Delhi High Court
Microsoft Corporation (India) ... vs Commissioner Of Service Tax & Anr. on 30 October, 2009
Author: A.K.Sikri
Reportable
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ WP (C) No. 11460/2009 & CM No. 11182/2009
% Reserved on: October 06, 2009
Pronounced on: October 30, 2009
Microsoft Corporation (India) Private Ltd. . . . Petitioner
through : Mr. M. Venkatraman, Sr. Adv.
with Mr. Achin Goel, Advocate
VERSUS
Commissioner of Service Tax & Anr. . . . Respondent
through : Mr. Biswajit Bhattacharya, Sr.Adv.
with Mr. Mukesh Anand,
Mr. Shailesh Tiwari and
Mr. Sumit Kumar, Advocates
CORAM :-
THE HON‟BLE MR. JUSTICE A.K. SIKRI
THE HON‟BLE MR. JUSTICE SIDDHARTH MRIDUL
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J.
1. The petitioner herein, namely, Microsoft Corporation (India) Private
Ltd., entered into market development agreement dated 1.7.2005
with Microsoft Operations, Singapore (hereinafter referred to as the
„MS‟). Both the MS and the petitioner are the wholly owned
subsidiaries of Microsoft Corporation, Washington (hereinafter
referred to as the „Holding Company‟). As per the agreement dated
1.7.2005, the petitioner was appointed to provide various technical
support services, including marketing of Microsoft products in
Bhutan, India, Maldives, Nepal and British Indian Ocean territory.
For the services provided by the petitioner to the MS under the
aforesaid agreement, the petitioner is receiving commission. The
respondent herein has taken the view that the commission received
on these services is amenable to service tax. After issuing show-cause
notice, the first respondent passed the order-in-original dated
23.9.2008 raising demand of more than Rs.255 crores, which
included service tax amounting to Rs.124.99 crores and penalty of
Rs.128.03 crores. After adding interest thereupon, the total demand
is in the neighborhood of Rs.400 crores.
2. The petitioner has filed appeal against this order before the Customs,
Excise and Service Tax Appellate Tribunal (hereinafter referred to as
the „Tribunal‟). This appeal is pending consideration. Along with
this appeal, the petitioner also moved an application for stay under
Section 35F of the Act, which is made applicable also to service tax
vide Section 83 of the Finance Act, 1994. The case of the petitioner
is that commission received by the petitioner under the agreement is
not liable to service tax on the ground that the same is export of
service, which is exempt from payment of cess tax. On this stay
application, the Tribunal has passed impugned order dated
31.7.2009 directing the petitioner to make pre-deposit of Rs.70
crores and realization of balance demand is settled till the disposal of
the appeal. The petitioner is not satisfied with this conditional stay
as it wants complete waiver of the condition of pre-deposit.
Therefore, challenging that order the present petition is filed.
3. We may point out at this stage that under the agreement dated
1.7.2005, four types of services are agreed to be provided by the
petitioner to the MS, which are as under :-
"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
fulfillment 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
revenue, 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 the 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."
4. The adjudicating authority, in its order-in-original, has held that the
petitioner is providing business support to the MS. The aforesaid
services were provided in India and were never provided outside
India, for which there was no export of services within the meaning
of Rule 3(1)(iii) of the Export of Service Rules, 2005 (hereinafter
referred to as the „Rules‟) for the period in question, i.e. 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 will
remain in force. This does not grant immunity for the petitioner
from taxation in respect of business auxiliary services provided by the
petitioner.
5. The Tribunal has referred to the said order and extracted the relevant
portions therefrom in extenso in its impugned order. It recorded
that the adjudicating authority had formulated four issues in para 214
of the order of adjudication. Thereafter, the answer to those issues
given by the adjudicating authority is also extracted. The
adjudicating authority discarded the plea of export of service made
by the petitioner holding that there was no export of services for
which the petitioner was liable to pay tax under the Finance Act,
1994, under the category of business auxiliary services providing
during the year in question. The Tribunal, thereafter, recorded the
submissions of the counsel for the petitioner, on the basis of which
order of the adjudicating authority is challenged and dealt with the
same, taking prima facie view of the matter.
6. Perusal of the order would also indicate that the Tribunal has heavily
relied upon the judgment of the Supreme Court in All India
Federation of Tax Practitioners & Ors. v. Union of India & Ors.,
2007 (7) STR 625, wherein it has been held that services fall in two
categories, namely, property based services and performance based
services and the service performed in India would be covered by the
service tax under the Finance Act, 1994. As per the prima facie view
taken by the Tribunal, place of performance of service is decisive for
determining event of taxability as well as incidence of tax.
