Custom, Excise & Service Tax Tribunal
Wipro Limited vs Pondicherry on 4 September, 2024
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
CHENNAI
REGIONAL BENCH - COURT NO. III
Service Tax Appeal No. 40206 of 2013
(Arising out of Order-in-Original No. 28/2012(C) dated 19.10.2012 passed by Commissioner of Central
Excise, No. 1, Goubert Avenue (Beach Road), Puducherry - 605 001)
M/s. Wipro Limited ...Appellant
No. 10, Thiruvandar Koil,
Thirubhuvanai,
Puducherry - 605 102.
Versus
Commissioner of GST and Central Excise ...Respondent
Puducherry Commissionerate,
No. 1, Goubert Avenue,
Beach Road,
Puducherry - 605 001.
APPEARANCE:
For the Appellants : Mr. S. Muthuvenkataraman, Advocate
Mr. Ramani Venkat, Company Representative
For the Respondent : Mr. C. Subramanian, Authorised Representative
CORAM:
HON'BLE MS. SULEKHA BEEVI C.S., MEMBER (JUDICIAL)
HON'BLE MR. VASA SESHAGIRI RAO, MEMBER (TECHNICAL)
FINAL ORDER No.41173/2024
DATE OF HEARING : 10.07.2024
DATE OF DECISION: 04.09.2024
Order :- Per Ms. SULEKHA BEEVI C.S.
Brief facts are that the appellant is engaged in providing
Information Technology Software Service (ITSS) and are registered with the
Service Tax Commissionerate w.e.f. 16.05.2008 onwards.
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1.2 It is the case of the Department that the appellant received IT
Services provided to them from outside India viz., M/s. Microsoft
Corporation, Singapore (herein after referred to as 'Microsoft'). Appellant
paid service tax on charges paid to Microsoft for services received by them
under reverse charge basis in terms of Section 66A of the Finance Act, 1994.
The services received from Microsoft were used for providing output services
to domestic consumers. The appellant paid service tax on output IT Services
provided by them.
1.3 On intelligence gathered and upon verification of accounts, it
was noted by the Department that appellant had entered into an agreement
(Microsoft Channel Agreement) with Microsoft as a Large Account Reseller
under which Microsoft has authorised appellant to distribute / sell Microsoft
Licences to domestic customers. The Agreement provides for 'Microsoft
Volume Licensing Programme-Select and Enterprise Scheme'. As per the
said Scheme, the end customers having huge number of computers, say
200-250 can obtain the License from Microsoft for the right to use the
software through the Large Account Re-seller instead of obtaining the
software in physical form. It is the case of the Department, that as per the
Agreement, Microsoft would sell Software Licence (i.e., Title for the right to
use the Microsoft software) for distribution / sale to the appellant and issue
invoice and receive the payment from the appellant in foreign currency. The
appellant in turn would distribute / sell the Software Licences to end
customers. The appellant would also issue invoices to the end customers
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who are SEZ as well as domestic customers. Thus, Microsoft has authorized
the appellant to distribute / sell the Software Licences in a specific territory
to the end customers.
1.4 The Department was of the view that Microsoft has provided IT
Services as defined under Section 65 (105)(zzzze) to the appellant which is
subject to levy of service tax w.e.f. 16.05.2008. Microsoft having provided
IT Services and the appellant being the service recipient is liable to pay
service tax for the disputed period from March 2009 to September 2009
under reverse charge basis on the payments made by the appellant to
Microsoft. The procedure involved in receiving IT Services by appellant
(M/s. Wipro) from Microsoft as per SCN is as under: -
i. The End Customer would approach Microsoft for the license of
Software required by them and Microsoft in turn would direct the End
Customer to the Large Account Re-seller for the specific area, in this
case M/s. Wipro.
ii. M/s. Wipro's Product Team in Bangalore would discuss the
requirements with the customers and the customer would place the
purchase order on Wipro for the Software Licenses. Based on the
above Purchase order, M/s. Wipro in turn would place purchase order
on Microsoft, Singapore.
iii. Microsoft would confirm the order and issue order confirmation in the
form of email to Wipro and subsequently issue invoice on M/s. Wipro.
The End-Customers name is also mentioned in the said invoices issued
by Microsoft.
iv. M/s. Wipro would declare the import of Software License to the
Customs Authority with the Chartered Accountant certificate, copy of
invoice and documents as per the RBI Circular. No customs duty is
paid as the product is described as paper licenses (Document of Title
conveying the right to use Information technology Software) and
classified the same under Chapter Heading 4907.00.30, which are
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completely exempted from Customs Duty. After Customs Clearance,
Goods Receipt Notes are issued for the receipt of Software License and
the numbers of licenses received are accounted in the books of Ms.
Wipro.
v. Based on the invoices issued by Microsoft, Service Tax is paid by M/s.
Wipro on the prices declared in the said Microsoft invoices on "Reverse
Charge Basis under Section 66A of the Finance Act, 1994" read with
Rule 2 (1)(d) (iv) of Service Tax Rules, 1994 (as recipient of service)
as a deemed Service Provider. The Service Tax is paid only after the
payment in foreign currency is made to Microsoft. For calculating the
Service Tax liability, a work sheet in a particular month based on
payment made to Microsoft against invoices is prepared. The service
tax is paid under GAR-7 challan as per the amount arrived at in the
work sheet. The amount so paid under GAR-7 is availed as input
service credit.
vi. Likewise, for the Outward IT Service provided by M/s. Wipro (i.e. sale
of Software Licenses to domestic customers), invoices are issued on
the end customer by M/s. Wipro. Service Tax is paid on the said
invoice prices after the payment is received from End Customer. The
credit availed on the import of service is used for payment of Service
Tax on the outward service and the balance is paid in cash.
vii. The End-Customer can directly download the software from the
Microsoft Portal after receiving the licenses through invoices from M/s.
