WP (C) No. 11460/2009 nsk Page 1 of 26 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 WP (C) No. 11460/2009 nsk Page 2 of 26 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 WP (C) No. 11460/2009 nsk Page 3 of 26 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 WP (C) No. 11460/2009 nsk Page 4 of 26 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 :- WP (C) No. 11460/2009 nsk Page 5 of 26 “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 WP (C) No. 11460/2009 nsk Page 6 of 26 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 WP (C) No. 11460/2009 nsk Page 7 of 26 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, WP (C) No. 11460/2009 nsk Page 8 of 26 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; WP (C) No. 11460/2009 nsk Page 9 of 26 (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.” WP (C) No. 11460/2009 nsk Page 10 of 26 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 :- WP (C) No. 11460/2009 nsk Page 11 of 26 (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." WP (C) No. 11460/2009 nsk Page 12 of 26 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: WP (C) No. 11460/2009 nsk Page 13 of 26 “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