7. We may also, at this stage, point out that the Supreme Court in the
aforesaid case had specified two categories of the services in the
following manner :-
"7. In the light of what is stated above, it is clear that Service
Tax is a VAT which in turn is destination based consumption
tax in the sense that it is on commercial activities and is not a
charge on the business but on the consumer and it would,
logically, be leviable only on services provided within the
country. Service tax is a value added tax.
8. As stated above, service tax is VAT. Just as excise duty is a
tax on value addition on goods, service tax is on value
addition by rendition of services. Therefore, for our
understanding, broadly 'services' fall into two categories,
namely, property based services and performance based
services. Property based services cover service providers such as
architects, interior designers, real estate agents, construction
services, mandapwalas etc. Performance based services are
services provided by service providers like stock-brokers,
practising chartered accountants, practising cost accountants,
security agencies, tour operators, event managers, travel agents
etc."
8. Contesting the approach of the Tribunal, the submissions of Mr.
N. Vekatraman, learned senior counsel appearing for the petitioner,
were as under :-
(a) The Tribunal has failed to appreciate that apart from the
aforesaid two categories of services enumerated by the Supreme
Court, the Government, while framing the Rules, had carved out
third category as well under rule 3 thereof, which reads as under :-
"Export of taxable services
3 (1) Export of taxable services shall, in relation to
taxable services -
(i) Specified in sub-clauses (d), (p), (q), (v), (zzq),
(zzza), (zzzb), (zzzc), (zzzh), (zzzr), (zzzy), (zzzz)
and (zzzza) of clause (105) of Section 65 of the
Act, be provision of such services as are provided
in relation to an immovable property situated
outside India;
(ii) Specified in sub-clauses (a), (f), (h), (i), (j), (l), (m),
(n), (o), (s), (t), (u), (w), (x), (y), (z), (zb), (zc),
(zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv), (zw),
(zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzl),
(zzm), (zzn), (zzo), (zzp), (zzs), (zzt), (zzv), (zzw),
(zzy), (zzzd), (zzze), (zzzf), (zzzp), (zzzzg), (zzzzh)
and (zzzzi) of clause (105) of section 65 of the Act,
be provision of such services as are performed
outside India:
Provided that where such taxable service is partly
performed outside India, it shall be treated as performed
outside India:
Provided further that where the taxable services referred
to in sub-clauses (zzg), (zzh) and (zzi) of clause (105) of
section 65 of the Act, are provided in relation to any
goods or material or any immovable property, as the
case may be, situated outside India at the time of
provision of service, through internet or an electronic
network including a computer network or any other
means, then such taxable service, whether or not
performed outside India, shall be treated as the taxable
service performed outside India;
(iii) Specified in clause (105) of section 65 of the Act,
but excluding -
(a) sub-clauses (zzzo) and (zzzv);
(b) those specified in clause (i) of this rule except
when the provision of taxable services specified
in sub-clauses (d), (zzzc) and (zzzr) does not
relate to immovable property; and
(c) those specified in clause (ii) of this rule,
when provided in relation to business or commerce, be
provision of such services to a recipient located outside
India and when provided otherwise, be provision of
such services to a recipient located outside India at the
time of provision of such service:
Provided that where such recipient has commercial
establishment or any office relating thereto, in India,
such taxable services provided shall be treated as export
of service only when order for provision of such service
is made from any of his commercial establishment or
office located outside India:
Provided further that where the taxable service referred
to in sub-clause (zzzj) of clause (105) of section 65 of the
Act is provided to a recipient located outside India, then
such taxable service shall be treated as export of taxable
service subject to the condition that the tangible goods
supplied for use are located outside India during the
period of use of such tangible goods by such recipient.
(2) The provision of any taxable service specified in
sub-rule (1) shall be treated as export of service when the
following conditions are satisfied, namely :-
(a) such service is provided from India and used outside
India; and
(b) payment for such service is received by the service
provider in convertible foreign exchange.
Explanation - For the purposes of this rule "India"
includes the designated areas in the Continental Shelf
and Exclusive Economic Zone of India as declared by the
notifications of the Government of India in the Ministry
of External Affairs numbers S.O. 429(E), dated the 18th
July 1986 and S.O. 643(E), dated the 19th September
1996."
