By TIOL News Service

BANGALORE, JUNE 18, 2013: IN six appeals filed by the company and the appeal filed by the Department, the substantive issue arose as to whether the company was entitled to claim refund of unutilized CENVAT credit taken on input services which were claimed to have been used for providing their output services which were claimed to have been exported by them.

In another appeal, the question arose as to whether the assessee was entitled to take CENVAT credit on the input services at all. The issue that arose in yet another appeal was whether the assessee was liable to pay service tax, under reverse charge mechanism, on a service classified as "manpower recruitment or supply agency service" and held to have been received by the assessee from abroad.

All the appeals are decided together.

FACTS : M/s. HSBC Electronic Data Processing (I) Pvt. Ltd., the assessee, commenced their operations at Delhi, Hyderabad, Visakhapatnam, Bangalore and Kolkata in June 2001 as 100% Export-Oriented Units ( EOUs ) registered with the respective Software Technology Parks of India (STPIs). HSBC group is said to be one of the largest banking and financial services groups in the world. It is said to have outsourced the customer care and back office support services to delivery centres. HSBC group has formed HSBC Global Resourcing (UK) Ltd. (HGRL), reportedly, for the purpose of co-ordination and control of the services rendered by the delivery centres. HGRL is said to be operating through a model of delivery centres spread all over the world, aiming at providing the best service to the banking customers of HSBC group. The assessee is said to be one of such delivery centres established to operate in India, HGRL has entered into 'Master Service Agreements' with various HSBC banking entities across the globe referred to as 'Business Partners'. HGRL has also entered into an agreement dt . 01/01/2006 with the assessee to provide services to the Business Partners and this agreement is called 'Sub-Contracting Agreement'. The assessee has entered into 'Performance Level Agreement' with the Business Partners. Under this entire scheme of business, the assessee is said to have rendered to the customers of the Business Partners various services such as credit card and debit card operations, contact centre services, payment services, claims processing, global research, strategic transaction support, investment administration of funds etc. HGRL appointed the assessee to provide such services to the Business Partners and their banking customers, which HGRL had contracted to provide under the Master Service Agreement with the Business Partners.

In other words, the assessee claims to have provided the aforesaid services on behalf of their client viz. HGRL and, therefore, all such services are claimed to be covered by the definition of "Business Auxiliary Service" (BAS) under Section 65(19) of the Finance Act, 1994. The assessee accordingly obtained Service Tax registration since 13/08/2007. As the service recipients viz , the Business Partners (HSBC banking entities) and their customers were located outside India and payments for such services were received in convertible foreign exchange, the services provided by the assessee appear to have satisfied the relevant conditions laid down under the Export of Services Rules, 2005. For providing output services, the assessee procured various input services and took CENVAT credit of the service tax paid thereon. As only a small part of such credit was utilized for payment of service tax on domestic output services, a major portion of the CENVAT credit remained unutilized.

Refund of such CENVAT credit which remained unutilized from December 2005 was claimed by the assessee from time to time under Rule 5 of the CENVAT Credit Rules ( CCR ) 2004 read with Notification No.5 /2006- CE( NT) dt. 14/03/2006. The assessee thus claimed refund of a total amount of Rs.110 ,06,60,464 /

