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Commissioner of Service Tax, Delhi V/S Convergys India Service Tax

    Final Order No. 60040/2018 and Appeal No. ST/55636/2013-DB

    Decided On, 22 January 2018

    At, Customs Excise Service Tax Appellate Tribunal Chandigarh Bench

    By, THE HONORABLE JUSTICE: ARCHANA WADHWA
    By, MEMBER AND THE HONORABLE JUSTICE: DEVENDER SINGH
    By, MEMBER

    For Petitioner: Atul Handa, AR And For Respondents: N.K. Sood, Advocate.



Judgment Text


1. The Revenue is in appeal against the order in Original No. 155-157/GB/12 dated 27.9.2012 and the Corrigendum, thereof, No. IV(16) Hqrs/Adj/Convergys/615/ST/10 dated 4.1.2012. The brief facts of the case are that three show cause notices dated 19.10.2010, 29.3.2011 and 17.11.2011 were issued to the appellants by the Commissioner of Service Tax, New Delhi. In the show cause notice, dated 19.10.2010, the allegation was that the respondent had paid IPLC Charges to its parent company M/s. CMG which the assessee classified under Lease Circuit Service whereas, the department was classifying the same under the Business Auxiliary Service and not under Lease Circuit/Tele communication Service. The demand of Rs. 2,37,20,350 was raised for IPLC Charges for the period 01.04.2005 to 31.3.2009 plus service tax leviable on payment of Rs. 14,50,679 made account of other expenses, which appeared to be taxable under Management Consultancy Services during the period 1.4.2005 to 31.3.2009. Further, the demand of Rs. 45,47,70,587 was raised on account of alleged suppression of taxable value from the department found on scrutiny of Balance Sheets and ST-3 returns for the period 2005-2006 to 2008-2009. In the show cause notice, dated 29.3.2011, the demand of Rs. 67,28,007 was raised for the period 2009-2010 on account of telecommunication cost (IPLC) charges. In the show cause notice, dated 17.11.2011, the demand of Rs. 39,86,179 was raised on account of the telecommunication cost (IPLC) charges and other expenses amounting to Rs. 13,415,713. All the three show cause notice

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s were adjudicated by the same adjudication order dated 27.9.2012. In the adjudication proceedings, in respect of the show cause notice dated 19.10.2010, the Ld. Commissioner (A) confirmed the demand of Rs. 1,56,320 on other expenses incurred by M/s. Convergys India P. Ltd. along with interest and imposition of penalty of Rs. 1,56,320 under Section 78 of Finance Act, 1994, and penalty of Rs. 10,000 under Section 77. No penalty was imposed under Section 76 of the Act. In respect of other two show cause notices, dated 29.3.2011 & 17.11.2011, the entire proceedings were dropped. Aggrieved from the order of adjudicating authority, the Revenue has filed this appeal.

2. The ld. AR relying on the grounds of appeal submits that reimbursement of the communication cost paid by the appellant to their parent company M/s. CMG comes under the category of Business Auxiliary Services as the provision of Communication link-IPLC has been procured by the parent company for the Indian subsidiary. He argued that it was covered by clause (iv) of Business Auxiliary Service, hence, it should be classified under the Business Auxiliary Services and not under the Telecommunication Services, particularly, when the payment was made in convertible foreign exchange to M/s. CMG on account of procurement of IPLC link for the appellant. Such procurement of services is covered under the clause (iv) of Business Auxiliary Service. Hence, the adjudicating authority has erred in arriving at the proposition that a service recipient cannot be a service provider. Since, the service provider is located outside India, the respondents are liable to discharge the service tax under reverse charge mechanism under Section 66(A) of the Finance Act, 1994. He pointed out that the definition of Business Auxiliary Service was amended on 10.9.2004 to include the sub-clause (iv) for procurement of goods or services, which are inputs for the clients. He also argued that the guiding factor for classification is the essential characteristic of relevant activities and that test should be applied in this case. He referred to the para 16 of the adjudication order and stated that the circular dated 19.12.2011 is applicable to Foreign Telecommunication Service Providers and in the instant case M/s. CMG is not the Tele communication Service Provider. In this case, he contended that Sprint Global Services and other vendors provided Telecom Services to M/s. Convergys US, who facilitated the appellants in their business by procuring the IPLC links from the actual telecommunication service provider. The appellants are not paying to the telecommunication service provider, but are making payment to M/s. CMG. On the question of mark up, he stated that this is not a criteria in deciding the taxability of any service provider.