He submitted that the Tribunal ignored the provisions of this
Rule, which in fact would govern the field and the case of the
petitioner squarely falls in category 3, which in no uncertain terms
excluded those services provided in relation to business or commerce,
the provision of such services to a recipient located outside India and
when provided otherwise, the provisions of such services to a
recipient located outside India at the time of provision of such
services. The second proviso to third category clarifies that where
the taxable service referred to any sub-clause (zzzj) of clause (105) of
Section 65 of the Act is provided to a recipient located outside India,
then such taxable service shall be treated as export of taxable service,
subject to the condition that the tangible goods supplied for use are
located outside India during the period of use of such tangible goods
by such recipient. His submission was that conditions of this category
are fulfilled by the petitioner and, therefore, the petitioner was not
liable to pay the service tax.
Learned senior counsel also referred to Circular dated
24.2.2009 as per which the applicability of the aforesaid clause was
amply clarified in favour of the persons like the petitioner in the
instant case.
(b) In all similar appeals which were pending before the different
Benches of the Tribunal, the Tribunal had been granted
unconditional stay by completely waiving the requirement of pre-
deposit. He referred to the following orders passed in this
connection :-
(i) M/s. GAP International Sourcing (India) Pvt. Ltd. v.
Commissioner of Service, Delhi -
"5. We have carefully considered the submissions from both
sides. We are conscious that we are dealing with export of
services which are intangible unlike export of goods. A reading
of the agreement shows that the decision relating to the choice
of various fabrics, vendor, service providers are to be taken by
the parent company which are based outside India.
Admittedly, they do not have any office in India. The
applicant has undertaken several activities in India but the feed-
back or the reports appear to have been submitted by them to
the parent company and the same may constitute the actual
rendering of services. The fact that the India based company
has received payment in foreign exchange, prima facie,
supports the claim of the applicant that they have exported the
services. The other issues raised by the learned Jt. CDR have to
be gone into at the time of final hearing."
(ii) M/s. Bitachi Home & Life Solution (I) Ltd. v. Commissioner of
Central Excise, Ahmedabad-III -
"3. Ld. Advocate submits that prior to 15.3.2005, such
services were fully exempted under Notification No. 2/2003
dated 20.11.2003. The benefit stands denied by Original
Adjudicating Authority only on the ground that the
commission received by the appellants in foreign currency was
not repatriated and no evidence stand produced by the
appellant to that effect. The appellants have contended that if
the amount is not repatriated, the production of positive
evidence is not possible. There is no evidence produced by the
Revenue to the contrary. The appellants have sworn on
affidavit that the amount was not repatriated.
As regards the period after 15.3.2005, Ld. Advocate submits
that such services would fall under the category of Export
Services and in terms of Export of Services Rules 2005, no tax
is liable to be confirmed in respect of the same. Ld. Advocate
has placed reliance on Circular No. 111/05/2009-ST dated
24.2.2009, laying down that Indian agents who undertake
marketing in India of goods of a foreign seller, would get
covered under the said Export of Service Rules. Ld. Advocate
also placed reliance on the Tribunal‟s decision in the case of
Blue Star Ltd. (2008(11) STR 23 (Tri-Bang) and in the case of
ABS India Ltd. (2009 (13) STR 65 (Tri.-Bang.), setting aside the
confirmation of service tax in respect of identical services.
4. In view of the above, we are of the opinion that the
appellant has good prima facie case on merits, so as to allow
the stay petition unconditionally. We order accordingly and
set aside the impugned order and remand the matter to
Commissioner (A) for decision on merits, without insisting on
any pre-deposit."
His submission was that the Bangalore Bench of the Tribunal
had even taken final view in certain appeals holding that no service
tax was payable in the following cases :-
(i) ABS India Ltd. v. CST, Bangalore
2009 (13) STR 65
(ii) Blue Star Ltd. v. CCE, Bangalore
2008 (11) STR 23
(iii) Lenovo (India) Pvt. Ltd. v. CCE (Appeals-II) & Ors.
2009 - TIOL - 911 - CESTAT - DEL.
On that basis, the submission was that the Tribunal could not
have ignored the aforesaid orders passed finally or by way of interim
measure while deciding the stay application of the petitioner.
According to him, as per the well-settled practice and principle of law
laid down by the Supreme Court and the High Courts, the petitioner
should have been meted out the same treatment by granting similar
stay. In this behalf, he drew our attention to the following
observations of the Bombay High Court in Wardha Coal Transport
Pvt. Ltd. v. Union of India & Ors., 2009-TIOL-79, where it was
observed as under :-
"8. It is not possible for us to agree with Mr. Desai. It is
pertinent to note that in similar fact situation in SSV Coal
Carriers Pvt. Ltd., the Tribunal has granted the prayer for
waiver of pre-deposit. Similarly, in Kartikay Bulk Movers Pvt.