The refund claim for the period 12/2005 to 3/2008 was rejected by the adjudicating authority on the ground that the services exported by the assessee were Information Technology Services which were excluded from BAS and hence not taxable. An appeal filed against this decision of the adjudicating authority was allowed by the Commissioner( Appeals) and the Revenue's appeal is against the decision of the appellate authority which held that the services exported by the assessee fell under BAS, a taxable service and hence they were entitled to claim refund of the CENVAT credit. The refund claim for the period from April to June, 2008 was also rejected by the adjudicating authority in the same manner as above but the appellate authority held that the output services were taxable under Information Technology Software Services ( ITSS ) and hence the assessee was eligible to claim refund of CENVAT credit for the period from 16/05/2008, the date on which ITSS was introduced as a taxable service. The appellate authority, on this basis, remanded the matter to the original authority for requantification of the amount to be refunded. Its order is under challenge in the assessee's appeal. The refund claims filed by the assessee for the total period from 7/2008 to 9/2011 were also rejected by the original authority holding that the output services exported by them were not taxable under BAS or ITSS or "Online Information Database Access or Retrieval Services"( OIDARS ) or "Business Support Services"(BSS). The orders passed by the adjudicating authority were set aside by the Commissioner( Appeals) who found violation of natural justice and remanded the matters to the lower authority for de novo decision. The orders passed by the Commissioner( Appeals) for the aforesaid period (July 2008 to September 2011) are under challenge.

CENVAT credit of Rs.26 ,32,69,482 /- which was allegedly taken irregularly on input services was proposed to be denied and equal amount was proposed to be recovered under Rule 14 of the CCR , 2004 read with the proviso to Section 73(1) of the Finance Act 1994 and an amount of Rs.25,85,61,094 /- was demanded as service tax under the said proviso on certain services allegedly received by the assessee from abroad. The Commissioner confirmed demand of service tax to the extent of Rs.22 ,82,07,695 /-on the services found to have been received by the assessee from abroad during the period 2005-06 to 2009-10 and also ordered for payment of interest thereon, He also imposed penalty equal to service tax on the assessee under Section 78 and a separate penalty on them under Section 76.

CENVAT credit of Rs.31 ,11,64,771 /- which was allegedly taken irregularly on input services from April 2010 to March 2011 was proposed to be denied to them and equivalent amount was proposed to be recovered from them under Rule 14 of the CCR 2004 read with Section 73 of the Act, interest thereon was also proposed to be recovered under Rule 14 read with Section 75 and a penalty was proposed under Rule 15 read with Section 78. Commissioner confirmed the entire demand, ordered for recovery of interest thereon and imposed a penalty of Rs.6 crores .

Tribunal's Findings : the assessee claimed a total amount of over Rs.110 crores as refund of unutilized CENVAT credit taken on input services which were claimed to have been used for providing output services classified as Business Auxiliary Services to service recipients located abroad. This claim of refund was for the period from December 2005 to September 2011. The original authorities rejected the claim on the ground that the output services exported by the assessee were not taxable as BAS, ITSS , OIDARS or BSS. The orders passed by the original authorities on the refund claims for the period from July 2008 to September 2011 were set aside by the Commissioner( Appeals) who remanded the matters to the lower authorities for de novo decision.

It appears that, on the part of the learned Commissioner( Appeals), no attempt was made to determine the exact nature of the output services exported by the assessee, nor to determine the nexus between the input services and the output services. The learned Commissioner( Appeals) chose to remand the cases to the lower authorities for de novo adjudication. As rightly submitted by the learned senior counsel for the assessee, it was not open to the appellate authority to do so inasmuch as he did not have the power of remand. All the relevant documents including the various agreements referred to by the learned counsel were available to the appellate authority which should have examined the documents for ascertaining the correct nature of the output services provided by the assessee. The orders passed by the learned Commissioner( Appeals) remanding the cases to the lower authorities for de novo adjudication are contrary to the statutory scheme and hence require to be set aside.

The assessee has consistently claimed that their output services were classifiable under BAS in terms of clause (iii) or clause (vi) or clause (vii) of the definition under Section 65(19) of the Finance Act 1994 and has accordingly obtained registration with the Department. However, the stand taken by the Department regarding the nature of the services exported by the assessee has not been consistent. For the period from December 2005 to June 2008, the Department classified the services under ITS which was excluded from BAS till 16/05/2008. For the period from July 2008 to September 2010, the Department was agreeable to consider the assessee's services as "operational or administrative assistance in any manner" which expression was inserted in the definition of BSS from 01/05/2011 only. However, from 01/05/2011, the services were not classified under BSS but held to be not taxable under BAS. In this approach of the Department, we see an element of arbitrariness which is anathema to taxation. The taxman should be consistent in the matter of classifying services under Section 65(105) of the Finance Act 1994. The nature of activities should be correctly deciphered from the terms of the relevant agreements and the same should be classified under the appropriate head under Section 65(105) of the Act. It is not open to the taxman to approbate and reprobate in this exercise . A correct decision on the subject refund claims should depend on the correct classification of the output services provided by the assessee to the foreign entities. Hence a remand of the case is warranted.

