By TIOL News Service

MUMBAI, APR 03, 2013: M/S Tech Mahindra Ltd. is engaged interalia in the business of “Information Technology Software Services” as defined in Section 65 (105) (zzzze) of the Finance Act, 1994 and they are providing these services mainly to their overseas customers.

These services are exported by M/s. TML to their overseas customers in two ways, i.e. by entering into a direct contract with its overseas customers or by entering into a contract with the overseas customers through its subsidiaries/branches located outside India. There are two components, namely, Offshore Software Development services provided by it from India and onsite Software Development Services provided by the subsidiaries located outside India.

M/s. TML are availing CENVAT Credit of tax paid on input services used in providing the output services. Since they are mainly exporting these services on a regular basis, they are not able to utilize the CENVAT Credit availed by them. Hence, in terms of Rule 5 of the CENVAT Credit Rules, 2004 read with the Notification No. 05/2006-CE(NT) dated 14/03/2006, they have been filing refund claims of the un-utilized CENVAT Credit from time to time.

In the present case, TML has filed 21 refund claims. Out of these, 16 claims are pertaining to the period prior to 27/02/2010 starting from the month of November, 2008. The remaining 5 claims are pertaining to the period post 27/02/2010. It is the claim of TML that it has exported taxable output services from India. Admittedly, some portions of the output services have been provided to the overseas customers by TML's subsidiaries located outside India as per the contracts entered into between TML and its overseas customers or between TML and its subsidiaries located outside India. And this is where the dispute begins inasmuch as the Revenue contends that such services cannot be treated as export of services from India.

However, it is the contention of TML that though the services are actually performed by its subsidiaries onsite at the premises of the overseas customers, contractually these services have been provided by them as they (subsidiaries) are its agents. In this connection, support is taken from the Tribunal's decision in the case of M/s. Paul Merchants Ltd. V/s. CCE, Chandigarh 2012-TIOL-1877-CESTAT-DEL.

In the adjudication of the said refund claims, the jurisdictional Assistant Commissioner sanctioned the refund claims in fourteen cases, which was set aside by the Commissioner (Appeals) - ten claims by a common order-in-appeal and four claims by four separate orders-in-appeal. M/s TML is in appeal against aforesaid orders-in-appeal before this Tribunal.

However, in respect of seven cases, the Assistant Commissioner withheld the refund claims relating to onsite services provided by M/s. TML's subsidiaries located outside India pending receipt of clarification sought by the department from the Central Board of Excise and Customs. In Appeal, by both M/s. TML and the department, the aforesaid orders of the Assistant Commissioner were disposed of by a common order-in-appeal by the Commissioner (Appeals) granting the refund. Hence, the department is in appeal before the Tribunal against the said order.

The rules that are involved in this entire episode are referred below –

+ ‘Explanation' to Rule 5 of CCR, 2004 reads:

"Explanation: For the purposes of the this Rule, the words ‘output Service which is exported' means the output service exported in accordance with the Export of Services Rules, 2005”.

+ Rule 3 of Export of Service Rules, 2005 provides for export of taxable services. Sub-rule (1) of Rule 3 classifies the taxable services under the following three categories:

Category I: Specified services provided in respect of immovable property situated outside India.

Category II: Specified services provided wholly or partly outside India.

Category III: Specified services in respect of which the recipient of service is located outside India.

+ Vide Notification No.2/2007-ST dated 01/03/2007, the Export of Services Rules, 2005 were amended by substituting sub-rule(2) of Rule 3 which reads as follows:

'(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 provided outside India is received by the service provider in convertible foreign exchange.

+ The Export of Services Rules, 2005 were again amended vide Notification No. 06/2010-ST dated 27/02/2010. By this amendment, clause (a) of sub-rule (2) was omitted. Sub-rule (2) of Rule 3 thereafter read:

‘(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) Omitted

(b) Payment for such service is received by the service provider in convertible foreign exchange.'

The Bench referred to the rules extracted above and at the outset citing the Supreme Court decision & Rowlatt J in the matter of interpretation mentioned that the first principle of interpretation is that a statute should be read in its ordinary, natural and grammatical sense; that there is no room for any intendment; that there is no presumption as to a tax; that nothing is to be read in & nothing is to be implied.

The Bench then noted the amendment made in the Rule 3 on 27/02/2010 and observed thus –

+ for the period post 27/02/2010 , the only condition required to be satisfied to constitute export of service is that payment for such services should be received by the service provider in convertible foreign exchange. There is no dispute in the present case that the appellant has received the consideration for the service rendered from the service recipient abroad in convertible foreign exchange both in respect of offshore services and onsite services rendered by them. There is no condition relating to place of provision of service post 27/02/2010. Even if the service is rendered from a place outside India, so long as the consideration is received in convertible foreign exchange, the transaction is treated as export. In other words, the rule does not differentiate between “on site services' and “off-site services”. Therefore, there cannot be any denial of refund claims filed by the appellant for the period after 27/02/2010.