Ltd. v. Commissioner of Central Excise, Nagpur delivered on 7-
10-2008, where also the facts were somewhat similar, waiver
of pre-deposit has been granted. Moreover, the Tribunal in
Sainik Mining & Allied Services Ltd.'s case (supra) has come to
the conclusion that service tax liability does not arise in such
cases. Learned Counsel for the petitioners is right in contending
that the petitioners have a prima facie case. We may usefully
refer to the observation of the Supreme Court in lndu Nissan
Oxo Chemicals Industries Ltd.'s case (supra), wherein the
Supreme Court has observed that:
"It is true that on merely establishing a prima facie case,
interim order of protection should not be passed. But if
on a cursory glance it appears that the demand raised
has no leg to stand, it would be undesirable to require
the assessee to pay full or substantive part of the
demand...."
9. Viewed in the light of above observations, we are of the
opinion that the impugned order deserves to be set aside and is
set aside accordingly. Once the Tribunal has granted full waiver
atleast in two similarly situated cases, it would not be proper
to take a different view and deny full waiver of pre-deposit.
Accordingly, we direct waiver of pre-deposit of the amounts in
question and stay recovery thereof pending appeal."
He also referred to the judgment of the Supreme Court in Polar
Industries Ltd. v. CCE, Meerut, 1999 (114) ELT 783, which is a short
order and reads as under :-
"1. Leave granted.
2. The short question that arises for consideration is whether
the High Court was justified in calling upon the assessee to
deposit a sum of Rs. 20,00,000/- while the assessee's appeal is
pending before the appellate authority. Be it be stated that the
Assistant Commissioner raised a demand of Rs. 48,87,777.70
against which the assessee has preferred an appeal and appeal
is pending before the appellate authority. The question for
consideration is whether the advertisement expenses could be
loaded to the value declared by the assessee to arrive at correct
assessable value. The assessee moved the appellate authority
for not depositing the amount, but having unsuccessful there he
moved the High Court. The High Court by the impugned
order directed the assessee to deposit a sum of Rs. 20,00,000/-
. Mr. Salve appearing for the appellant brought to our notice
that for the previous year CEGAT has accepted the contentions
of the assessee and has disposed of in favour of the assessee.
Mr. Ganguli, the learned Senior Counsel for the department,
on the other hand, contended that the said year was in relation
to the peculiar facts of that case and may not be applicable to
the case in hand. We are not inclined to delve into that
question, since we are not inclined to express any opinion on
the merit of the contentions made by the parties as the appeal
is pending before the appellate authority. But having
considered the facts and circumstances of the case we direct
that the assessee may not be called upon to deposit any
amount till the appeal of the assessee is disposed of by the
appellate authority. The impugned order of the High Court
and the appellate authority refusing the prayer for not
depositing the amount are set aside. The appellate authority is
directed to take up the appeal on merits without insisting upon
any deposit to be made by the assessee. The appeal may be
heard expeditiously.
3. The appeal is disposed of accordingly."
(c) His next submission was that the learned Tribunal also did not
correctly appreciate the principles on which applications for stay are
to be considered. According to him, when the petitioner had made
out a strong prima facie case in its favour and the Tribunal had in
other cases taken the view that no pre-deposit is required, merely
because the petitioner had capacity to pay the amount would not by
itself be a determinative factor. In this behalf, he submitted that this
Court in the case of Sri Krishna v. Union of India, 1998 (104) ELT 325
had unambiguously observed that if the appellant has such a prima
facie strong case and as is most likely to exonerate him from payment
and the Tribunal still insisted on deposit, the same would amount to
undue hardship. The relevant portion is as under :-
"7. In view of the above said submissions in which we find
substance, a case for waiver of pre-deposit was made out
clearly and the Tribunal could not have insisted on pre-deposit
of the amount of the impugned penalty either wholly or in
part.
8. Mr. M.L. Bhargava, the learned Counsel for the respondent
submitted that the impugned order being a discretionary order
is not liable to be interfered with in exercise of writ jurisdiction
of this Court. He relied on the decision of the Supreme Court
in S.I. Coir Mills v. Addl. Collector, Customs, AIR 1976 SC 1527
and Oswal Weaving Factory v. State of Punjab, AIR 1966
Punjab 532. Suffice it to observe that while disposing of an
application under Section 129 of the Customs Act, 1962 the
Tribunal is obliged to adhere to the question of undue
hardship. The order of the Tribunal should show if the pleas
raised before it, have any merit prima facie or not. If the
appellant has such a prima facie strong case as is most likely to
exonerate him from payment and still the Tribunal insists on
the deposit of the amount it would amount to undue
hardship."
