The export of services from India, which is exempt from service tax, is governed by the Export of Services Rules, 2005, first introduced in March of that year. There has since been a series of legislative amendments, and litigation in the area.
A key question concerns what activities constitute an “export of service” vis-à-vis services classified under category 3 for applying the criteria set out in the export rules. Until recently, the settled position has been that an export of service occurs if the recipient of the services is located outside India, and the benefit of the services (“beneficial enjoyment”) accrues outside India. This position was clarified and confirmed through decisions of the Customs, Excise and Service Tax Tribunal in the cases of Blue Star, ABS and Gap International Sourcing India, and also an administrative circular of 24 Feburary 2009 issued by the Central Board of Excise and Customs (CBEC).
However, a recent ruling by the tribunal in relation to an application for stay of demand for service tax in the case of Microsoft Corporation v CST, has called this settled position into question.
Microsoft Corporation (Microsoft India) entered into an agreement with Microsoft Operation of Singapore (Microsoft Singapore), under which it was to provide product support and consulting services in relation to the marketing of Microsoft products in India, and was to be paid for these services on a cost plus basis. Microsoft India classified its services as “business auxiliary services” (in terms of the classification provided in Service Tax law) and sought exemption from service tax on the ground that the services qualify as exports under Category 3 of the rules. Microsoft India contended that the service recipient (Microsoft Singapore) is located outside India, and that payment for the services was received in foreign currency. Microsoft India also argued that the conditions that the services must be “delivered outside India” and “provided from India and used outside India” should be interpreted to mean that the benefit of the services accrues outside India, irrespective of the place of performance. In this case, although Microsoft India performed the services in India, it was argued that ultimately the services were consumed by Microsoft Singapore, outside India. Microsoft India relied on the CBEC circular and the earlier decisions of the tribunal for this case.
The tribunal held that the marketing support services provided by Microsoft India to Microsoft Singapore under the agreement resulted in the supply of goods or provision of services to customers in India only, and that India was the place of ultimate use and beneficial enjoyment. Consequently, the services were not used outside India, and so do not constitute an export of services under the rules.
The tribunal relied on the Supreme Court’s decision in All India Federation of Tax Practitioners v Union of India. In its judgment the court found that there is no distinction between the consumption of goods and consumption of services, as both satisfy human needs. The court further noted that service tax is a kind of value-added tax that is a destination-based consumption tax, since it is levied on commercial activities at the point of customer consumption (rather than directly on the business providing the service); and thus is leviable only in a country where the services are consumed.
Interestingly, the tribunal focused on services provided to end consumers in India by Microsoft Singapore. However, it should have restricted its scrutiny to the services provided by Microsoft India to Microsoft Singapore, which were in pursuance of a distinct commercial agreement.
Further, it should be noted that it is a globally accepted principle across jurisdictions that where the beneficial enjoyment of a service is outside the territory of a taxing jurisdiction, then the same is treated as an export of service. The tribunal did not explain, substantiate or justify its finding that the marketing services Microsoft India had agreed to provide to Microsoft Singapore were in fact “delivered” to end-use customers in India.
Finally, the tribunal’s order equated the term “use” with performance or rendition of service. However, the rules recognize a difference between performance and use, and the terms “performed” and “used” have been consciously used by the legislature in the context of the rules as distinct terms with different meanings.
The tribunal’s order unsettles the certainty that had previously been established on the question of how export of service is defined. The decision on the appeal is thus being eagerly awaited.
A writ petition filed by Microsoft India before Delhi High Court, seeking modification to the terms of the tribunal’s order as regards pre-deposit of taxes, was dismissed by the court as not being a fit case to interfere with.
Until the present controversy is settled, assessees seeking to contest orders for recovery issued by the revenue authorities must do so on the basis that since the orders have been issued in the context of a stay application, and are interim orders that do not finally and conclusively decide an issue, the tribunal’s order in the Microsoft case cannot be used as a precedent for deciding similar issues.
Parties entering into contracts, and parties currently preparing new contracts, should carefully draw up the terms to establish an export of services avoid similar controversies.
Rohan Shah is the managing partner at full-service law firm Economic Laws Practice. The firm is headquartered in Mumbai, and has offices in New Delhi, Pune and Ahmedabad.
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