Custom, Excise & Service Tax Tribunal
Bayer Bio Science Pvt Ltd vs Hyderabad-Ii on 26 February, 2019
(1)
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
REGIONAL BENCH AT HYDERABAD
Division Bench
Court - I
Appeal No. Appellant Respondent Impugned Order
OIA: 28/2010-ST dt.4.5.2010 ST/2079/2010 passed by CCCE & ST, Hyderabad
- II OIO: 54/2012-ST dt.31.12.12 ST/25939/2013 passed by CCCE & ST, Hyderabad Bayer Bio CCCE & ST,
- II Science Hyderabad -
OIA: 127/2013-ST dt.27.8.13
Pvt Ltd II
ST/28551/2013 passed by CCCE & ST, Hyderabad
- II
OIA: 126/2014-ST dt.29.10.14
ST/20174/2015 passed by CCCE & ST, Hyderabad
- II
Appearance:
Shri Prasad Paranjapa, Advocate for the Appellant
Shri B. Guna Ranjan, Superintendent/AR for the Respondent. Coram:
HON'BLE Mr. M.V.Ravindran, MEMBER (JUDICIAL) HON'BLE Mr. P. Venkata Subba Rao, MEMBER (TECHNICAL) Date of Hearing: 29.01.2019 Date of Decision: 26.02.2019 FINAL ORDER No. A/30262-30265/2019 [Order per: P.V. Subba Rao.]
1. The facts of these four cases are that the appellant has an agreement with M/s Aventis Crop Science GmbH (herein after referred to as M/s Aventis) located in Germany under which they provide services to their client. The appellant has a plant breeding team which looks for specific traits from the germplasm and then they cross pollinate such plants with existing parental lines. After cross pollination, they test the varieties so produced continuously for 7 to 9 years across the country in different agro climatic zones to check their performance and stability. After evaluating, they send their reports to their client to M/s Aventis who file a patent application and obtain Intellectual Property Rights (IPR) for hybrid seeds so produced. The first element of the (2) demand from the department is to charge the amount which the appellant received from M/s Aventis under 'scientific and technical consultancy service'.
The appellant also has another set of agreements with the farmers under which they engage farmers to multiply the seeds so developed. The appellant has exclusive right to multiply the hybrid seeds which they provide to farmers for multiplication and purchase the seeds so produced for a price as decided. In order to enable the farmers to multiply these seeds effectively the appellant also provides them technical guidance and support and charges a fee from the farmers for such guidance. The second demand is on the amounts which the appellant collected from the farmers for providing such technical guidance under the head 'scientific and technical consultancy service'. In the impugned orders the demands were confirmed along with interest and penalties were imposed which are subject matter of these appeals.
2. Before we proceed further it would be profitable to discuss, in brief, the process by which modern agriculture has developed. It is based on seed-water- fertilizer technology which relies on developing seeds of new varieties and hybrids which can consume more water and fertilizer and produce larger yields. The entire green revolution which has eliminated famines from the world is based primarily on this technology of which Norman Borlaug is considered the father. Of these three elements the first viz. seeds are the issue in dispute. Development of new varieties of seeds involves identification of appropriate parent lines and crossing them through a variety of techniques so as to finally produce seeds which have the desired characteristics and which can produce higher yields. This, in turn, would require collection of a wide variety of plants of the same species but with different characteristics (commonly known as germplasm). The characteristics of each of these plants are tested, seeds of such plants are maintained and through appropriate breeding techniques the characteristics of different plants are combined to develop a variety with the (3) desired characteristics. Since the development of the variety involves considerable cost, the company which produces the variety obtains IPR on it. Thereafter, the company multiplies the seeds of the variety/ hybrid either directly or through farmers and sells them to other farmers for profit. This is the complete business model. The process of multiplication of the hybrid seed or the variety goes through four levels of multiplication commonly called as the breeder's seed, registered seed, foundation seed and certified seed.
3. In this case, the entire process of testing the germplasm and cross pollinating and developing a variety which takes up to 5 to 7 years is done by the appellant for their client M/s Aventis in Germany. This testing is done physically in different agro climatic zones because the plant may perform differently in different regions. After doing all this work including assessing the performance of the so developed, the entire information is turned over by the appellant to their overseas client who obtains IPR for the seed. In the second leg of the transaction, the appellant provides the foundation seed of a variety which has already been developed, to farmers and gets them multiplied with a condition that all the seeds are sold to them. In turn the appellant sells the seeds commercially for a profit.