He also drew our attention to the principle laid down by the
Supreme Court in Ravi Gupta v. Commissioner of Sales Tax, Delhi,
2009 (237) ELT 3, wherein the principles governing grant of stay
were discussed in the following manner :-
"8. Principles relating to grant of stay pending disposal of
the matters before the concerned forums have been considered
in several cases. It is to be noted that in such matters though
discretion is available, the same has to be exercised judicially.
9. The applicable principles have been set out succinctly in
Silliguri Municipality and Ors. v. Amalendu Das & Ors. (AIR
1984 SC 653), M/s. Samarias Trading Co. Pvt. Ltd. v. S. Samuel
& Ors. (AIR 1985 SC 61) and Assistant Collector of Central
Excise v. Dunlop India Ltd. (AIR 1985 SC 330).
10. It is true that on merely establishing a prima facie case,
interim order of protection should not be passed. But if on a
cursory glance it appears that the demand raised has no leg to
stand, it would be undesirable to require the assessee to pay
full or substantive part of the demand. Petitions for stay
should not be disposed of in a routine manner unmindful of
the consequences flowing from the order requiring the assessee
to deposit full or part of the demand. There can be no rule of
universal application in such matters and the order has to be
passed keeping in view the factual scenario involved. Merely
because this Court has indicated the principles that does not
give a license to the forum/authority to pass an order which
cannot be sustained on the touchstone of fairness, legality and
public interest. Where denial of interim relief may lead to
public mischief, grave irreparable private injury or shake a
citizens‟ faith in the impartiality of public administration,
interim relief can be given."
This view was reiterated by the Supreme Court in Benara
Valves Ltd. v. CCE, 2006 (204) ElT 513.
9. Mr. Bhattacharya, learned senior counsel appearing on behalf of the
respondents, countered the aforesaid arguments in the following
manner :-
(i) His preliminary submission was that the Tribunal had exercised
its discretion and granted interim relief directing deposit of only 17%
of the total demand. Section 35F of the Act, which has been made
applicable under Section 83 of the Finance Act, 1994 mandates
conditional right to appeal having regard to securing interest of
revenue and undue hardship. Undue hardship has not even been
pleaded. Therefore, the interim order of stay does not warrant
interference in exercise of discretionary writ jurisdiction of this Court.
He referred to the judgment in the case of Vijay Prakash Mehta v.
Collector of Customs, (1988) 4 SCC 402. He, thus, pleaded that
discretion exercised by the Tribunal in granting conditional reply to
appeal be not interfered with, more so when it was based upon
proper appreciation of the case.
(ii) His further submission was that the prima facie case and undue
hardship were held earlier to be mutually inclusive concepts.
Gradually, this position has undergone some change, as is clear from
the following three cases where the courts have held that prima case
alone is not sufficient to grant an interim stay :-
(i) Benera Valves (supra)
(ii) Ravi Gupta (supra)
(iii) Wardha Coal Transport Pvt. Ltd. (supra)
Thus, even if a prima facie case is assumed to exist, no stay
order can be passed without pleading financial hardship.
(iii) Without prejudice, his contention was that even a prima facie
case does not exist. The petitioner and MS are both wholly owned
subsidiaries of the Holding Company. Both have entered into an
agreement dated 1.7.2005 to further their common interest in a
concerted manner to provide service to Indian consumers. Clause
5.2 of the agreement makes it clear that MS provides services to the
petitioner and in turn the petitioner provides services to MS. Clause
6 stipulates that MS reimburse expenses incurred to the petitioner. It
is these expenses that generate business in India. Consumers are
based in India. Destination and consumption are both in India.
Indian consumers pay for the services which go out to the owners in
the Holding Company and part of it comes back to India in the
shape of commission. Economic and commercial activities take place
in India. Entire performance is exhausted and becomes extinct in
India. Under these circumstances, it becomes clear that prima facie
case does not exist. According to him, the Tribunal had been
indulgent to the petitioner by granting stay in liberal terms.
(iv) Adverting to the Rules, he argued that even as per Rule 3(2) of
the Rules, in order to claim export, service ought to be used outside
India. These words have remained in this Rule intact, even after a
series of amendments to the said rule. Therefore, these Rules which
have been framed by the Central Government under Section 9u3 and
94 of the Finance Act, 1994 and notified in the official gazette have
to be read as it is.