Where the output services of the assessee are found to be taxable and classifiable under the appropriate head, the next question which would arise in the context of dealing with the refund claims is whether the input services in respect of which the refund was claimed were essential for the assessee to provide the output services to the service recipients located abroad. In other words, one has to detect a nexus between the input services and the output services, without which any refund of unutilized CENVAT credit taken on the input services will not be admissible to the provider/exporter of output services. We find that the original authorities did not have the occasion to determine any such nexus as they found the output services to be non-taxable. Further, where a nexus is found between the input services and the output services, the amount of CENVAT credit to be refunded to the assessee will have to be determined in accordance with the procedure laid down by the Board in Circular No.120 /1/2010 dt. 19/01/2010. On the facts of the present case, therefore, the entire exercise including determination of the nature of output service and its classification, determination of nexus between input service and output service and quantification of refund has to be undertaken at the original level. Therefore, the cases require to be remanded to the adjudicating authorities concerned for de novo adjudication.

In one case( ST/2390/2012), CENVAT credit was denied to the assessee in view of rejection of the relevant refund claim. This would mean that any decision on the refund claim will have a bearing on the admissibility of CENVAT credit to the assessee. Therefore the case against denial of CENVAT credit on input services also has to be remanded to the adjudicating authority concerned.

Appeal No.ST/1172/2012 filed by the assessee is directed against the Commissioner's order demanding service tax of Rs.22.82 crores on the services held to have been received by them from overseas-located service providers and imposing penalties on the assessee. The impugned order was passed in adjudication of a show-cause notice which invoked the proviso to Section 73(1) of the Finance Act 1994 on the alleged ground of suppression of facts by the assessee, for recovery of service tax under reverse charge mechanism. The learned Commissioner dropped the demand for the period prior to 18/04/2006 and confirmed demand to the extent of Rs.22.82 crores for the period from 18/04/2006, the date on which Section 66A of the Act came into force. This demand was based on the finding that the assessee received 'manpower recruitment or supply agency service' from the overseas-based HSBC entities during the said period. In the appeal before us, the assessee has contended that the adjudicating authority travelled beyond the scope of the show-cause notice, that the Commissioner misinterpreted the relation between the overseas-HSBC entities and the employees assigned/deputed by them to the appellant, that no services classifiable under 'manpower recruitment or supply agency services' were received by the appellant from the overseas-entities and hence the appellant did not have service tax liability under the reverse charge mechanism, and that the appellant had always been maintaining the bona fide belief that they were not liable to pay service tax on the employees assigned to them by the overseas-entities and therefore the extended period of limitation was not invocable in this case. The appellant has also relied on case law on various points. On a perusal of the impugned order, we find that some of the submissions made by the assessee were not considered by the adjudicating authority . No plea of revenue-neutrality was raised before us on behalf of the assessee. If this plea was made in their reply to the show-cause notice, the same may also be considered by the Commissioner while dealing with the limitation issue . In the result, the liability, if any, of the assessee under Section 66A ibid, the invocability of the proviso to Section 73(1) ibid etc. need to be re-examined by the adjudicating authority. In this view of the matter, the dispute covered by appeal No.ST/1172/2012 is also found to be fit for remand.

In the result, the impugned orders are set aside and these appeals are allowed by way of remand to the respective adjudicating authorities for de novo adjudication of the disputes in accordance with law.

(See 2013-TIOL-918-CESTAT-BANG)