Wipro.
1.5 The evidences collected by Department to conclude that
appellant has received IT Services from Microsoft as alleged in the Show
Cause Notice is as under:-
"6. Evidence in Support of Receipt of IT Services by M/s. WIPRO
The following facts are relevant in this regard: -
i) The "Microsoft Volume licensing Reference Guide" available on the
Microsoft website clearly specifies that the software acquired
through "Microsoft volume licensing scheme" is a software license
only and it provides the right to run / use the Microsoft Software
Product. Thus, M/s. Wipro is acquiring software license only.
Further, they have declared to the customs that they are procuring
and importing software license only."
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1.6 It is alleged that Microsoft has authorized appellant to distribute
/ sell the software licenses (right to use the software) and appellant in turn
has distributed / sold the licensed software to customers including SEZ units.
This activity of providing the right to use the IT Software for distribution /
sale would fall within the definition of IT Services. The appellant has made
payments to Microsoft in foreign currency. The appellant obtained
registration under IT Services and discharged service tax on reverse charge
basis as a deemed service provider.
1.7 On verification, it was seen that appellant failed to pay service
tax on the IT Services received from Microsoft in cases where such services
were received and then provided to SEZ units like M/s. Covensys, M/s.
Cognizant Technology Solutions Pvt. Ltd., Macmillan Publishing Solutions,
Aditi Technologists, etc. In other words, where the end customers are SEZ
units, the appellant did not pay service tax on the IT Services received from
Microsoft. It was noted by the Department that the appellant was following
the same procedure, in case of customers located within SEZ unit and
domestic customers located outside SEZ. However, though the appellant
paid service tax for IT Services received from Microsoft and intended for
domestic customers (located outside SEZ) had failed to pay service tax on
services intended for distribution / sale of software for customers located
within SEZ.
1.8.1 It is also alleged that though the appellant has provided services
to SEZ units, the exemption from payment of service tax under Notification
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No. 04/2004 dated 31.03.2044, Notification No. 09/2009 dated 31.30.2009
and amended by Notification No. 15/2009 dated 15.05.2009 is not available
to the appellant as these Notifications are applicable only to the service
providers providing service to SEZ. The Notification is not applicable to IT
Services received from outside India for which the recipient is liable to pay
service tax under reverse charge basis.
1.8.2 The appellant is therefore liable to pay service tax of
Rs.14,83,51,647/- being the service tax liable to be paid under reverse
charge mechanism for IT Services received from Microsoft (outside India)
and intended for distribution / sale to SEZ units for the period from
16.05.2008 to 15.09.2009.
1.8.3 From the records, it was noticed that M/s. Cognizant Technology
Solutions India Private Limited, a DTA, Non-SEZ customer had placed
purchase order on appellant as purchase order dated 20.02.2008 for various
software licenses for total value of Rs.58,66,99,823/-. The appellant in turn
had placed an order for the software licence to Microsoft, Singapore. The
invoice issued by Microsoft is dated 22.02.2008 which is prior to 16.05.2008.
These licences were received in appellants Puducherry unit on 18.07.2008.
Appellant had not paid service tax on the invoice dated 22.02.2008, but had
adjusted the service tax paid for IT Services received and intended for SEZ
towards the invoice of Cognizant Technologies. Such adjustment is not
proper. As per the service tax details for the month of September 2008,
January 2009, February 2009 and March 2009, it was noted that the
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appellant had paid service tax in respect of invoices issued to Aditi
Technologies, Macmillan Publishing, Cognizant Technology Solutions, Metlife
Global Operations Support, Novelis India Infotech and Sasken
Communication Technologies. The appellant on the pretext that they are not
required to pay service tax on IT Services meant for SEZ customers, have on
their own, without informing the Department, adjusted. The service tax paid
for SEZ towards the invoices of the above customers. There short payment
of Rs.86,92,073/- by such adjustment for the month of March 2009.
1.8.4 The appellant while making payment of service tax in respect of
Microsoft invoice meant for end customers Aditi Technologies-SEZ units had
worked out service tax on the basis of US Dollars instead of Indian Rupees
and thereby paid lesser service tax during the month of September 2008.
For this reason, they have paid lesser service tax to the tune of
Rs.10,73,293/-.
1.8.5 It thus appeared to the Department that the appellant had
properly paid the service tax of Rs.6,24,50,069/- for the IT Services received
from Microsoft and intended for SEZ units. The adjustment resorted to by
appellant is in violation of law and therefore they had short paid service tax
to the tune of Rs.5,37,57,996/- by resorting to wrongful adjustment they
had short paid service tax for the month of March 2009 to the tune of
Rs.86,92,073/-. They had paid lesser service tax to the tune of
Rs.10,73,293/- by calculating service tax wrongly on the basis of US Dollars.
Thus, there is a short payment of service tax of Rs.6,35,23,362/-.
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1.9.1 As per the records, the appellant paid service tax of
Rs.6,24,50,069/- for the services received from Microsoft and intended for
providing to SEZ units which they have subsequently adjusted. The
appellant also availed input service tax credit of the said amount which is
ineligible. As per Notifications No. 04/2004, No. 09/2009 and No. 15/2009,
the exemption is available for the output services (IT Services) provided to
SEZ units. These services being consumed in SEZ are completely exempted
from service tax. The appellant having provided the IT Services to SEZ units
they are not eligible to avail credit as per the above exemption Notifications.
