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:
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:
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.
The Hon’ble CESTAT, Delhi by majority view held the following:
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: email@example.com)