ST - Whether it is Technical testing or Repair, it is accepted that employees sitting in India have to access servers abroad - location of client cannot be uncoupled from performance of service and as at least some portion of service is rendered outside country, these services are outside ambit of taxation: CESTAT
By TIOL News Service
MUMBAI, FEB 15, 2016: THIS is a Revenue appeal against the order passed by Commissioner of Central Excise, Pune-III covering six show cause notices in connection with 369 projects executed by the respondent. M/s HSBC Software Development (India) Pvt. Ltd has filed cross-objection under section 86(4) of the FA, 1994 and this is also taken up as an appeal filed by the assessee.
The impugned order has confirmed tax demand of Rs.5,42,40,164/- while dropping the demand for Rs.1,27,12,457/- in show cause notice dated 5 th August 2008 and dropping proceedings entirely in the other five show cause notices.
The dropped demand in the first SCN (and the other five) relates to ‘technical testing and analysis' service while the confirmed demand in the first SCN relates to ‘maintenance or repair service'.
The facts are that HSBC Software Development (India) Pvt. Ltd undertakes software development and software implementation for the HSBC group companies across the globe. In the course of handling these projects, their activities include ‘technical testing and analysis agency' service and ‘maintenance and repair service'.
Revenue contends, in the grounds of appeal, that the adjudicating authority has not considered the specific requirement as per Rule 3(1)(ii) of Export of Service Rules, 2005 that performance of service, even partly, out of India is a necessary condition for treating the rendition of both these services as exports. It is claimed that the activities in relation to testing of software and maintenance/ repair of software is executed off-site i.e. from India and hence the services are taxable.
According to the respondent, 97% of their services are rendered to foreign clients and are provided by accessing the server/system of the client located outside India through internet and that, to the extent that these services have the effect of making the software functional at the client's end, at least a part of the service is performed outside India. According to the assessee, the reasoning of the adjudicating authority was no less applicable for the period prior to 1 st March 2008 also in relation to ‘management, maintenance or repair' service.
The respondent also relied upon the following decisions in support - SGS India Pvt Ltd 2014-TIOL-580-HC-MUM-ST, BA Research India Ltd 2010-TIOL-1134-CESTAT-AHM, Nestle India Ltd 2014-TIOL-930-CESTAT-DEL, Aztecsoft Ltd 2013-TIOL-1541-CESTAT-MUM.
The Bench observed-
6. …, we note that the cogent and reasoned findings of the adjudicating authority, in relation to ‘technical testing and analysis service' and ‘management maintenance and repair service for the period after 1 st March 2008, have not, even peripherally, been countered in the grounds of appeal. Mere assertion that ‘performance in India' is the meaning assigned to it by the reviewing Committee will not suffice to overrule the provisions of the law and precedent judgements examined in the impugned order. Indubitably, the incorporation of ‘information technology software' in section 65 (106) of Finance Act, 1994 defining ‘technical testing and analysis' can have no implication other than it being outside the tax net prior to 16 th May 2008. That the activity of the respondent is in relation to software has been accepted by Revenue. The reliance placed by the original authority on the amendment to the statutory provision with effect from 1 st March 2008 viz. second proviso to Rule 3(1)(ii) of Export of Service Rules, 2005 deeming the use of internet and electronic network in relation to certain specified services performed on goods et al located outside to drop the demands for the period after the amendment can only be endorsed. When there is a specific deeming of exports in a particular circumstances that squarely fits the activities of the respondent, reference to the meaning of a specific phrase in the general provision is irrelevant.
8. Whether it is ‘technical testing and analysis' or ‘management, maintenance or repair' that is performed on software of the clients of the respondent, it is accepted that expert employees sitting in India have to access the servers/computer networks abroad. The performance of these operations is manifested in the efficient and smooth working of the software in the operations of the client. The location of the client cannot be uncoupled from the performance of the service. And as at least some portion of the service is, thereby, rendered outside the country and hence the renders these services outside the ambit of taxation even before 1 st March 2008…."
Placing reliance on the Bombay High Court decision in SGS India Pvt Ltd 2014-TIOL-580-HC-MUM-ST the Bench concluded -
"9. Accordingly the truncated demand for tax and interest in the impugned order does not also survive. The question of penalties does not arise."
The appeal of Revenue was rejected and that of the assessee was allowed.
(See 2016-TIOL-415-CESTAT-MUM)
