by the overseas customers, the respondent purchased the software license from Microsoft for which it made payments to Microsoft. The tax invoice of Microsoft is billed to the respondent. The address of the Indian affiliate of end customer is shown to be in India. The Respondent receives the payment from the overseas customers. The payment made to Microsoft is independent of any payment received by the respondent from the overseas customers. There is, therefore, no error in the finding recorded by the Commissioner (Appeals) that the respondent is not an “intermediary”.

28. The Commissioner (Appeals) may not have referred to the invoices, but he has referred to the balance sheet of the respondent. The invoices do not indicate that the respondent would be an “intermediary”. In fact they only support the case of the respondent that it is not an “intermediary”. The Channel Agreement has been taken into consideration by the Commissioner (Appeals) and therefore, the Appellant is not correct in contending that it has not been taken into consideration.

29. In such a situation, when service is provided by the respondent on its own account, the respondent cannot be called an “intermediary”.

30. The Appellant is also not justified in asserting that Microsoft India is a licensor and the end customers is the licensor merely because the software is coupled with a condition regarding acceptance of the software license. As noticed above, the license itself has been purchased by the respondent and then sold to the end customers.

31. This apart what needs to be noticed is that the respondent was also selling the product to customers situated within India and was paying service tax under the category “Information Technology Service”. It was not paying service tax as an ‘agent’, for which a much lesser amount of service tax would have been levied, because service tax would be paid on the margin i.e. sale price of software minus the Purchase price of software. This fact has also been noticed by the Commissioner (Appeals).

32. It has also been contended by the Authorised Representative of the Department that clause (f) of Rule 6A (1) of the 1994 Rules are not satisfied since the respondent has Branch Offices outside India and for this reliance has been placed on the findings recorded by the Assistant Commissioner in the order dated 27 July 2018 rejecting the sixth refund claim filed by the respondent.

33. It is not possible to accept this contention. In the first instance, only a general statement has been made by the Assistant Commissioner in the order dated 27 July 2018 that the provision of service by the respondent is to their own overseas Branch Offices. Even the name of the Branch Office has not been mentioned, though a specific finding has been recorded after examining the complete records including the invoices by the Assistant Commissioner in the order allowing the five refund claims of the respondent that the respondent does not have any Branch Office outside India.

34. Thus, for all the reasons stated above the provision of service provided by the respondent has to be treated as “export of service” under Rule 6A of the 1994 Rules. The two reasons pressed by the Appellant for not treating it as export of service cannot be accepted. Rule 9(c) provides that in the case of ‘intermediary services’, the place of provision shall be the location of the service provider. This Rule would not be applicable as the respondent is not an intermediary. On the other hand, Rule 3 that provides that the place of provision of a service shall be the location of the recipient of service. This Rule would be applicable and since the location of the recipient of service is outside India, the place of provision of the service would be outside India.

35. At this stage it is also necessary to take note of the Appeals that have been filed by the Revenue. Six refund claims had been filed by the respondent and these were decided by six separate orders. Five refund claims were allowed and one was rejected. The Revenue, however, instead of filing five appeals before the Commissioner (Appeals) filed only two appeals. One appeal was in regard to the four refund claims orders mentioned as serial no. 1,2,3 and 4 of the above mentioned chart and one appeal was with regard to the order passed at serial no. 5. The Respondent had also filed one Appeal to assail the order passed on the sixth refund Application. The Commissioner (Appeals) initially decided the two appeals filed by the Revenue by a common order dated 11 January 2018 and the Appeal filed by the respondent by a separate order dated 19 September 2018. However, only two appeals were filed by the Revenue before the Tribunal challenging these two orders. When the Tribunal allowed the Appeal, with a direction to the Commissioner (Appeals) to pass a fresh order, the Commissioner (Appeals) decided all the three appeals by an order dated 12 March 2019. The Revenue thereafter filed only one appeal before the Tribunal. However, since the Appeal has been listed for final hearing we have not taken into consideration these facts and have proceeded to decide the Appeal on merits.

36. Thus, for all the reasons stated above, the Appeal deserves to be dismissed and is, accordingly, dismissed.

(Pronounced in the open Court on 09 January 2020)