1.9.2 In terms of Rule 2(l) read with Rule 3 of CENVAT Credit Rules,
2004, the service tax paid on any input services can be availed as input
service credit and the same can be utilised for payment of output service
tax. The appellant has utilised the input service tax credit for providing
output service to domestic and non-SEZ customers and the credit availed
was also utilised for payment of service tax on output services. Rule 6(1)
read with Rule 2(e) of the CENVAT Credit Rules, 2004, says that credit is not
eligible for exempted services. In the present case, IT Services provided by
appellant to above mentioned SEZ units are completely exempted from
payment of service tax as per the Notifications. In such circumstances, the
input service tax credit availed by the appellant to the tune of
Rs.6,24,50,068/- is ineligible.
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1.10 On verification of their output services and service tax liability
statement, it was noted that appellant received IT Services from Microsoft,
Singapore which were for their own use in Wipro Technologies and Wipro
BPO divisions, which are integral part of the appellant company. The
appellant ought to have paid service tax under reverse charge basis for the
IT Services received from Microsoft, Singapore for their own use. They have
not discharged service tax on IT Services received by them meant for their
own divisions located in DTA, there is a short payment of service tax on
Rs.1,94,52,275/- for this reason.
1.11 On verification pertaining to output service and various purchase
orders, it was noted that the appellant has received IT Services from
Microsoft, Singapore for their own use in customer care division,
infrastructure division, etc., which are integral part of the appellant
company. In this case, the IT Services received from Microsoft are neither
used for the manufacture of any excisable goods nor for providing any
output services. It is put to their own use of developing software in their
offices. Hence, the appellant is not eligible to avail credit. In the above
cases, the appellant has paid service tax under reverse charge mechanism
even though the software was meant for their own use in the various
divisions. The credit to the tune of Rs.2,24,51,388/- is thus ineligible.
1.12 On verification of records, it was noted that software licences
received from Microsoft have been returned to Microsoft as rejected / not
required etc., in certain cases. The payment made to Microsoft for these
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licences are made only after completion of 70 days from the date of receipt
of software licences / Microsoft invoices. It was noted that the rejection has
taken place 70 days before any payment is made to Microsoft. In such
cases, Microsoft issued an RMA (Rejected Material Advice) invoice to the
appellant. The RMA invoice is like a credit note and is issued to neutralize
the earlier invoices issued in their books of account. Thus, no input service
has been received by appellant against the RMA invoices. The appellant paid
service tax on the RMA invoices inadvertently treating them as regular
invoices. They have paid service tax without actually receiving any services.
The credit to the tune of Rs. 19,02,796/- is ineligible. The appellant also
availed input service credit of the tax paid by them which is ineligible.
1.13 After availing the credit, the appellant has used the credit to
discharge the service tax liability in subsequent months. For this reason, the
service tax for the subsequent months has become short paid to the tune of
Rs.19,02,796/-.
1.14 On scrutiny of records, it was noticed that for the month
December 2008, the appellant had paid service tax to the tune to
Rs.17,99,073/- on the MOLP software licences received from M/s. IP
Softcom, a domestic service provider of IT services. The appellant
inadvertently included the same in the liability statement for service tax as
tax paid under reverse charge mechanism. The appellant also availed credit
of the service tax paid by them and reflected it in ST-3 returns for the month
of December 2008.
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1.15 After availing such credit, the appellant has used such credit for
payment / adjustment of service tax liability for import of services for the
month of January 2009 which is in violation of law. The appellant has thus
short paid service tax for the month of January 2009 to the tune of
Rs.17,99,073/-.
1.16 Further, it was noticed that appellant has been preparing among
their service tax liability statements for each month based on the payments
made to Microsoft, Singapore. However, on reconciliation of Microsoft ledger
and monthly statements, the appellant on two occasions has failed to consider
the entire amount paid to Microsoft. The appellant has taken into consideration
only part of the amount for the purpose of calculating the service tax liability
under reverse charge basis. By resorting to this method, the appellant has
short paid service tax to the tune of Rs.17,17,672/-.
1.17 Further, on verification of invoices, it was found that appellant
failed to pay service tax on IT Services received from Microsoft for their
domestic and non-SEZ customer viz., M/s. Biocon Limited and M/s.
Cognizant Technologies vide invoices dated 26.06.2008 and 22.02.2008,
respectively. Though the appellant contends that they have not paid service
tax for SEZ customers and have discharged service tax in respect of
domestic customers, it was found that they have not paid service tax in
regard to the above 2 domestic customers. The appellant has thus short
paid service tax of Rs.25,94,764/-.
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1.18 On further verification, it was found that the appellant has
transferred an amount Rs.18,44,85,113/- as CENVAT credit to their
Bangalore unit, under Central Excise invoice dated 17.08.2010. The said
credit was lying in the trading unit and has been transferred after the
closure of the trading unit at Pondicherry. In terms of sub-Rule (2) and (3)
of Rule 10 of CENVAT Credit Rules, 2004, transfer of CENVAT credit shall be
allowed only if stock of inputs or capital goods, semi-finished goods are
transferred. There is no provision in Rule 10 of CCR, 2004 for transfer of
unutilised CENVAT credit of input service lying in the books of account.
Hence, the transfer of CENVAT credit is not in order. It is pertinent to
mention that the trading unit at Pondicherry was merged with the Bangalore
unit on 15.09.2009 but CENVAT Credit was transferred only on 17.08.2010.
The appellant has contravened the provisions of Rule 10 and is liable to pay
penalty under Rule 15 read with 15A of CENVAT Credit Rules, 2004.
1.19 The appellant suppressed various facts and fully misstated facts
relating to various issues with intention to evade payment of service tax.
1.20 Show Cause Notice dated 21.10.2011 was issued to the
appellant invoking the extended period and raising the above allegations.
