Unreported Decisions – ST – April 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether offsite IT services wherein such services are rendered from service providers premises was taxable under the category of ‘man-power supply or recruitment services’? Whether services provided to a client through an Offshore Development Centre developed by the service provider exclusively for such client at its premises is taxable under the head of ‘Infrastructural Support Services’ under the category of ‘support services to business or commerce’?

Facts and Pleading: M/s. Cybage Software Pvt. Ltd. (hereinafter referred to as Respondents) are engaged in providing software development services to its clients located both in India and outside India. The Respondents have entered into agreements with various clients for providing Onshore & Offshore IT services. In offsite site IT services, the Respondent was rendering IT services from its own location and in onsite services, the Respondent was rendering IT services at client’s location. The Respondents were paying service tax on onsite services but not on offsite services. Further, the Respondents have also entered into agreement with HSBC to provide IT Services through Offshore Development Centre (ODC) developed by the Respondents.

The Department alleged that in case of the offsite services, the Respondents have rendered ‘man-power supply or recruitment services’ as the Respondents have computed consideration for the said offsite services in terms of the software engineers deployed at the premises of the client and have thus, supplied manpower in the form of Software Engineers with specific skills. In case of services rendered to HSBC, the department has demanded service tax under the category ‘Support Service to Business or Commerce service’ on the allegation that the Respondents have provided infrastructural facilities in the form of Offshore Development Centre (ODC) to HSBC.

The Appellant contended that that in case of the offsite services, the services rendered in all of the agreements concerned was for ownership of work and not for mere supply of manpower. As the risk and obligations undertaken were far greater than those assumed under supply of manpower and hence the same cannot be taxable under the head of ‘man-power supply or recruitment services’. In case of services rendered to HSBC, the Respondents submitted that ‘Infrastructural Support Services’ under ‘support services to business or commerce’ covers only providing passive infrastructure to the client, it would not cover a case where the software company itself uses the ODC to provide software development service to the client.

Judgment: The Hon’ble CESTAT agreed with the submission of the Respondents and relied upon held that the Respondents have the decision of Chennai CESTAT in Cognizant technology – 2010-TIOL-698-CESTAT-Madras to held that the Respondents have entered into agreement with such clients to render IT services and software engineers deployed at the clients’ premises are under the management and supervision of Respondents to provide such IT Services. The Hon’ble CESTAT also held that the deployment of engineers at client’s premises is a normal practice in IT industry and the same cannot be considered as ‘manpower supply or recruitment services’ merely because the Respondents have received consideration by monetising the time spent by such engineers for rendition of IT services under the contract. In case of services rendered to HSBC, the Hon’ble CESTAT held that the services rendered at ODC are mere extension of the offsite service rendered to the clients and hence, ‘information technology software service’ which was not excisable to tax at that point of time.

M/s. CCE vs. M/s. Cybage Software Pvt. Ltd., CESTAT, Mumbai, decided on 21.1.2020 in the Final Order No. A/85484-85485/2020.

M/s. Cybage Software Pvt. Ltd.

2. Whether keeping of gold in the vault of a Bank after importing the gold into India from foreign supplier till the time a domestic customer for the said gold is identified amounts to rendition of Safe Vault Service to such foreign supplier and hence taxable under Banking and other Financial Services? Whether profit earned by the Bank which is a difference between the sale price of gold to their domestic customers and purchase price of gold from foreign suppliers can be considered as consideration for rendition of the aforesaid Banking and other Financial Services? Whether interest charged by the Bank for lending metal to the customers is leviable to service tax?

Facts and Pleading: M/s. Indian Overseas Bank (hereinafter referred to as ‘The Appellant’) is a banking company and is inter alia involved in sale and purchase of gold. The appellant imports gold from Union Bank of Switzerland and MKS Finance, Geneva (‘foreign suppliers’). The Appellant holds the said gold in its vault till such time the Appellant finds a suitable customer. After the customer is identified and the price of the gold is confirmed, the Appellant collects money from such customer. After retaining its mark up, the Appellant sends the money to the suppliers such as foreign suppliers. At this point of time, the Appellant purchases the gold which is already in their physical custody. Immediately on purchase of the gold, the same is delivered to the customers. Further, the Appellant also lends metals to its customers and charges interest as consideration for such lending of metals. Further, eventually such metal is required to be returned to the Appellant by its customers.

The department demanded Service tax on the alleged storage services rendered to the foreign supplier under ‘Banking and Financial service’. Department was of the view that till the time of price fixation the Appellant was holding the stock with them, thus rendering storage services to foreign supplier. The consideration for the storage service was considered as margin i.e. difference between the purchase price and sale price. Further, the Department also demanded services tax on the interest earned by the Appellant for lending of metal to its customers on the count that only if the loan is in the form of Indian rupee and interest is earned on that, then alone under the provisions of Valuation Rules or Section 66D of Finance Act, 1994 interest is not to be treated as part of consideration for determination of service tax.

The Appellant contended that there is no consideration charged by the Appellant for rendition of the alleged safe vault service to foreign suppliers as the profit earned by the Appellant is received from the customer and not the foreign suppliers. The Appellant also contended that there is no allegation in the show cause notice that Appellant had received any consideration from foreign supplier for providing safe vault service. The Appellant also contended that the case of the department that the only interest earned on loans granted in cash is excluded from the ambit of service tax is incorrect on the count that there is no such distinction in the provisions of the law.

Judgment: The Hon’ble CESTAT set aside the demand on the storage services only on the ground that as there is no separate consideration for safe vault service. In absence of any consideration, service tax cannot be levied. The Hon’ble CESTAT also noted that the onus is on revenue to prove there is consideration, which revenue failed to do so in the present case. The Hon’ble CESTAT set aside the demand of Service Tax on interest earned on metal loan on the footing that Rule 6 (2) (iv) of the Determination of Value, Rules 2006 do not make any distinction between the interest on cash loan or metal loan. In other words, all interests are excluded from the value of the service whether it cash loan or any other loan.

M/s Indian Overseas Bank vs. CCE, CESTAT, Chennai, decided on 10.2.2020 in Final Order Final Order Nos. 40243-40249/2020.

M/s Indian Overseas Bank