The appellant appears to have performed service in India for ultimate consumption thereof in India by its clients/customers in India. The service is destined to exhaust in India and extinct soon after performance thereof. Post performance liability only remains to be discharged by foreign principal through the appellant in India. Thus the beneficiaries of services were located in India for ultimate consumption of the service provided in India.
The services provided by the appellant were only to benefit the consumers of Indian Territory and that was provided for and on behalf of the holding company in USA as well as the subsidiary in Singapore. The end user of service being located in India and need of such consumers being met by the appellant for and on behalf of its foreign principal, such services appear to have been provided in India and there appears no export of service. The foreign principal acted through its appellant Agent. The principal was not the beneficiary. A service provider acting directly or indirectly through its agent is not the beneficiary of service so provided while providing of service is its contractual obligation under terms of contract with clients/customers. Therefore in the present case of the appellant no service has occasioned to move out of India to a place out side India following well tested meaning of the term “export” under Section 2(18) of the Customs Act, 1962.
Business auxiliary service provided by a service provider in terms of Section 65(105)(zzb) of Finance Act, 1994 is taxable for the rationale that the principal to whom the marketing support is given by the service provider, ultimately makes available of goods or services to the consumers in India. Similarly marketing support provided to the foreign principal as agent thereof also results with either ultimate supply of goods or provision of services to the consumers of India only and service reaches its destination in India to the intended consumer of the goods or services. Therefore whether service is directly provided by a foreign Principal in India or foreign principal providing service in India through its agents in India makes no difference under service tax law when service tax is a VAT and that too destination based consumption tax as per Apex Court Judgment in All India Fedn. of Tax Practitioners (supra). Had the service been provided to the foreign principal not resulting with ultimate supply of goods or provision of service to the consumer in India, such services might have assumed the character or nature of export of service following tested principles of customs law in India(Para 27)
IN THE CESTAT, PRINCIPAL BENCH, NEW DELHI
Microsoft Corporation (I) (P) Ltd.
Versus
Commissioner of Service Tax, New Delhi
Stay Order No. ST/276/2009(PB), dated 31-7-2009 in Application No. ST/Stay/2721/2008 in Appeal No. ST/866/2008
ORDER
By D.N. Panda, Member (J)
1. Being aggrieved by the order of adjudication passed on 23-9-2008 by the learned Commissioner, Service Tax, New Delhi, the appellant came in Appeal to Tribunal with stay application for stay of realisation of the demand raised by that order with following consequence:
(i) Service Tax amounting to Rs. 124,99,49,345/- (Rupees one hundred twenty-four crore, ninety-nine lakh, forty-nine thousand and forty-five only) out of Rs. 126,26,10,497/- was confirmed and recoverable from the appellant under the proviso to Section 73(1) read with Section 68 of the Finance Act, 1994 and Rule 6 of Service Tax Rules, 1994;
(ii) Education Cess and Secondary and Higher Education Cess amounting to Rs.3,04,18,968/- (Rupees three crore, four lakh, eighteen thousand, nine hundred sixty-eight only) out of Rs. 3,06,42,746/was confirmed against the appellant under the proviso to Section 73(1) read with Section 66 of the Finance Act, 1994, Section 95 of Finance Act, 2004 and Section 136 of Finance Act, 2007;
(iii) Penalty of Rs. 1,000/- (Rupees One Thousand only) was imposed upon the appellant under Section 77 of the Finance Act, 1994 for contravention of the provision of the Act ibid and the Rules framed thereunder; and
(iv) Penalty of Rs. 128,03,68,313/- (Rupees one hundred twenty-eight crore, three lakh, sixty-eight thousand, three hundred and thirteen only) equivalent to the amount of service tax including both type of cess was imposed upon the Appellant under Section 78 of the Finance Act, 1994 for suppressing the value of the taxable services provided by the appellant with an intent to evade payment of service tax.
2. Aforesaid adjudication was made against the appellant relating to the period 19-4-2006 to 31-12-2006, denying exemption claimed by the appellant on the ground of exporting of business auxiliary service to the foreign principal. Such service was taxed by the impugned order. Added to this, service of repair and maintenance of software was made taxable by that order.
3. In terms of a market Development Agreement dated 1-7-2005 (sample copy available in appeal folder at pages 41-46), Microsoft Operation Pvt. Ltd. of Singapore (hereinafter referred to as “MO”) appointed the appellant to provide various technical support services including marketing of Microsoft products in the “territory” defined by the agreement and to identify the services to be provided by the Singapore concern to the Appellant. In the said agreement, the Appellant is referred to as the “subsidiary” and the term “territory” was defined to include Bhutan, India, Maldives, Nepal and British Indian Ocean Territory. Both “MO” i.e. Singapore concern and the “subsidiary” i.e. appellant are wholly owned subsidiaries of the holding company M/s. Microsoft Corporation of Washington (hereinafter referred to as “MSFT”). 4 (four) types of services were intended to be provided in terms of the above Agreement and those are as follows:
“2. PRODUCT SUPPORT SERVICES & CONSULTING SERVICES
2.1 Product Support Services and Consulting Services. Subsidiary shall have a non-exclusive right to provide product support services and consulting services for Microsoft Products in the Territory.