4. In this background, the department's contention is that the service provided by the appellant to their overseas client is 'scientific and technical consultancy service'. Learned counsel for the appellant submits that entire activity carried out by them is in the nature of execution of work and does not contemplate or involve providing any advice, consultancy or scientific or technical assistance. He further says that they simply carry out cross pollination on the instructions and guidance of their overseas client and communicates the results. He further submits that they are not an organisation qualified as scientific or technical institution or organisation. He submits that the process takes 7 to 9 years and they receive fees from their client. As an alternative (4) argument, he submits that activity carried out by them qualifies as an export of service and hence is not liable to service tax. He submits that impugned order denies exemption only on the ground that the seeds are used in India. He further submits that the Export of Service Rules were introduced in 2005 and prior to their introduction as per notification 21/2003-ST which covers their service from 1-4-2004 to 14.3.2005 they were exempted anyway in view of the fact that they received the remittance in foreign exchange currency. Learned departmental representative asserts that entire nature of work conducted by them is scientific and technical consultancy and they are liable to pay service tax. He further asserts that as per Export of Service Rules, 2005 the services rendered by them to their clients are consumed in India even if the report is received by their client in Germany.
5. We have considered the arguments on both sides on this point and find that activities undertaken by the appellant form the heart and soul of the entire plant breeding programme which results in development of new varieties such seeds are the essence of modern agriculture and green revolution. These activities start from testing germplasm to cross pollination to developing varieties and testing them in agro climatic zones continuously for a period of 7 to 9 years to ascertain their performance in Indian conditions. The activity undertaken by the overseas client is accepting those reports and filing for necessary patents. He also provides guidance to the appellant on conducting the research. Under these circumstances, we find that the appellant is only rendering scientific and technical consultancy services. We also find no force in the argument of the appellant that they are not a scientific or technical research institution or an organisation. They are definitely an organisation engaged in doing scientific research. Scientific research is not confined to fundamental research but can also be applied research. Learned counsel also tried to impress upon us that plant breeding is not science which we find without any force. If (5) plant breeding is not a science at all then nothing in the modern agriculture which resulted in green revolution is science. We find that the appellant, under the first agreement, rendered scientific and technical consultancy services to their overseas client and received consideration in foreign exchange. For the period 01.04.2004 to 14.03.2005, they are not liable to pay service tax as they were covered by the exemption notification 21/2003-ST. With respect to the service tax post introduction of the Export of Service Rules, in terms of Rule 3(1), where the taxable services are performed partly outside India and partly in India it shall be treated as an export of taxable service. In this case, the entire research including cross pollination and testing of the germplasm and testing the variety so developed is done within the country but the reports were delivered to Germany. The service is complete only when the reports are also sent to their client as per the agreement in Germany. Until the report is delivered the service is not complete and the appellant is not entitled to the consideration for the service. Therefore, we find in this particular case that the service by the appellant is rendered partly outside India and partly in India although the part rendered outside India is very small. In terms of Rule 3(1) of the Export of Services Rules such services should be treated as export of services. The learned adjudicating authority had held that these cannot be considered as export of service because the overseas client ultimately uses for promotion of his sales of the new varieties developed in India and the services provided by the assessee will be utilized in India. He reasoned that the services rendered by the assessee do not qualify as export of services. We do not agree with this view. The scientific and technical consultancy services provided to their overseas client is one leg of transaction which ends when the reports are delivered to their client in Germany. The service tax proposed to be charged is on this leg of transaction. After having received the reports the clients in Germany files applications for and obtains IPR and thereafter the second phase (6) of the activity viz., multiplication of the seeds developed and their sale in India begins. The service in question is not relatable to the second phase of the activity which begins only after they have obtained IPR. Therefore, we find that the services in question are delivered partly outside India and partly within India and the payment for the services is received in foreign exchange and hence these services should be treated as export of services and therefore they are not liable to service tax on these services.
6. Insofar as the second element of demand is concerned, we find the appellant is providing guidance to farmers in cultivating crops to multiply the seeds of the variety so developed. The appellant himself buys the seeds so multiplied by the farmers and pays a price for that. In order to help the farmers multiply these seeds effectively the appellant provides guidance. Such guidance, in the field of agriculture is known as extension-education which is a branch of agricultural science which deals with transferring the knowhow to farmers. This does not involve any scientific or technical research but only in passing on knowhow to the farmers about the agronomic practices to be followed and guiding them from time to time if there are any pest infestations, diseases etc. In our view, these services cannot be termed as scientific or technical consultancy services. Therefore, the demand on this element also fails. In view of the above, we find that the appellant is not liable to pay service tax on both the services rendered by them and the demands, interest as well as the penalties are liable to be set aside and we do so.
7. The appeals are allowed and the impugned orders are set aside.
(Pronounced in the Open Court on 26.02.2019)
(P.VENKATA SUBBA RAO) (M.V. RAVINDRAN)
MEMBER (TECHNICAL) MEMBER (JUDICIAL)
Veda