3. The Ld. Advocate for the appellants submits that the issues raised in this appeal are settled against the Revenue by various judicial pronouncements. On the IPLC charges, he argued that no demand under Business Auxiliary Service was held to be unsustainable this Tribunal in the case of Infosys Ltd. v. CST [2014] 47 taxmann.com 76/46 GST 551 (Bang. - CESTAT) and it is not the department's case that the overseas entity was holding license under Indian Telegraph Act, 1985. Hence, service tax was not payable for such charges. On the difference of Revenue between balance sheet and ST- 3, he submits that being exporter of services they are seeking quarterly refund of service tax and the turnover is certified by statutory auditors as per Circular No. 120 dated 19.1.2010. He also submits that for computing the eligible amount of refund, the Revenue as per the balance sheet and the ST-3 return is reconciled. He relied on the following case laws:

(i) Kipps Education Centre v. CCE : [2008] 17 STT 306 (New Delhi - CESTAT)

(ii) CCE v. Ramesh Studio & Colour Lab : [2010] 27 STT 459 (New Delhi -CESTAT)

(iii) CCE v. May fair Resorts : [2010] 28 STT 471 (New Delhi - CESTAT)

(iv) Commissioner, CE v. Mayfair Resorts : [2011] 12 taxmann.com 340/32 STT 405 (Punj. & Har.)

4. He also stated that they had no incentive to suppress as they were entitled to claim refund on services being an exporter. He also argued that the balance sheet had been provided by the respondent only and hence suppression cannot be alleged. On the third issue of management expenses, he stated that the respondent had paid the amount of Rs. 12,94,359.00 out of Rs. 14,50,679 before the adjudication along with interest leaving a balance of Rs. 1,56,320 on which penalty was levied.

5. Heard the parties and examined the records.

6. We find that there are three issues which are arising from the impugned order. First issue relates to the taxability of IPLC charges and whether such service would fall under Business Auxiliary Service or Telecommunication Service. On the question of whether the services provided by M/s. CMG for procuring IPLC service and obtaining dedicated link, which has been established between the appellant and M/s. CMG, would be covered under the Business Auxiliary Services, we find that the Ld. Commissioner has correctly dealt with these issues in paras 12(a), 13 and 14, which are extracted below:

"12 (a) taxability of reimbursement of communication cost

The show cause Notice under adjudication has been issued the notice proposing to levy service tax on the reimbursement of Communication Cost paid by them to their parent company M/s. Convergys US under the taxable category of Business Auxiliary Service on the ground that this activity is covered under clause (iv) of Section 65(19) of the act procurement of goods or services, which are inputs for the client.

(i) There must be procurement of services that are input services;

(ii) The services must be procured for a client;

So far, the first condition whether the Communication services- IPLC link are input services for Convergys or not is an admitted fact on record that the Communication Link- IPLC link is an input service for the notice.

13. Now coming to second condition whether the provision of Communication Link- IPLC can be considered as have been procured by the service provider for a client. I find the services are being provided by the notice to its parent company located outside India and for rendition of those services, parent company has arranged for Communication Link- IPLC link from Sprint, cost of which is reimbursed by Convergys. Hence it is a case that a client is providing service to service provider and not a case where services are being procured for a client and hence the second condition of clause (iv) of Business Auxiliary Service is not satisfied.

14. Accordingly the services received by the notice in relation to communication link (IPLC) does not merit classification under the category of Business Auxiliary Service being not tenable both on facts and in law as alleged by the department in the impugned show case notice. I also find that it is well settled that once there is a specific entry for an item in the tax code, the same cannot be taken out of that specific entry for an item in the tax code, the same cannot be taken out of that specific entry and taxed under any other entry. In the present case it appears to me that the impugned S.C.N, is seeking to discard the specific entry and to bring the noticees services under a very general entry, only because under the specific entry no tax is payable. This approach is contrary to the scheme of legislation as what is specifically kept out of a levy by the legislature cannot be subjected to tax by the department under another entry."