The Show Cause Notice proposed to disallow credit, demand the short-paid
service tax along with interest and for imposing penalties. After due process
of law, the Original Authority dropped the demand alleging ineligible credit of
Rs.6,24,50,068/-. However, the various other demands were confirmed
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with interest and imposed penalties. Aggrieved by such order, the appellant
is now before the Tribunal.
2.1 The Ld. Counsel Shri S. Muthuvenkataraman appeared and
argued for the appellant. The Ld. Counsel adverted to para 20 of the Show
Cause Notice to point out the issues on which the demand has been raised in
the Show Cause Notice. These issues are as under:-
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2.2 The first issue is the demand of Rs.14,83,51,647/- raised
alleging that the appellant has received IT Service from Microsoft for which
payments were made by appellant to Microsoft and such payments being
consideration paid by appellant is liable to pay service tax on such
consideration on reverse charge basis, as a service recipient. It is alleged in
Show Cause Notice that Microsoft has given the appellant, the right to sell
software (Licence) and this activity falls within the definition of Information
Technology Software Services.
2.3 The definition of Information Technology Services introduced
w.e.f. 16.05.2008 was referred to by the Ld. Counsel and reads as under:-
"Section 65(105)(zzzze) to any person, by any other person in relation
to information technology software Including,-
(i) development of information technology software,
(ii) study, analysis, design and programming of information
technology software,
(iii) adaptation, upgradation, enhancement, implementation and other
similar services related to information technology software,
(iv) providing advice, consultancy and assistance on matters related to
information technology software, including conducting feasibility
studies on implementation of a system, specifications for a
database design, guidance and assistance during the startup
phase of a new system, specifications to secure a database,
advice on proprietary information technology software,
(v) [providing] the right to use information technology software for
commercial exploitation including right to reproduce, distribute
and sell information technology software and right to use
software components for the creation of and inclusion in other
information technology software products,
(vi) [providing] the right to use information technology software
supplied electronically;]"
Prior to 2009: -
Instead of 'providing', the word was 'acquiring'.
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2.4 The Ld. Counsel submitted that Department alleges that
appellant has received services from Microsoft which would fall under sub-
clause (v) of the definition. The definition had undergone an amendment in
2009 (16.05.2009) which was made applicable retrospectively. By the
amendment the word 'acquiring' was substituted by the word 'providing'.
The period involved in the present dispute is after the amendment. In any
case, the said substitution is applicable retrospectively. The Ld. Counsel
argued that the allegation of the Department, that Microsoft has provided
Information Technology Software Services (IT Services) to the appellant is
factually and legally wrong. The case of the Department is that Microsoft
has sold the Software to the appellant and that the appellant has been given
the right of use by which appellant distributes and sells the Software to the
end customers. The Ld. Counsel referred to the Agreement entered by the
appellant with Microsoft dated 01.09.2009. The Agreement is called
Microsoft Channel Agreement - Select and Enterprise (Indirect) Agreement -
Large Account Reseller Authorization. Para 4 of the Agreement reads as
under:-
"4. Licensed Software orders. Company may accept orders and
receive payments for Licensed Software and Software Assurance from
Customers located in the Territory. Company will not accent orders
from any entity other than Customer unless authorized by Microsoft
in writing. Company will not accept orders or receive payments from
any entity other than the Customer unless authorized by Microsoft in
writing. Each Customer will designate a Large Account Reseller for
itself and its affiliates and an Enrolment Company may not accept
orders or receive payment for Licensed Software and Software
Assurance from a Customer outside the Territory. In addition,
Company may not accept orders or receive payment for Licenced
Software or Software Assurance (but may accept orders for
Documentation Components) from any Enterprise (Direct) Agreement
Customer that has an Enrolment directly with Microsoft.
.
.
.
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6. Pricing, purchase orders, purchase order revisions, payment.
a. Pricing. Microsoft's prices for all Customer orders of Licensed Software and Software Assurance are available at the Channel Partner Website or, if applicable, in a channel price sheat Microsoft gives Company in connection with a specific Customer's Enterprise (Indirect) Agreement Enrollment. b. Purchase order submission. Company will submit purchase orders to Microsoft on a regular basis. Details regarding purchase order submission are outlined in the Guide for Large Account Resellers.
c. Purchase order revisions. Company may submit revisions to its Customer purchase orders. Microsoft may require detailed back-up for any purchase order revision. Additional details regarding purchase order revisions. Additional details regarding purchase order revisions are outlined in the Guide for Large Account Resellers.
d. Payment. All payments must be remitted to the account identified in the Guide for Large Account Resellers. e. Credit worthiness and collection guidelines. Company will decide whether or not to extend Credit to its Customers. Company will use commercially reasonable efforts to ensure that each of its Customers i.e. credit worthy before it submits any Customer Agreement to Microsoft, such as by collecting and reviewing financial statements and credit reports. Company must periodically monitor each Customer's continued credit worthiness throughout the Customer Agreement term.
7. Company's representations and warranties. Company represent and warrant that it will: (i) have current access to all of Microsoft's online tools necessary to perform its Large Account Reseller obligations. (ii) use commercially reasonable efforts to service and support its Customers, (iii) Inform Microsoft of any difficulties it encounters in servicing its Customers, (iv) deliver the software CDs and Documentation Components only to the Customer for which they were intended, and (v) promptly tell Microsoft about any known or suspected violations of the terms and conditions of a Customer Agreement by a Customer."
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ST/40206/2013 2.5 The above Agreement would show that Microsoft has not sold Software to the appellant. The appellant has been appointed as a Large Account Reseller for its customer affiliates. The software is a licensed product which is governed by product use rights specific to each product and version of software. The appellant is not given any right to acquire or download the Software. The information, data, etc., of the Software supplied by Microsoft to the customer is relevant to the customer only and the right to use such Software after downloading is given to the customer only. The appellant has no access to such Software. The Software being a licenced product requires grant of licence by the owner viz., Microsoft, in this case. If the appellant downloads the Software, it will result in infringement of intellectual property right. The transaction between Microsoft and appellant is explained by the Ld. Counsel as under.
