Service Tax - Export - Microsoft has the lost word
IT was a 256 Crore case and the issue was very simple. The wise men at the Board, the learned Commissioners, distinguished lawyers, the agonised assessees and even the Hon'ble Lordships had no real idea as to what constitutes export of services.
We reported the story first in 2008 as The 'real' and 'surreal' tax demands besiege Microsoft in India!
Microsoft India (Pvt) Ltd has entered into a "Market Development Agreement” with MO, Singapore under which the former will use its best efforts to further the interest of MO and maximize the markets for Microsoft products in India, Bhutan, Nepal and Maldives. For such service, Microsoft (India) Pvt Ltd will issue invoices in USD on MO Singapore. Microsoft (India) has been treating such income as export of service (under Business Auxiliary Service) and therefore has not paid any service tax on the income received.
It is the case of the Department that the service cannot be considered as export of service. The grounds taken were:
The services of marketing of Microsoft products rendered by MSIPL are performed and used in India for furtherance of business of Microsoft, Singapore;
The 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 service or not.
The Delhi Service Tax Commissioner confirmed a tax and penalty of Rs. 256 Crores on 23.09.2008. The CESTAT ordered a pre-deposit of Rs. 70 Crores. - 2009-TIOL-1325-CESTAT-DEL. On appeal, the Delhi High Court did not find it a fit case for interference. -
In the CESTAT, there was a difference of opinion between the two Hon'ble Members.
The Member (J) held that "meaning of export presupposes 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... .”
The 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"
The issue was very simple as explained by the Member (T) that If a person does market promotion for a manufacturer located outside India for selling the goods in India after its import, the goods will be considered to be imported but the marketing services will be considered to be exported.
But obviously, it was difficult to understand this simple logic.
And so the matter went to a Third Member. And recently the Third Member gave her decision.
Actually in another case on an identical issue [Paul Merchants Ltd. - ], the matter was decided by a Third Member on a reference from a Bench of the same Members.
As the issue was already decided two years ago, the Third Member in this Microsoft case also decided the case in favour of Microsoft. I discussed the issue with a colleague and an assessee - both believe that Microsoft's problems are over as the issue is twice settled by two (deemed) Larger Benches of the Tribunal.
But stories don't end like that. The Paul Merchants case has been taken to the High Court by the Revenue - and obviously the Microsoft case will also go the same way.
Microsoft must have found creating Windows and Office much easier than understanding Indian Tax Laws.
Please see
Please also see:
1. -24.08.2009
2. Export of Service : To deliver or to provide is the question?
3. - 25.02.2009
4. Service Tax - Money Transfer from abroad - whether Export or Service rendered in India - Matter referred to Third Member: CESTAT
5. ST - Export of Services - Provision of marketing support services on behalf of client outside India not regarded as export of service if said services are consumed by ultimate clients located in India - Microsoft ordered to pre-deposit Rs 70 Crore: CESTAT
6. The 'real' and 'surreal' tax demands besiege Microsoft in India!
7. Microsoft - Export vs import of services - Rs 70 Crores pre-deposit confirmed - Not a fit case to interfere under writ jurisdiction: Delhi HC
8. - 16.11.2011