(v) Countering the argument based on clarificatory circular, he
submitted that the following judgments of the Supreme Court amply
demonstrate that the Courts/Tribunals are not bound by that
Circular:-
(i) CCE v. Dhiren Chemical Industries,
(2002) 2 SCC 127
(ii) Kalyani Packaging Industry v. UOI,
(2004) 6 SCC 719
(iii) CCE, Bolpur v. Ratan Melting,
2008 1) ELT 22 (SC)
He, thus, pleaded that any interpretation of Rule 3(2) as
aforesaid given by the CBEC vide Circular dated 24.2.2009 shall not
be binding on Tribunals/Courts. In any event, having regard to the
facts of the case, the Tribunal has returned a finding that the
interpretation of the Circular runs counter to the Supreme Court
judgment in the All India Federation of Tax Practitioners (supra).
(vi) As regards the judgment of the Supreme Court in All India
Federation of Tax Practitioners (supra), he argued that two categories
of services were carved out by the Hon‟ble Supreme Court. This is
binding on all Courts and Tribunals. The said judgment carves out
property based services ad performance based services. Admittedly,
the agreement dated 01.07.2005 (subject matter of litigation) is
performance based services. Both these categories can have trans-
border implication. Such trans-border implication would be sub set
of these board categories and by itself cannot be termed as a third
category. Interpretation of Service Tax Rules and arguments cannot
be pressed to dilute the binding judgment of Hon‟ble Supreme Court
in All India Federation of Tax Practitioners (supra). Therefore,
destination based consumption of service ends with the performance
of service in India and this satisfies performance based service tax
concept as held by the Hon‟ble Supreme Court in All India
Federation of Tax Practitioner case.
(vii) He further pleaded that this Court should not be influenced by
the stay orders granted by the Coordinate Benches of the Tribunal.
In ABS India and Blue Star (supra) were the plain and simple import
of goods and radically different from the present case which fastens
liability on Microsoft India based on agreement dated 01.07.2005.
These import of goods can never be equated with peculiar terms of
the agreement dated 01.07.2005 between MI and MS. Other
benches of the Tribunal had relied upon these judgments of ABS
India and Blue Star (supra).
He, thus, made a fervent plea that the impugned order is in
favour of the petitioner and in any case is most equitable and did not
require any interference.
10. In the first blush, one finds that the arguments of learned counsel for
the petitioner are quite attractive. Not only he has given precedents
of interim orders as well as final orders passed by the Tribunals in the
matter involving service tax which may appear to be similar, he has
also pointed out the import of Rule 3 of the Rules and the
clarification issued by the Board itself. However, at this stage, one is
to look into the prima facie view of the matter. We find from the
impugned order passed by the Tribunal that it has discussed this
aspect in much detail though at this stage only prima facie view is
taken, which it was supposed to. The Tribunal has extensively
quoted from the judgment of the Supreme Court in All India
Federation of Tax Practitioners (supra). As of today, the action of
the adjudicating authority is predicated on the said judgment.
Whether case of the petitioner falls in third category of Rule 3 of the
Rules is yet to be finally determined. The Tribunal was not oblivious
to these Rules either, as reference thereto finds place in the impugned
order. It would be of use to incorporate the following discussion
contained in the order of the Tribunal, analyzing the terms of
agreement between the petitioner and MS :-
"24. It also appears that 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. Such a view is also very clear when object
of Article 2.1, 2.2.1, 2.2.3, 2.3, 3.1, 3.2.1, 3.2.2, 3.3.1 and 3.3.1
of the sample agreement dated 01.07.2005, which has been
extracted hereinbefore, is read. Remuneration for the service
provided by the appellant was linked with expenses incurred in
terms of Article 6.1 and 6.2 of the sample agreement dated
01.07.2005. It may be appreciated that to provide service,
expenses were incurred in India in terms of the sample
agreement for which the appellant got reimbursement of such
expenses and a percentage thereof is paid to it as its
remuneration. Thus expenditure met in India has generated
service potentiality in India.
25. Reading of the letters filed by the Appellant as stated in this
order hereinbefore and also reading of the sample agreement
throws light that the appellant was acting on behalf of the
foreign principals in India as subsidiary of the foreign holding
company. It had acted as agent of the foreign principals to
result with provision of services in India out of the endeavour
of the appellant with the technical assistance of the holding
company and subsidiary company abroad. The service
provided in India was consumed without reverting back to
foreign principals for consumption abroad. Ultimate outcome
of service having been exhausted in India, there appears to be
no export of such services since efforts in India generated
service recipients in India only. The foreign principals
discharged post service contractual obligations. Even the
Appellant's plea that Board Circular dated 24.02.2009 clarified
that the benefits of the service accrue outside India, does not
appear to be of any help to the appellant since benefit of the
services has accrued to the consumers in India for the service
provided to the consumers thereat to fulfil contractual
obligation of the foreign holding company as well as subsidiary
company of Singapore. The benefit of service terminated in
India only, without travelling abroad. The performance based
service provided in India in terms of the sample agreement
dated 01.07.2005 appears to have resulted with provision of
service to the consumers in India. Therefore it appears that
even the circular does not explain the position of law as
claimed by the appellant to its advantage.
