Sunday, March 23, 2014

Service Tax - Infosys wins Rs 160 Crores case in CESTAT

 BANGALORE, MAR 18, 2014: THERE is a demand of service tax of 148 crores under reverse charge on the appellant Infosys. Also there is denial ofCenvat credit on various input services including tax paid on group health insurance of employees and construction services availed at Mysore campus. Further the overseas branches of the appellant undertook several projects relating to software development etc., which were entrusted to overseas sub-contractors. The appellant received certain services outside the territory of India relating to data link and communication charges from foreign service providers, who were not licensed in terms of the provisions of section 4 of the Indian Telegraph Act, 1885.
Adjudication proceedings have culminated in a total demand of Service Tax and CENVAT Credit of nearly Rs. 164 Crores.
The Issues and the Tribunal's Decisions are:
Liability to pay service tax in respect of information technology software services received from overseas sub-contractors to overseas branches of the appellant : The most important evidence for identifying a service recipient is the agreement between the parties where it is available, invoices raised by the service provider to the service recipient and details of evidence relating to the nature of the service provided if any. The conclusion of the Commissioner about the liability has arisen on two grounds viz. the appellant has incurred foreign exchange expenditure towards services received by sub-contractors/branches and the payments made by the appellant directly or through branches can be said to have been made for services received. He has observed that services have been received by the appellant from the sub-contractors through their branches only on the ground or on the basis of payments in foreign exchange made.
If the service has been rendered in USA or Canada received by the branch office of the appellant in USA or Canada and utilised by the branch office at USA or Canada and paid for out of the foreign exchange earned, unless the Revenue is able to show that the service has been received in India, or the benefit of service rendered abroad has been received in India, the tax, would not be payable.
Unlike the case of availment of CENVAT credit where the receipt of service is required to be proved and shown to the Department by the assessee, in the case of determination of liability for service tax in the hands of receiver or provider, it is for the Department to show that taxable event has taken place. This issue is no longer res integra and there are several decisions in the case of Central Excise matters and Customs matters wherein it has been held that taxable even has to be proved by the Revenue. In the case of Central Excise duty, it is for the Revenue to show that manufacture has taken place and if the Revenue cannot show it, no liability arises. Therefore in this case the observation of the Commissioner that payment has been made by Infosys and when the payment is made by the branch, it has been made by Infosys through their branch and therefore obviously service has been received cannot be a conclusion and especially in this case when such an allegation is made and is rebutted, such rebuttal will have to be properly considered and evidence shown to show why such rebuttal is not accepted which, has not been admitted even.
Revenue has not been able to show that ITSS has been received through their branch office in India and in the absence of receipt of service, in our opinion, there is no taxable event and therefore there is no liability on the receiver to pay tax. Therefore the entire demand of Rs.132,35,71,266/- cannot be sustained and has to be set aside and is set aside.
Liability for payment of service tax on services received in respect of International Private Leased Circuit (IPLC): the service is correctly classifiable under “Tele Communication Service's and such services are taxable only when the same is provided by person who has been granted a licence under Indian Telegraph Act, 1985. It is not the case of the department that Foreign Service suppliers have been licensed under the Indian Telegraph Act. Therefore, the demand in this category is not sustainable and is set aside
Insurance Premium in respect of Group Health Insurance Scheme for the employees : On a specific query from the Bench as to whether Heath Insurance Policy covered the employees alone or the parents and others also, there was no categorical submission that it covers only employees. If the insurance policy covers persons other than employees and no contribution is required from the employees towards such coverage, the service tax paid on insurance premium to that extent on a proportionate basis will have to be reversed. It cannot be said that the insurance provided to the parents or family towards all the employees is relatable to output services provided by the appellant. Therefore, this matter is required to be reconsidered in view of the fact that investigating officers/adjudicating authority would not have considered this aspect since the entire credit was proposed to be denied. Matter remanded to limit the demand to the extent admissible.
Admissibility of credit of service tax paid on various activities relating to construction of Hostel, Food Court, Gym & Global Education Centre which have been constructed at Mysore campus: .The appellant has taken the credit in respect services rendered for global training centre, hostel and gym which have been disallowed. As regards global training centre, in view of the fact that counsel has made vehement submission that the appellant was providing commercial training and coaching service and the premises of global training centre is often used for conducting commercial coaching service on which service tax is paid, credit would be admissible since it becomes a premises of the service provider for providing the service of commercial training or coaching centre. At this juncture, it becomes necessary to note the fact up to 1.4.2011, setting up of a premises of output service provider was also an activity for which services used were eligible for credit. Therefore, in respect of construction services used for setting up global training centre, would be covered by definition of input service up to 1/4/2011, since it is the claim of the appellant that the services were used for setting up a global training centre. This view is supported by the decision of High Court of Andhra Pradesh in the case of SaiSamhita Storages (P) Ltd. - 2011-TIOL-863-HC-AP-CX.However, subsequent to 1.4.2011, it is to be made clear that the services used in respect of modernization, renovation or repairs of premises from where service is provided only would be admissible.
As regards hostel and gym, in respect of which various services received had been claimed to be input service, it is quite clear from the definition that both of them cannot be considered as premises from where the service is provided or an office relating to the premises from where service is provided. Therefore, the question of their necessity or essentiality is not really material once it is clear that the services are not covered by the definition itself.
The matter is remanded for recalculation of admissible amount since it is held that:
a. Credit is admissible in respect of ‘global training centre' up to 1.4.2011;
b.After 1.4.2011, the services used for setting up of ‘global training centre' would not be input service but services used for repairs, renovation or modernization would be admissible;
c. Cenvat credit of service tax paid on services used in respect of hostel and gym whether it is setting up or repair or renovation or modernization cannot be considered as input service.
Conclusions :
(a) Denial of CENVAT credit and demand for the same in respect of service tax paid on insurance premium in respect of group health insurance scheme as regards employees is set aside. However, the matter is remanded to verify and limit the demand to the extent of service tax payable on insurance premium attributable to families of employees, if other family members are covered and expenses are borne by the appellant.
(b)(1) Denial of CENVAT credit attributable to services utilised for construction, maintenance or repair or renovation of Global Training Centre up to 01/04/2011 is not sustainable and is set aside. However for the period subsequent to 01/04/2011, if any service has been used for setting up of global training center, such credit would not be available. To examine this aspect and to quantify the amount in this regard, the matter is remanded to Original Authority.
(b)(2) As regards credit of service tax paid on services used in respect of hostel, food court, gym etc., in view of the interpretation of definition we have given, CENVAT credit would not be admissible in respect of service tax paid relating to construction, maintenance, repair or renovation to these facilities. Credit has been simply disallowed in relation to all services attributable to construction service and maintenance or repair service. The adjudicating authority is requested to get each invoice verified and quantify the demand.
(c) The demand of service tax with interest in respect of Telecommunication service is set aside.
(d) The demand for service tax in the capacity of receiver for ITSS received from overseas sub-contractor by overseas branches of the appellant is also set aside.
(e) All the penalties under various Sections imposed on the appellant in their entirety set aside.

Regards
Prarthana Jalan
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