7. In this regard, we also find that the issue of taxability of IPLC service has been already decided by this Tribunal in the case of Infosys Ltd. {supra), wherein this Tribunal came to the following conclusion:

'6.2 Learned counsel relied upon the Boards Circular issued in F. No. 137/21/2011 -S.T. dated 19.12.2011 to submit that the Government has accepted the position that service tax is not payable by the service provider in respect of such service. He also submitted that the very same issue had come up for consideration of the Commissioner in the case of their own sister company, M/s. Infosys BPO Ltd. and the Commissioner in Order-in-Appeal No. 122/2012 dated 12.10.2012 had dropped the demand with the following observations:

"In view of the Boards clarification, I hold that the demand of service tax amounting to Rs. 1,72,49,472/- made in the show-cause notice on the expenditure incurred in foreign currency by the assessee during the period from 1.10.2010 to 30.9.2011 towards payment for service (International Private Leased Circuit) provided my M/s. ATMT, BT, MCI, etc. under reverse charge mechanism under the category of Business Support Service is not sustainable."
In this case also, service has been received from the same suppliers and the facts under consideration are also same. Therefore, Boards clarification referred to above to be applicable. Moreover, we also find that the service is correctly classifiable under Tele Communication Services 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.'

8. Following the above judgment of the Tribunal, which takes into consideration the Board Circular No. 137/21/2011-ST dated 19.12.2011, which was the basis of the decision by the Ld. Commissioner, we hold that such services do not fall under the category of Business Auxiliary Services but falls under Telecommunication Service. However, in the absence of a licence under Indian Telegraph Act, 1985 for the foreign supplier, demand on this issue is not sustainable.

9. Further, we find that as admitted in the show cause notice which is M/s. CMG is only charging the cost paid to the telephone company from the respondent without any mark up, which clearly shows that no extra charges are being collected by M/s. CMG for facilitating the connectivity with Sprint Global Services and other vendors.

10. In view of the above, we find no infirmity in the analysis of Ld. Commissioner on the issue of IPLC Charges.

11. On the difference of Revenue between balance sheet and ST-3, we find that the show cause notice has simply taken the difference between ST-3 Return and balance sheet and prepared a table without offering any explanation or basis as to how the demand had arisen for different periods and services. Demands appears to have been calculated the service tax in the show cause notice without doing any investigation or analysis of relevant documents or co-relation with the refunds taken by the respondent. Admittedly, the respondent are eligible for refund of the service tax on quarterly basis and turnover is certified by statutory auditors as has observed by the Ld. Commissioner. We agree with his findings in para 18 of the Order-in-Original reproduced below:

"18. I find that the turnover in balance sheet is on accrual basis and whereas the turnover in ST-3 is on cash basis, therefore, there is bound to be difference in the turnover between Balance Sheet and the ST-3. Further, as stated by the Learned Counsel that at the time of finalizing accounts, normally adjustment entries with regard to foreign exchange fluctuations, cost escalations etc are passed and the same are declared in the subsequent return for the simple reason that the returns cannot be revised after 90 days. I find such explanations have been considered and accepted by the Division Office while granting the refunds under Notification 5/2006 dated 14th March, 2006 and the said refund orders have attained finality because neither the department has reviewed the refund orders and filed any appeal challenging refund nor the board has reviewed. Moreover, the turnover in ST-3 has been certified by the Statutory Auditors as provided under the Circular No. 120 dated 19.10.2010 issued by the Board.

Further, In addition to the above findings the Revenue declared in the balance sheet is for the purposes of income tax and the same cannot be considered as revenue for levy of service tax."

12. We also find that the issue is covered by the following judgments relied upon by the appellants.

(i) Ramesh Studio & Color lab (supra).

(ii) May fair resorts (supra).

(iii) Mayfair resort (supra).

13. On the third issue of other expenses and management consultancy service, the Ld. Commissioner in paragraph 19 of the impugned order has not dealt with the issue in a proper manner and his findings are vague. We also note that the Ld. Commissioner has given no finding at all on the management consultancy service, which formed part of the demand under other expenses in show cause notice dated 19.10.2010. We agree with Ld. AR that no findings have been given in respect of dropping of demand of Rs. 13,81,818, which was raised as part of total demand in show cause notice dated 29.3.2011. In the absence of clear findings on other expenses, the matters required to be remanded back to the adjudicating authority for passing a fresh order, after re-examining the demand of other expenses and management consultancy raised in show cause notices dated 19.10.2011 and 17.11.2011. In view of the foregoing, the appeal of the Revenue is dismissed on the issues of IPLC charges and the service tax calculated on the difference between balance sheet and ST-3 returns. On the third issue of the service tax on other expenses and management consultancy, the matter is remanded back to the adjudicating authority for passing a fresh order giving clear findings in accordance with law. The respondent should be given fair opportunity to present their case.

The appeal is disposed of in the above terms.

O R