26. The circulars hold that location of service receiver is
relevant factor to decide export of service under Rule 3(1)(iii)
of Export of Services Rules, 2005. This does not rule out that
when ultimate outcome of service is consumed in India, the
service exhausts or extinct thereat without being capable of
exported, losing its utility. Performance of service being
decisive for taxation and to decide taxable event and incidence
of tax, export of service pleaded by the appellant is
inconceivable.
27. It may be stated that 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. But present case is a departure to that principle. The
appellant is an intermediary meant to provide well defined
services to clients/customers in India with the technical
assistance of foreign principal. To provide service in India, the
appellant was supported by technical assistance by the foreign
principals and the appellant as well as Singapore concern are
subsidiaries of the holding company in USA being centrally
governed. Service tax law does not appear to have brought
any anomalous situation to the concept of service provided in
India for its ultimate consumption thereat."
11. The Tribunal also took note of the orders passed by the other
Benches, but distinguished the same in the following words :-
" 28. In the course of hearing, learned Counsel placed reliance
on the decisions of Tribunal in case of ABC (India) Ltd v. 2009
131 STR (65) and Blue Star 2001 (11) STR (23). Such reliance
was placed to advance argument that when recipient of
services is located outside India, it cannot be said that the
services were delivered in India or used in India. Services are
utilized only outside India and such services shall be eligible to
benefit of export of services. Subsequent to hearing of the
matter, learned Counsel also submitted a copy of the decision
of the Tribunal in the case of Lenovo (India) Pvt. Ltd. 2009
TIOL BANG, wherein it was held that the said case was similar
to case of ABC (India) Ltd and Blue Star (supra). But these
decisions, prima facie, do not come to rescue of the appellant
for the law laid down by Apex Court in All India Fedn. Of Tax
Practitioners - 2007 (7) STR 625 (SC).
29. Appellant also relied on the decision of Ahmedabad Bench
in 2009 TIOL 602 CESTAT AHMD. A copy of the said decision
was submitted subsequent to hearing. That decision related to
interim order passed by the Ahmedabad Bench. However,
while passing order, Bench had taken note of the decision in
Blue Star and ABC (India) Ltd. In addition to these citations,
the appellant also relied on decision of Delhi Bench in case of
Gap International Sourcing (India) Pvt. Ltd. 2009 TIOL 249
CESTAT DEL. Appellant's submission was that absolute stay was
granted in identical issue of existence of recipients of services
outside India shall enjoy export service benefit. Therefore,
appellant's contention in present case is that when services
recipients were outside India, appellant is entitled to similar
benefit."
These orders are already reproduced above, which are short
orders of single para. As against this, in the present case there is a
detailed discussion by the Tribunal on the various aspects while
taking prima facie view.
12. It has also discussed the judgment of the Bombay High Court in
Wardha Coal Transport Pvt. Ltd. (supra), as is clear from the
following discussion in the impugned order :-
"31. Learned Adjudicating Authority appears to have thread
bare examined the issue by a reasoned and speaking order in
different paragraphs depicted aforesaid. There were no
materials brought out by the appellant to distinguish its case as
export. The Appellant relied on the decision of Hon'ble High
Court of Bombay in the case of Wrdha Coal Transprot Pvt.
Ltd, Chandrapur v. UOI 2009 TIOL 79 HC Mum ST. to plead
for stay of realisation of the demand in view of stay order
passed by Ahmedabad Bench. It may be stated that no two
cases are equal. It may also be stated that interim orders cannot
be precedent decisions following decision of Apex Court in
Empire Industries case - 1985 (20) ELT 179 (SC)."