2.6 The Ld. Counsel has submitted the grounds regarding to this issue as follows:-
i. Appellant is a large account reseller under the volume licensing scheme.
ii. End customer requires license from Microsoft which directs the customer to the larger account reseller. According to the requirements of the customer, an order is placed on the appellant who in turn places and order on Microsoft.
iii. Confirmation email from Microsoft is forwarded to the Customer and invoice is raised by the Appellant. Customer is provided access to a 18 ST/40206/2013 secure Microsoft website from which they can download the licenses software.
iv. License is directly provided to and used by the end customer. The license agreement is directly between the customer and Microsoft. There is no transfer of license first to the Appellant and thereafter to the customer; there is no retransfer of license. Appellant only facilitates the placing of the Customer's order requirements with Microsoft.
v. The secure Microsoft website allows only the end customer to access and download through the use of an access code. The Appellant is not provided with the access code and does not download anything from Microsoft. The license to use/right to use the software could only be granted by Microsoft and not by the Appellant.
vi. Therefore. Appellant is not the receiver of the service directly and it is received by the customer electronically by downloading it. No service provided by Microsoft to the appellant.
vii. Since the software is directly downloaded by SEZ from the Microsoft portal, the SEZ units are the recipient of the service and it is exempt in the hands of the SEZ unit under Section 26 of the SEZ Act. viii. Section 26 of the SEZ Act provides that clearly provides for exemption from Service tax for the SEZ developer and the unit. Since the service in this case is directly provided by Microsoft to the SEZ unit, exemption under SEZ Act would override Section 66A of the Finance Act. SEZ Act also has overriding effect.
ix. Further, license is in the name of the SEZ unit which is the service receiver. Appellant does not have any copyright or right to distribute 19 ST/40206/2013 and therefore cannot be foisted with any liability in any case. Appellant does not have the end use license to distribute any further. x. Just because the appellant raised the invoice and collected the consideration for the supply provided by Microsoft directly to the SEZ units, it does not give rise to two transactions one by Microsoft to the Appellant and then by the Appellant to the SEZ unit. xi. Appellant has paid tax under reverse charge on non-SEZ domestic units Payment for non- SEZ domestic units cannot be the base for the demand on SEZ transaction; payment for non-SEZ domestic units is erroneous.
2.7 The demand has been raised against the appellant alleging that Microsoft has sold the software to the appellant. The payment made by appellant to Microsoft for facilitating as Large Account Reseller has been subject to levy of service tax under ITSS on reverse charge basis. The appellant though is called a Large Account Reseller has no right to sell / distribute the Software. The appellant is not given any right to use or download the Software as per the Agreement. The appellant merely facilitates Microsoft in obtaining orders, collects the money and transmits in foreign currency to Microsoft, supplies PIN to the customers after payment or as agreed by the parties.
2.8 In the process of the transaction, the end customer also enters into an Agreement with Microsoft. The Agreement dated 26.06.2003 entered between Covansys (India) Pvt. Ltd. and Microsoft was referred by 20 ST/40206/2013 the Ld. Counsel. The said company is an SEZ unit. Para 2 of the Agreement reads as under:-
"2. Use and ownership. Unless otherwise specified in a license agreement, use of any product that you Licence from us is governed by product use rights specific to each product and version and by the terms of the Licence agreement under which you licensed the product. We will provide you with a copy of the applicable product use rights or will make them available to you either by publication on the World Wide Web, at meruseti.com/licensing or at a successor site that we identify, or by some other reasonable means. You acknowledge that you have access to the World Wide Web. We do not transfer any ownership rights in any licensed product and we reserve all rights not expressly granted.
Use of any fixes is defined by the product use rights for the affected product or, if the fix is not provided for a specific product, any other use terms we provide. All fixes are licensed to you. Use and ownership of service deliverables will be as set forth in the applicable services agreement and related documents."
2.9 The Ld. Counsel argued that all these would go to show that Microsoft does not transfer the title or ownership of software to the appellant. So also, the appellant has not been provided right to use the software. For this reason itself the activity does not fall under the definition of Section 65(105)(zzzze) of the Finance Act, 1994. At the most, the said activity without admitting would fall under BAS / BSS for the reason that the appellant has facilitated Microsoft for procuring orders, billing and collection of payments. As there is no transfer of right to use the Software by Microsoft to appellant, the demand of service tax raised against the appellant under the reverse charge mechanism invoking Section 66A of the Finance Act, 1994 read with Rule 2(1)(d)(iv) of Service Tax Rules, 1994 (as recipient of service) cannot sustain. The Ld. Counsel referred to the judgment of the Hon'ble Apex Court in the case of Commissioner of Service Tax Vs. Quick Heal Technologies Ltd. [2022 (63) G.S.T.L. 385 (S.C.)]. The Hon'ble Apex Court held that the Software contained in physical form would 21 ST/40206/2013 fall within the definition of goods. The decision rendered by the jurisdictional High Court in the case of M/s. Infotech Software Dealers Association Vs. Union of India [2010 (20) STR 289 (Mad.)] was referred by the Hon'ble Apex Court in the said decision.
