We are sharing with you an important judgment of the Hon’ble CESTAT, Delhi in the case of Microsoft Corporation (I) (P) Ltd. Vs. Commissioner of Service Tax, New Delhi [2014-TIOL-1964-CESTAT-DEL] on the following issue:

Issue:

Whether the services provided to principals situated outside India to market their products in India is an export of service under the erstwhile Export of Services Rules, 2005 (the Export Rules)?

Facts and background:

Microsoft Corporation India Pvt. Ltd. (“the Appellant”) entered into a Market Development Agreement (“the Agreement”) with Microsoft Operation Pvt. Ltd., Singapore (“MO”) to provide various technical support services to further the interest of MO & maximize the markets for Microsoft products (“the Services”) in India, Bhutan, Nepal and Maldives. The Appellant was treating the Services as export of services (under Business Auxiliary Service under Section 65(105)(zzb) of the Finance Act, 1994) in terms of Rule 3(1)(iii) of the Export Rules in as much as the Services has been used by the persons located abroad for their business and the payment have been received in convertible foreign exchange. Therefore, the Appellant has not paid any Service tax on such revenue/ income received from MO.

The Department contended that the Services cannot be considered as export of services as the Appellant was performing the Services in India which were used in India for furtherance of business of MO. It was further contended that Service tax is a destination based tax and particularly in case of exports, the place of performance of the service is very crucial for deciding whether the service is covered under export of services or not.

Accordingly, a Service tax demand of Rs. 256 Crore was confirmed on September 23, 2008. The Hon’ble CESTAT, Delhi on appeal filed by the Appellant ordered a pre-deposit of Rs. 70 Crores [2009-TIOL-1325-CESTAT-DEL]. On further appeal filed by the Appellant on pre-deposit of Rs. 70 Crores, the Hon’ble Delhi High Court did not find it a fit case for interference [2009-TIOL-601-HC-DEL-ST] and the matter went back to the Hon’ble CESTAT, Delhi for deciding the case.

In the CESTAT, there was a difference of opinion between the two Hon’ble Members as to whether the Services provided by the Appellant amounts to export of services considering Article 286(1)(b) of the Constitution of India explaining the term ‘export’ read with Apex Court’s decisions in the following cases of:

  • State of Kerala and Others Vs. The Cochin Coal Company Ltd. [(1961) 12 STC 1 (SC)] (“Cochin case”);
  • Burmah Shell Oil Storage and Distributing Co, of India Ltd. and Other Vs. Commercial Tax Officers and Others [(1960) 11 STC 764 (SC)] (“Burmah case”); and
  • All India Federation of Tax Practitioners Case [2007 (7) STR 625 (SC)] (“AIFTP case”).

The Hon’ble Member (J) held that “meaning of export pre-supposes taking out of India to a place outside India; Article 286(1)(b) of the Constitution explains what “export” means. Such concept was incorporated into Customs Act, 1962 in term of section 2(18) thereof. The activity of “taking out of India to a place outside India” is recognized test to hold an activity to be export. Activity relating to goods being equal to the activity relating to service, following “Principles of Equivalence”, meaning of the term “export” recognized by Constitutional provision and tested by law relating to Central Sales Tax, Customs, Central Excise and Export and Import Policy….”

On the other hand, the Hon’ble Member (T) observed, “The word “export” in Article 286 in the Constitution is used with reference to goods. So is the case with definition of “export” in section 2(18) of the Customs Act, 1962. It will obviously need some dovetailing in the context of export of service which issue has come up only after 1994. It is this dovetailing that is being achieved through Export of Service Rules, 2005 and the criteria laid down in the Rules are neither arbitrary nor inconsistent with any provision in the Constitution. The issue being dealt with in the Rules is that whether taking out of India should be decided with reference to the situs of the property or the situs of the activity or the situs of the person receiving the service. It is difficult to conceive of taking the service and crossing the border”

Consequently, the matter was referred to be decided by a third Member of the Hon’ble Tribunal.

Held:

The Hon’ble CESTAT, Delhi by majority view held the following:

  • The marketing operations done by the Appellant in India cannot be said to be at the behest of any Indian customer. The Services being provided may or may not result in any sales of the product on Indian soil. As such, the Services are being provided by the Appellant to MO to be used by them at Singapore, may be for the purpose of the sale of their product in India, have to be held as export of service;
  • The Services provided by the Appellant were delivered outside India and as such were used there and thus, are covered by the provisions of the Export Rules and are not liable to Service tax;
  • In the case of Larsen & Toubro [2013-TIOL-1458-CESTAT-DEL], it is held that a majority decision is Larger Bench decision having the same binding criteria as that of Larger Bench and, therefore, the majority decision in the case of Paul Merchants Ltd. Vs. CCE Chandigarh [2012-TIOL-1877-CESTAT-DEL] is required to be followed;
  • Similar stand also taken in Gap International Sourcing (India) Pvt. Ltd. [2014-TIOL-465-CESTAT-DEL], Vodafone Essar Cellular Ltd. [2013-TIOL-566-CESTAT-MUM]Bayer Material Science Pvt. Ltd. [2014-TIOL-1084-CESTAT-MUM]and no contrary decision has been brought to notice by the Department;
  • The Board Circular No. 111/05/2009-ST dated February 24, 2009 also clarifies that the relevant factor for Rule 3(1)(iii) of the Export Rules is the ‘the location of the service recipient’ and not the ‘place of performance’. The phrase ‘used outside India’ is to be interpreted to mean that the benefit of the services should accrue outside India;
  • The decisions inCochin case as also in Burmah case explaining the meaning of export is not relevant in as much as the same deals with the export of goods and not export of services;
  • The principal of equivalence between the taxation of goods and taxation of services as also the principal of destination based consumption tax as laid down by the Hon’ble Supreme Court in AIFTP case were in the context of Constitutional Authority of levy of Service tax on certain services and the issue of export of services in terms of the Export Rules was not the subject matter of said decision.

Therefore, the Hon’ble CESTAT, Delhi rejected the contention of the Department and decided the case in favour of the Appellant.

(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com)

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