13. After discussing all these aspects, the Tribunal exercised its discretion
in directing the petitioner to make pre-deposit of Rs.70 crores and
granting stay of the balance demand, which by all means is no less as
the amounts covered by the stay order comes to more than Rs.300
crores. While adopting this approach, the Tribunal has taken into
consideration various judgments of the Supreme Court laying down
the principles which are to be kept in mind for dealing with the
application of stay :-
"32. Prima facie, the appellant has not brought out its case for
total waiver of pre-deposit during pendency of appeal since
appeal is a conditional right granted by law as held in the case
of Vijoy D. Meheta - 1988 (4) SCC 402 : 1989 (39) ELT 178
(SC). Balance of convenience does not tilt in favour of the
appellant. There was no case made out to show that
irreparable injury or undue hardship shall be caused to the
appellant if no full waiver is granted. So also, neither materials
were produced nor was financial hardship pleaded in the
course of hearing. Rather, Revenue appears to be prejudiced if
realization of demand is stayed following decision of Apex
Court in Benera Valve‟s case 2006 (204) ELT 513 (SC). The
applicable principles have also been set out succinctly in Silliguri
Municipality and Ors. v. Amalendu Das and Ors. (AIR 1984 SC
653), M/s. Samarias Trading Co. Pvt. Ltd. v. S. Samuel and Ors.
(AIR 1985 SC 61) and Assistant Collector of Central Excise v.
Dunlop India Ltd. (AIR 1985 SC 330). While arriving at the
above conclusion, we were conscious of decision of Apex
Court in Ravi Jain‟s case - 2009 (237) ELT 3 (SC). The
Hon‟ble Supreme Court in para 10 of the judgment held as
under :-
"10. It is true that on merely establishing a prima facie case,
interim order of protection should not be passed. But if on a
cursory glance it appears that the demand raised has no leg to
stand, it would be undesirable to require the assessee to pay
full or substantive part of the demand. Petitions for stay-
should not be disposed of in a routine matter unmindful of the
consequences flowing from the order requiring the assessee to
deposit full or part of the demand. There can be no rule of
universal application in such matters and the order has to be
passed keeping in view the factual scenario involved. Merely
because this Court has indicated the principles that does not
give a license to the forum/authority to pass an order which
cannot be sustained on the touchstone of fairness, legality and
public interest. Where denial of interim relief may lead to
public mischief, grave irreparable private injury or shake a
citizen‟s faith in the impartiality of public administration,
interim relief can be given."
33. Having given due considerations to various aspects as
aforesaid and to the limitation aspect pleaded by the appellant
involving Rs.30.00 crores and refund plea to the extent of
Rs.20.00 crores raised on behalf of the appellant in the course
of hearing, as an interim measure to work out the modality for
protection of interest of revenue, following decision of Apex
Court in Dunlop India‟s case - 1985 (19) ELT 22 (SC), we direct
the appellant to make pre deposit of Rs.70.00 crores (Rupees
seventy crores only) within 4 (four) weeks of receipt of this
order and make compliance on 30.09.2009. Subject to such
compliance, realization of balance demand shall be stayed till
disposal of appeal."
14. In Ravi Gupta (supra), referred to by the learned senior counsel for
the petitioner, the Apex Court reiterated the principle, firmly
approved by series of judgments, that merely on showing a prima
facie case, interim order of protection should not be passed. Such a
course of action is to be taken only "if on a cursory glance it appears
that the demand raised has no leg to stand".
15. We are afraid, the petitioner cannot pitch its case to that level as
there are various thronging issues which are settled and cobwebs
cleared. As per the respondents, in view of their submissions taken
note of above, the case at hand is not that of plain and simple
import of goods. The agreement makes it clear that MS provides
services to the petitioner and the petitioner provides services to MS.
The consumers are based in India, both destination and consumption
is in India. Indian consumers pay for services which go out to the
owners, namely, the Holding Company and part of it comes back to
India in the shape of commission. Economic and commercial
activities also take place in India. On the basis of these features, it is
the argument of the respondent that entire performance is existed
and becomes extinct in India. It is not the province of this Court, in
these proceedings, to finally pronounce on these aspects and once
we take the view that both sides have arguable case and final
determination of these issues is to be done in the first instance by the
Tribunal only, it would not be even wise to venture into that
exercise. Insofar as the Tribunal is concerned, it has kept in mind all
necessary parameters which are required to be gone into for deciding
such applications for stay/waiver of pre-deposit and has passed an
equitable order.
16. In exercise of our jurisdiction under Article 226 of the Constitution,
we feel that it is not a fit case where one should interfere with the
said order. This writ petition is, accordingly, dismissed. However,
we grant four weeks time to the petitioner to make deposit of the
amount as directed by the Tribunal for compliance. The parties shall
appear before the Tribunal on 1st December 2009.
No costs.
(A.K. SIKRI)
JUDGE
(SIDDHARTH MRIDUL)
JUDGE
October 30, 2009
nsk