2.10 The document furnished by appellant before Customs Authority and relied by Department was explained by the Ld. Counsel. It is submitted that the appellant while receiving the invoices for software by e-mail from Microsoft, Singapore and also for receiving the PIN to be supplied to customer for using the licenced Software, had to comply with the RBI Circular No. 106 dated 19.06.2003. This Circular states that when imports are made in non-physical form, i.e., software or data through internet / datacom channels, a certificate from the Chartered Accountant that the software is received (imported) has to be furnished. The appellant has complied with this requirement. These documents referred by the Department are certificates furnished to Customs Authorities for import of software through internet. The intention of this Circular is to ensure that the foreign exchange paid to Microsoft is for import of software, as the imports are not in physical form. It is submitted that such intimation given to the Customs Department does not in way convey title, ownership or the right to use Software to the appellant. When the Agreement entered between the appellant and Microsoft does not say that the title, ownership or the right to use the Software is given to the appellant, the Department cannot merely rely upon the intimation given to the Customs Department to allege that the title, ownership / right to use the Software has been transferred to the appellant. The Ld. Counsel pointed out that in the said intimation, the Tariff 22 ST/40206/2013 Heading of the documents (Software) is mentioned as CTH 4907. It is not mentioned as 8523 which would apply to downloaded Software contained in media (physical form). This itself would show that the appellant was issuing paper licences to the end customer and has not transferred any title or ownership or right to use the software, as alleged by Department. 2.11 In regard to the issue alleging that there is short payment of service tax of Rs.6,35,23,362/-. The Ld. Counsel submitted that this is regard to software provided to SEZ units. Appellant is not liable to pay service tax under reverse charge basis or forward charge basis. Moreover, the download of software has taken place in most cases before 16.05.2008. 2.12 From the records of the appellant, it was noted by the Department that M/s. Cognizant Technology Solutions India Private Limited which is a non-SEZ customer had placed purchase order on 20.02.2008 on the appellant for various software licenses. Based on the above purchase order, the appellant had placed order on Microsoft, Singapore. After confirming the order, Microsoft, Singapore issued invoice dated 22.02.2008. The licences were received on 18.07.2008 and therefore not subject to levy of service tax as IT Services had not come into force at the date of downloading / invoice. It is alleged that appellant failed to pay service on the transaction with M/s. Cognizant and instead has adjusted the service tax paid for IT Services (under RCM) intended for SEZ customers on the pretext that they are not required to pay service tax and had erroneously paid. The Ld. Counsel submitted that the first issue being the demand in regard to SEZ 23 ST/40206/2013 customer if the first issue is held in their favor this demand cannot sustain. Further, that appellant is not liable to pay service tax as the download by customer happened prior to 16.05.2008, as per agreement with Microsoft. Table in para 5 of the Reply to Show Cause Notice was referred as under: -
The appellant is not liable to pay service tax on these transactions and therefore had adjusted towards the payment in the subsequent quarter. 2.13 Another reason for confirming the demand on this second issue is that the appellant has adjusted the service tax paid by them for payment of service tax for the period September 2008, January 2009, February 2009 and March 2009. In fact, the appellant had paid service tax under reverse charge mechanism on certain IT Services after 16.05.2008 which they are not liable to pay. On realising that they are not required to pay service tax, 24 ST/40206/2013 the appellant adjusted the said tax towards payment of service tax for subsequent period in terms of Rule 6(3) of Service Tax Rules, 1994. The Department has taken the view that the appellant is liable to pay service tax on ITSS provided to SEZ unit and therefore the adjustment done cannot be accepted. On similar allegations, the demand of Rs.6,35,23,362/- has been confirmed.
2.14 On the 3rd to 6th issues, the allegation is that the credit of the service tax paid on IT Services received is not eligible to the appellant.
Since, the appellant had the utilised the credit availed by them for payment service tax, these demands have been confirmed. It is submitted by the Ld. Counsel that if the first issue is considered in favour of the appellant, the demands under these issues cannot sustain.
2.15 The 7th issue is with regard to credit availed on RMA invoices. The appellant had paid the service tax and therefore, the credit availed is legal and proper.
2.16 The allegation in the 8th issue is that the appellant has paid short paid service tax as they had calculated the tax liability only partial amount paid to Microsoft, the Ld. Counsel submitted that the said conclusion is incorrect. The appellant is not liable to pay any service tax under reverse charge basis as there is no services provided to Microsoft. 25
ST/40206/2013 2.17 The 9th issue is with regard to non-payment of service tax on IT Services received from Microsoft and provided to domestic customer. This also has relevance to the first issue and the same arguments are adopted by the appellant. The Ld. Counsel prayed that the appeal may be allowed. 3.1 The Ld. Special Counsel Shri C. Subramanian appeared and argued for the Department. The Show Cause Notice dated 21.10.2011 was referred to explain the allegations. It is submitted that the IT Services received by appellant from Microsoft were used for providing outward IT Services to the domestic customers. During the course of verification, it was noted that the appellant had entered into an Agreement (Microsoft Channel Agreement) with M/s. Microsoft Corporation as a Large Account Reseller under which Microsoft has authorised the appellant to distribute / sell the Microsoft software licenses under Microsoft Volume Licensing Programme- Select and Enterprise Scheme. The Microsoft Channel Agreement Para 4 of the Microsoft Channel Agreement pointed by the Ld. Authorised Representative which reads as under:-
"4. Licensed Software Orders. Company may accept orders and receive payments for Licensed Software and Software Assurance from Customers located in the Territory. Company will not accept orders from any entity other than Customer unless authorized by Microsoft in writing. Company will not accept orders or receive payments from any entity other tan the Customer unless authorized by Microsoft in writing. Each Customer will designate a Large Account Reseller for itself and its affiliates on an Enrolment Company may not accept orders or receive payments for Licensed Software and Software Assurance from a Customer outside of the Territory. In addition, Company may not accept orders or receive payment for Licensed Software or Software Assurance (but may accept orders for Documentation Components) from any Enterprise (Direct) Agreement Customer that has an Enrolment directly Microsoft."