2.2 Subsidiary’s Duties
2.2.1 Subsidiary will use its best efforts to further the interests of M.O. and to maximize the markets for product support services and consulting services in the Territory.
2.2.2 Subsidiary shall not solicit orders of agreements from outside the Territory.
2.2.3 Subsidiary may provide product support services, which may include standard Microsoft product support services for products which are generally made available to end-users and may include requests for support originating from the Territory.
2.3 MO’s Duties. MO will use its best efforts to assist Subsidiary with technical matters in connection with the marketing of Microsoft Products and Services.
3. MARKETING OF MICROSOFT PRODUCTS
3.1 Marketing. Subsidiary shall have a non-exclusive right to market Microsoft Products in the Territory.
3.2 Subsidiary’s Duties. Subsidiary will use its best efforts to further the interests of MO and to maximize the markets for Microsoft Products in the Territory.
3.2.1 Subsidiary shall not solicit orders or agreements from outside the Territory. In soliciting orders, Subsidiary shall only be authorized to inform customers of price, payment, delivery and other terms offered by MO in accordance with information received from MO or its affiliates, as appropriate. Unless otherwise authorized herein or otherwise agreed by the parties, Subsidiary shall not enter into any agreements with customers regarding Microsoft Products, but shall instead promptly submit written customer orders to MO or its affiliates, as appropriate, for its acceptance or rejection.
3.2.2 Subsidiary shall assist MO as requested in collection past due accounts and performing other activities reasonably related to MO’s business.
3.3 MO’s Duties.
3.3.1 MO will use its best efforts to fill, or procure the fulfilment of, orders as scheduled and assist Subsidiary with technical matters in connection with the marketing of Microsoft Products and Services.
3.3.2 MO shall permit Subsidiary to operate a service on MO’s or its affiliate’s web sides for the support of MO’s or its affiliate’s customers in the Territory, without charge by MO.
4. RGE SERVICES
MO shall reimburse Subsidiary for expenses arising from Resident Guest Employee Services (“RGE Services”). RGE Services include but are not limited to human resource expenses, legal expenses and internal information technology expenses.
5. OTHER INTERCOMPANY SERVICES
5.1 Services between MO and MSFT and Affiliates. Subsidiary acknowledges that MO provides services to MSFT and its other affiliates from time to time. Subsidiary acknowledges that MO may from time to time provide as a service the physical payment to Subsidiary of amounts owed by MSFT or its other affiliates to Subsidiary. MO shall clearly identify for Subsidiary which portion of funds are paid on its own behalf and which are paid on behalf of MSFT. Subsidiary shall not hold MO liable for any disputed amounts owed by MSFT to Subsidiary that are not provided by MSFT to MO for payment to Subsidiary.
5.2 Services between MO and Subsidiary. MO and Subsidiary acknowledge that MO and/or its affiliates may from time to time provide services to Subsidiary and Subsidiary may from time to time provide services to MO and/ or its affiliates.
4. Payment terms for aforesaid 4 types of services were provided in para 6.1, 6.2, 6.3 and 6.4 of agreement which reads as under :-
“6.1 Product Support Services and Consulting Services. For product support services and consulting services rendered pursuant to Article 2, MO shall pay Subsidiary an amount equal to one hundred and ten percent (110%) of Subsidiary’s actual expenses, less revenues, incurred in connection with its duties, provided such expenses comply with Subsidiary’s budget, as adjusted from time to time, and provided, further, such expenses are not already covered by another section of this Agreement or covered in another agreement between Subsidiary and MO or any MO affiliate. The reimbursement and additional compensation shall be exclusive of any applicable consumption tax such as a Value Added Tax or a Goods and Services Tax, which consumption tax shall be the responsibility of MO.
6.2 Marketing of Microsoft Products. For assistance in the marketing of Microsoft Products under Article 3, MO shall pay Subsidiary one hundred and fifteen percent (115%) of Subsidiary’s actual expenses, less revenues, incurred in connection with its duties as defined in Article 3, provided such expenses comply with Subsidiary’s budget, as adjusted from time to time, and provided, further, such expenses are not already covered by another section of this Agreement or covered in another agreement between Subsidiary and MSFT or any MSFT affiliate. Taxes, insurance, duties, freight and other charges not attributable to the Microsoft Product itself paid by the customer shall not be considered in calculating the amount of commission. The commission payments shall be exclusive of any applicable consumption tax such as a Goods and Services Tax or a Value Added Tax which consumption tax shall be the responsibility of MO.