+ For the period prior to 27/2/2010, for a transaction to be considered as ‘export', two conditions were required to be satisfied, namely, (i) such service provided from India and used outside India and (ii) payment for such service provided outside India is received by the service provider in convertible foreign exchange. In the present case, there is no dispute about satisfaction of the second condition. The dispute is only with respect to the first condition, i.e., whether the service has been provided form India. It is clear that in respect of overseas customers, the subsidiaries performed the onsite services on behalf of the appellant at the customers' premises abroad. The appellant' subsidiaries located outside India are independent entities and they are not appellant's agents. This position is clear from the agreement entered into between the appellant and its subsidiary in America, namely, Tech Mahindra America dated 27/03/2008. Para 19 of the said agreement specifically states that all dealings between the parties shall be in accordance with the arms length standard and nothing contained herein shall be construed as constituting any relationship of agency or Joint venture or partnership between the parties or the management of any operation of TML in America relating to this agreement or otherwise by TM Inc America. This clause in the agreement clearly evidences the fact that the subsidiary located in America is an independent contractor and is providing software development service to the appellant's overseas customers as such. Therefore, it cannot be said that the onsite services provided by the subsidiary have been rendered from India to the appellant's customers abroad. Thus the first condition that the service should be provided from India to constitute export is not satisfied.

The Bench also noted that when similar services were provided by the appellants' own branches abroad, they discharged the local taxes and did not pay any service tax under the reverse charge mechanism and this showed that the service rendered abroad by way of onsite services cannot be treated as service ‘provided form India'. It was also observed that the nature of services provided by the appellant's subsidiaries abroad were such that these services could not be performed from India at all as the service recipient's systems are located abroad inasmuch as Maintenance, testing, removal of defects, etc. of the systems located abroad had to be done at the site where the systems are located.

The Bench then held that the provisions/decisions pertaining to Customs, Exim policy, Income Tax, OECD guidelines, decision of the European Court, etc. cited in support by the appellant were of no consequence to the case on hand. The appellant had also sought to draw support from the Education Guide and the Place of Provision of Services Rules, 2012 but the Bench brushed them aside by noting that the said Rules were not in existence when the impugned transactions took place and that a retrospective application of a law could not be given unless the law itself specifically provided for the same.

And, then the Bench concluded thus -

"5.8 In view of the above, we are of the considered opinion that the appellant has not satisfied the terms and conditions of export as defined in the Export of Service Rules, 2005, in respect of onsite services for the period prior to 27-2-2010 and therefore, they are not eligible for refund of service tax in respect of such services rendered abroad. Accordingly, order No. PIII/VM/227-280/2010 dated 20/10/2010 passed by the lower appellate authority has to be set aside and the Revenue's appeal against the same has to be allowed. Similarly, order No. PIII/RS/198-2007/2011 dated 25/07/2011 needs to be upheld in respect of the claims of the appellant for the period prior to 27/02/2010 and the TML's appeals in this regard merit to be rejected."

The appellant then tried another effort to justify his claim by making an alternate argument that if their refund claim cannot be considered under Rule 5 of the CENVAT Credit Rules, 2004, then the same should be considered under section 11B of the Central Excise Act, 1944.

To this, the Bench remarked -

"…We do not understand the logic of this argument. If a transaction (onsite services) does not constitute export, how can a refund claim arise under section 11B of the Central Excise Act, 1944, in respect of the same transaction? The appellant has paid service tax on the services rendered to them by their subsidiaries (for which they have paid the consideration) on reverse charge basis, treating the same as deemed import of services as provided for under section 66A of the Finance Act, 1994. It is not the contention of the appellant that the said transaction does not amount to import of services. If the appellant's contention is that they were not required to pay service tax on the services received from their subsidiaries abroad, then such a claim should have been made before the lower adjudicating and appellate authorities. Having not done so, such a plea cannot be entertained at this stage."

Subsequently, another plea was made for allowing CENVAT Credits which were denied to them on the ground that PAN based registration numbers were not mentioned in the input invoices and on the ground that the premises in respect of which ST on renting of immovable property was claimed was not initially included in the Centralized registration issued. The Bench directed that both the matters be verified by the adjudicating authority in the light of the Board Circulars in the subject matter and whether the said unit/premises was used for the purpose of export of services and a decision be arrived at.

The appeal was disposed of in above terms.

(See 2013-TIOL-543-CESTAT-MUM)