26
ST/40206/2013 Para 6 stipulates about the prising, purchase orders, etc. The said para reads as under: -
"6. Pricing, purchase orders, purchase order revisions, payment.
a. Pricing. Microsoft's prices for all Customer orders of Licensed Software and Software Assurance are available at the Channel Partner Website or, if applicable, in a channel price sheet Microsoft gives Company in connection with a specific Customer's Enterprise (Indirect) Agreement Enrolment.
b. Purchase order submission. Company will submit purchase orders to Microsoft on an regular basis. Details regarding purchase order submission are outlined in the Guide for Large Account Resellers.
c. Purchase order revisions. Company may submit revisions to its customer purchase orders. Microsoft may require detailed back-up for any purchase order revision. Additional details regarding purchase order revisions are outlined in the Guide for Large Account Resellers.
d. Payment. All payments must be remitted to the account identified in the Guide for Large Account Resellers. e. Credit worthiness and collection guidelines. Company will decide whether or not to extend credit to its Customers. Company will use commercially reasonable efforts to ensure that each of its Customers is credit worthy before it submits any Customer Agreement to Microsoft, such as by collecting and reviewing financial statements and credit reports. Company must periodically monitor each Customer's continued credit worthiness throughout the Customer Agreement term."
3.2 As per the Scheme, the end customers have huge number of computers (say 200 to 250) and desired to obtain the licence from Microsoft. They obtain the right to use the software through the Large Account Reseller (appellant) instead of obtaining the software in physical form. As per the above Agreement, Microsoft would sell software (i.e., title for the right to use the Microsoft Software) for distribution / sale to appellant and issue an invoice. Microsoft receives the payment from appellant in foreign currency. The appellant in turn would distribute / sell the said software licences to domestic customers who require the licence. The appellant would also issue 27 ST/40206/2013 invoices on these domestic customers after including a profit margin and received the payment from the end customers. The licences so issued through the invoices under the above Scheme by Microsoft is for a specific period as per requirement of the customer. It can be seen from the Agreement and the transactions that Microsoft has authorised the appellant to distribute / sell the software to the end customers in a specific territory. The title of the software is transferred to the appellant. The appellant distributes / resells the software. The activity therefore falls within the definition of IT Services.
3.3 To support the arguments that the title of the software is transferred from Microsoft to the appellant. The Ld. Counsel adverted to a Letter dated 30.06.2009 issue by the appellant to the Assistant Commissioner of Customs. In the said document, the appellant has stated that they have imported the document of title convey the right to use Information Technology Software. The said document reads as under:- 28
ST/40206/2013 3.4 The said document is issued by the appellant to the Customs Authorities in compliance with Foreign Exchange Management Act (FEMA), 1999 Import of Goods in India Rules. While undertaking import transaction, it is obligatory for the receiver of foreign exchange to intimate the Customs Authorities as to the import of goods. In para A.10.1 of the A.P.(DIR Series) Circular No. 106 dated 19.06.2003 under sub-clause (ii), it has been stated that where imports are made in non-physical form, i.e., software or data through internet / datacom channels / drawing / designs through e-mail / fax, a Certificate from a Chartered Accountant that the software has been received by the importer, has to be obtained. The appellant in compliance to 29 ST/40206/2013 such Rules has intimated the Department to importing the document of title in the software. Along with this, the Certificate issued by the Chartered Accountant is also furnished. This Certificate of the Chartered Accountant certifies the remittance against the imports. These documents are sufficient proof to establish that the title of the software has been passed on by Microsoft to the appellant. Microsoft has therefore provided IT Services to the appellant for which payments have been made by the appellant to Microsoft. The appellant is liable to pay service tax on the payments made to Microsoft under reverse charge mechanism.
3.5 Though, the end customers are situated in SEZ, during the disputed period, the transactions are not covered by Notification No. 4/2004-
ST dated 31.03.2004. The said Notification would exempt services provided under Section 66 of the Finance Act only. Later by Notification No. 17/2011- ST dated 01.03.2011, the Service Tax in respect of services provided to SEZ was exempted even under reverse charge mechanism. The period involved falls prior to 2011 and Notification No. 4/2004 would be applicable. Therefore, the services provided to the SEZ units by the appellant is not eligible for exemption.
3.6 The Ld. Special Counsel for the Department submitted that after paying the service tax, the appellant has adjusted the amount towards the liability for payment of service tax on domestic transactions. The service tax paid in respect of IT services for SEZ units being in full order, the appellant ought not to have adjusted the same. In fact, the appellant had obtained 30 ST/40206/2013 registration and paid the service tax on reverse charge basis under Section 66A read with Rule 1D(iv) of Service Tax Rules, 1994 as a deemed service provider. They ought not to have adjusted the payment for subsequent liability.
3.7 The Ld. Special Counsel submitted that on verification of the records, it was noted that the appellant failed to pay service tax on IT Services received from outside India (Microsoft, Singapore) under Section 66A read with Rule 1D(iv) of Service Tax Rules, 1994. The appellant has paid service tax when the services were intended for domestic customers located outside SEZ. However, they did not pay service tax for end customers who were located within SEZ. The exemption under Notification No. 4/2004 later Notification No. 9/2009 dated 31.03.2009 is not applicable to the appellant. Hence, the demand confirmed on transaction with end customers located within SEZ is legal and proper.