6.3 RGE Services. For RGE Services rendered pursuant to Article 4, MO shall pay subsidiary an amount equal to one hundred and ten percent (110%) of Subsidiary’s actual expenses, less revenues, incurred in connection with its duties, provided such expenses comply with Subsidiary’s budget, as adjusted from time to time, and provided, further, such expenses are not already covered by another section of this Agreement or covered in another agreement between Subsidiary and MO or any other MSFT affiliate. The reimbursement and additional compensation shall be exclusive of any applicable consumption tax such as a Value Added Tax or a Goods and Services Tax, which consumption tax shall be the responsibility of MO.
6.4 Other Intercompany Services. For other services and/or sales provided pursuant to Article 5, MO or Subsidiary shall invoice the recipient of the sales and/or services for such sales and/ or services at a price as may be agreed between the parties from time to time, provided, however, that any amount so invoiced shall be consistent with the arm’s length standard (as defined in the OECD transfer pricing guidelines and relevant national legislation). The invoice shall contain a general description of the sales or services and the cost of the sales and/or services to be paid.”
5.1 On the basis of materials on record and pleadings made by the appellant, learned Adjudicating Authority found that as per agreement dated 1-7-2005 business support was provided by the appellant to the Singapore concern. Such services were provided in India and were never provided out side India for which there was no export of services within the meaning of Rule 3(1) (iii) of Export of Services Rule 2005 for the period 19-4-2006 to 31-5-2007. Further, for the period 1-6-2007 onwards the criterion of providing of service outside India being omitted from the law, the condition of service provided from India and used outside India still remained in force. This does not grant immunity to the appellant from taxation in respect of Business Auxiliary services provided by the Appellant.
5.2 Ld. Adjudicating Authority formulated following 4 issues in Para 214 of the order of adjudication (at page 148 of the appeal folder) for consideration:
(i) Whether the income earned on account of services claimed as export under the category of “business auxiliary services” is chargeable to service tax during the period 19-4-2006 to Dec., 2007.
(ii) Whether income on account of “maintenance & repair of software” is chargeable to Service Tax during the period from 9-7-2004 to 6-102005.
(iii) Whether income on account of “seminar & training fees-sponsorship received in relation to MCIPL Conferences” is chargeable to service tax under the category of “convention services” for the period 2002-03 to 2007-08 (upto Dec., 2007).
(iv) Whether the income on account of “royalty” is chargeable to service tax.
5.3 The first issue was elaborately discussed by Ld. Adjudicating Authority in para 224 to 226 of the order of adjudication which reads as under :-
“224. The noticee has tried to make out a case that under the Market Development Agreement with M/s. M.O. Singapore they were providing Marketing support services. Even though with regard to Marketing Support Services, MCIPL creates services awareness of Microsoft products in India, they were delivered and used abroad in as much as in respect of these services with regard to the condition of services delivered outside India and used outside India, they submitted that the service recipient i.e. Microsoft Singapore did not have any office in India, the provision of marketing support services by MCIPL increased the sales turnover of Microsoft Singapore and impacted the following aspects of business operations of Microsoft Singapore in Singapore, i.e. Production operations, Sales operations, Finance operations, Recruitment plans etc. Therefore, the services were deemed to be delivered and used outside India. In other words, Noticee feels that the place of use of service will also be the place where the intended beneficiary is located. I am afraid to say that if this interpretation were to be accepted it would lead to the redundancy of the legal provisions. The Rules clearly specify two separate set of conditions i.e. the user should be located outside India and the use should also be outside India. These conditions have to be satisfied independently of each other. If the Noticee’s explanation were to be accepted, a mere change in location of the recipient will also lead to change in the place of use of service. For example, if in the case the recipient were to be relocated from Singapore to say Japan, in terms of the Noticee’s logic, the place of use of service will stand automatically shifted from Singapore to Japan. There is no effort made in the submissions to draw the distinction and establish independently where the services are being provided and/or used. If the mere location of the recipient was to determine the place of use, it will open innumerable loopholes of misuse whereby services meant to be used in India would be merely routed through a foreign recipient.
225. I, therefore, proceed to examine the case on pure merits as to whether the services rendered in this case have actually been used in India. The services involved in this case are Marketing Support Services for the marketing of Microsoft products in India. This comprises a host of services viz. maximising the markets for Microsoft products including all local advertising, and performing other activities including dissemination of information to potential customers, commenting on any developments in the territory affecting the software industry, investigating feasibility of new markets for Microsoft retail products and providing other services of marketing nature etc. Much of this is accomplished by way of identifying the customers regarding marketing of Microsoft products, local advertising, performing other activities including dissemination of information to potential customers, commenting on any developments in the territory affecting the software industry. These services once provided, are not capable of being used in a territory other than where they have been provided. In fact most of the time provision, delivery and use is happening simultaneously. It will be naive to even conceive that the above said services provided in India can even be delivered or used in a territory other than where these have been provided.
226. It has been stated in a number of circulars issued by the Board that Service Tax levy is a destination- based tax. This understanding follows similar understanding in some parts of the world. Particularly Europe, where the tax is levied at the place where the services are finally destined or used. The Indian Law, however, has clearly laid down that both the test of customer’s location and use should be satisfied. This will be clear from the following diagram :
