By TIOL News Service

MUMBAI, SEPT 06, 2014: THE appellant entered into distributorship and agency agreement with their group entities situated in Finland, Sweden, Norway, Ireland, Switzerland, Italy, France, Singapore, U.K., Germany, China, Philippines and United Arab Emirates in respect of the products manufactured by the foreign entities. The said agreement envisaged that, when acting as a distributor, the appellant will sell in its own name and on its own account the product of the foreign supplier, and that while acting as an agent, the appellant will solicit customers and promote the sale and services of the products manufactured by the foreign entities and the appellant will also assist in the preparation of any product sale contract between the foreign entity and the Indian buyer and also in the collection of sale proceeds. For these services rendered, the appellant was entitled to receive a commission in accordance with the said agreement. The products covered by the agreement were such as 2/4 stroke engines, domain spare parts, propulsion spare parts, boiler parts and so on and the commission ranged from 5% to 16% of the net sale value.

Once the purchase orders were placed by the buyer in India through the appellant to the foreign entity, the goods were supplied directly by the foreign entity to the Indian buyer for which the appellant received a local agency commission. The commission was paid in convertible foreign currency.

The department was of the view that this activity undertaken by the appellant comes within the purview of 'Business Auxiliary Service' and since the services has been rendered in India, the appellant is liable to pay service tax on reverse charge basis.

Accordingly, SCN was issued on 20/08/2008 for the period 01/07/2003 to 31/03/2008 demanding service tax of Rs.12,06,39,710/- under the head "BAS". The appellant also procured IT products from their foreign entities on which they were discharging service tax liability under 'Information Technology Services' since 16/05/2008. The department was of that for the period 18/04/2006 to 31/03/2008, the appellant was liable to pay service tax of Rs.1,16,84,140/- on reverse charge basis under 'On-line Information and Database Access and/or Retrieval Services'.

The CST, Mumbai-II confirmed the demand along with penalties and interest and so the appellant is before the CESTAT.

The appellant inter-alia relied upon the decisions in GAP International Sourcing (India) Pvt. Ltd. vs. Commissioner of Service Tax, Delhi - 2014-TIOL-465-CESTAT-DEL, Alpine Modular Interiors (P) Ltd. vs. Commissioner of Service Taxi (Adjudication), New Delhi - 2014-TIOL-517-CESTAT-DEL & Lenovo (India) Pvt. Ltd. vs. Commissioner of Central Excise, - 2009-TIOL-911-CESTAT-BANG and submitted that the activity of the appellant qualified to be exports and, therefore, no service tax liability would accrue.As regards, the demand on software services received in India during the period 18/04/2006 to 31/03/2008, for which a service tax demand of Rs.1,16,84,140/- has been confirmed, the appellant submitted that the product received by the appellant was Information Technology Software Service which became taxable w.e.f. 16/05/2008 and the appellant has been discharging service tax accordingly and the department has not disputed this classification and, therefore, for the period prior to 16/05/2008, the services received cannot be classified under "On-line Information and Database Access and/or Retrieval Service.' The appellant further submitted that bulk of the demands are time-barred and only an amount of Rs.3.42 crore in respect of 'Business Auxiliary Service' and Rs.45 lakhs in respect of 'On-line Information and Data Base Access and/or Retrieval Service' would fall within normal period of limitation.

The AR placed reliance on the order in Microsoft Corporation (I) P. Ltd. - 2009-TIOL-1325-CESTAT-DEL wherein in respect of 'Business Auxiliary Service' rendered in India to a foreign entity, a prima facie view was taken that since the service had been rendered in India, it is liable to tax in India. In the matter of demand of service tax under 'On-line Information and Database Access and/or Retrieval Service', it is submitted that since software has been imported into India through internet, it would amount to 'On-line Information and Database Access and/or Retrieval Service' and hence liable to service tax accordingly.

The Bench observed -

++ For the period 01/07/2003 to 14/03/2005, since the consideration for the services rendered has been received in convertible foreign exchange, the same is exempt from tax under Notification 21/2003-ST dated 20/11/2003 and also in terms of the Board's Circular No. 56/5/2003-ST dated 25/04/2003 and, therefore, the liability to pay service tax will not arise at all. For the period after 15/03/2005 till 31/03/2008, the appellant has satisfied the conditions of export with regard to the business auxiliary services under Rule 3(1)(iii) of the Export of Service Rules and the said service has been rendered in relation to commerce and industry. The service recipient is situated outside India and the consideration for the provision of service has been received in convertible foreign exchange. Thus, the service has been provided from India and used outside India. In these circumstances, in terms of the Export of Service Rules, as they stood at the relevant time, the activity of the appellant amounts to export of service.

++ We respectfully agree with the decisions (in the case of GAP International Sourcing (India) Pvt. Ltd.,; Simpra Agencies & Another and Lenovo (India) Pvt. Ltd.)and are of the prima facie view that services rendered by the appellant in the present case also amounts to export of services and hence not taxable in India.

++ As regards the demand of service tax on the 'Information Technology Software' received by the appellant through internet, we notice that, it is not in dispute that since 01/05/2008 the classification made by the appellant under 'Information Technology Services' has been accepted by the department. If that be so, we do not understand why the same service would merit classification under 'On-line Information and Database Access and/or Retrieval Service' for the period prior to May 2008 inasmuch as 'Information Technology Service' has not been carved out of 'On-line Information and Database Access and/or Retrieval Service'. It is a settled position in law that when a levy is introduced on a new category of service, the same would apply only prospectively and the same service cannot be classified elsewhere under other categories prior to the inception of levy.

Holding that the appellant has made out a strong prima facie case for grant of stay, the Bench granted unconditional waiver from pre-deposit of adjudged dues and stayed the recovery.

In passing: A thirteen crore demand bites the dust…well almost!

(See 2014-TIOL-1685-CESTAT-MUM)