3.8 With regard to second point, the Ld. Special Counsel submitted that from on scrutiny of records, it was noted that M/s. Cognizant Technology Solutions India Private Limited had placed purchase order on the appellant for various software licenses. On the basis of the above purchase order, the appellant had placed an order for software licenses on Microsoft, Singapore. After confirmation of the order, Microsoft Singapore issued invoice for specific software license and thereby has provided IT Services to the appellant. These licenses were received by the appellant Puducherry unit on 18.07.2008. Hence, the IT services has been received on 31 ST/40206/2013 18.07.2008 and the payment for such services has been made in July 2008 itself, the demand and confirmation of service tax under IT Services is legal and proper. The contention of the appellant is that these documents were downloaded prior to 16.05.2008 is factually wrong. The appellant on the pretext that they are not liable to pay service tax on IT Services meant for SEZ customers have on their own without informing the Department, adjusted the service tax amount to the tune of Rs.6,24,50,069/-. Such adjustment is not in accordance with their liability for payment of service tax and therefore there is short payment for which the demand has been raised and confirmed. The Ld. Special Counsel prayed that the appeal may be dismissed.
4. Heard both sides.
5. From the narration of facts and the various issues as above, we are of the opinion that the foremost issue to be analysed is whether Microsoft has provided any IT Services to the appellant by which the appellant is liable to pay service tax under reverse charge mechanism. The answer to the first issue would be relevant to analyse the other issues. This is because, all the other issues are in consequence of non-payment of service tax by the appellant for the services received by them from Microsoft. So also, the allegation of availing ineligible credit and wrong adjustment of input service tax credit is dependent on the answer to the first issue. We are therefore proceed to analyse the first issue. 32
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6. The allegation in the Show Cause Notice is that the appellant received IT Services from Microsoft and used these services for providing IT Services to domestic customers. Para 2 of the Show Cause Notice dated 21.10.2011 is reproduced as under:-
"M/s. Wipro had received "Information Technology Software Services"
(hereinafter referred to as IT Services) from outside India from M/s. Microsoft Corporation, Singapore and paid service on such service tax under Section 66A of the Finance Act, 1944 as a deemed service provider. The IT Services received from Microsoft were used for providing outward IT Services to the domestic customers. M/s. Wipro had also paid service tax on the outward IT Services provided by them."
The procedure involved in receiving IT Services by the appellant is explained in para 4 of the Show Cause Notice. The same has been reproduced in 1.4 above.
7. The definition of IT Services is reproduced in para 2.3 above. According to the Department, sub clause (v) of the definition is applicable to the transaction for levy of service tax. It is the case of the Department that Microsoft has transferred the title and owner ship or right to use the software to the appellant enabling the appellant to distribute and sell the software to end customers (SEZ and non-SEZ customers). However, we do not find any document which shows that Microsoft has sold the software to the appellant. As per the Microsoft Channel Agreement entered by Microsoft and appellant, the appellant is authorised as a Large Account Reseller. The Department has been carried away by the word 'Reseller' to reach the conclusion that the software has been sold by Microsoft to the appellant who is reselling the software to its end customers. The Agreement does not 33 ST/40206/2013 show that the Microsoft has transferred the title and ownership or right to use of software to the appellant. It is pertinent to note that the demand raised is on reverse charge basis construing the appellant to be a deemed service provider. In other words, the case of the Department is that Microsoft has provided IT Services to the appellant by transferring the title / right to use the software to appellant. On perusal of the Agreement, there is nothing coming out to show that there has been a sale or transfer of right to use of software or that the value of the software has been paid by appellant to Microsoft. The payments made by the appellant to Microsoft is the amounts collected from the end customers and transmitted to Microsoft.
8. There is nothing to show that the appellant has downloaded the software. Even by the case of the Department as discussed by the Adjudicating Authority in para 14, after a customer places purchase order for software, the same is provided by Microsoft to the end customer. The appellant facilitates procurement of order, issuance of invoice and collection of payments. They also deliver the PIN given by Microsoft to the customer after payment formalities. It is Microsoft who generate the PIN. The appellant only supplies the PIN to customer and is not given right to use the PIN to download the software. In the transaction explained in para 4 of the Show Cause Notice, we do not find any service falling under the definition of ITSS provided by Microsoft to Wipro. So also, we do not find any consideration paid by the appellant as value of the software to Microsoft in the form consideration for sale or right to use. Again, the invoices issued by Microsoft mentions the name of the customer and not appellant. This itself is clear indication that Microsoft is not selling or transferring right to use the 34 ST/40206/2013 software to Wipro but, selling it directly to customer and the appellant only facilitates the placing of order, supply of software and collection of payment.
9. The Ld. Senior Counsel has relied upon the document furnished by the appellant before the Customs Authorities. This document is for compliance of FEMA Regulations in regard to foreign currency remittances. The document is reproduced in para 3.3. Merely because, it is stated in the document that the right to use IT Services is transferred, it cannot be said that such right has been transferred to the appellant. Unless the document entered between Microsoft and appellant shows that software is sold or the right to use is transferred to the appellant, the allegation of the Department is not tenable. However, we find that all these require thorough scrutiny. The Adjudicating Authority has not taken into consideration the pleas put forward by appellant. Instead has relied on the software Microsoft Volume Licensing Reference guide. It is stated that the software license provides the right to run a Microsoft software product. It requires to be examined whether these licenses issued by Microsoft are used by appellant. For this reason, we are of the opinion that the matter requires to be remanded.
10. As we stated earlier, the other issues are in consequence and connected with the first issue. These issues are adjustment of service tax, credit availed, etc. On the basis of our finding in the first issue, the other issues have to be verified and reconsidered by the Adjudicating Authority. The Adjudicating Authority is directed to reconsider all issues afresh. 35
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11. In the result, the impugned order is set aside. The matter is remanded to the Adjudicating Authority for denovo consideration.
12. The appeal is allowed by way of remand.
(Order pronounced in open court on 04.09.2024)
sd/- sd/-
(VASA SESHAGIRI RAO) (SULEKHA BEEVI C.S.)
MEMBER (TECHNICAL) MEMBER (JUDICIAL)
MK