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Steag Encotec India Pvt. Ltd. v. Commr. Of Cus. (Airport)
The appellants imported Performance Analysis and Diagnostic Optimization System (“PADO”) software package and Boiler Performance Optimization System software package (“BPOS”) and claimed exemption from Additional Customs Duty and Education Cess in lieu of Central Excise Duty classifying the same as customized software.
Certain important and recent legal developments and case laws in this area are set out below:
Cases
Excise and Customs
Steag Encotec India Pvt. Ltd. v. Commr. Of Cus. (Airport)
The appellants imported Performance Analysis and Diagnostic Optimization System (“PADO”) software package and Boiler Performance Optimization System software package (“BPOS”) and claimed exemption from Additional Customs Duty and Education Cess in lieu of Central Excise Duty classifying the same as customized software.
The main issue involved in this case is about the eligibility of the customized software to exemption whereby it is clarified that though ‘customized software’ may have a wide meaning in common parlance but by virtue of the restrictive clause the eligibility to the exemption is restricted to only ‘custom designed software’.
It was observed by the tax tribunal that the impugned software/ its constituent modules did exist prior to importation and have been installed and employed in many coal-based power plants in many parts of the world including India. The impugned software when imported is in the nature of packaged software but the same is modified to suit the various parameters as required by the power plants. Thus, it was held that the impugned imported PADO software and BPOS software packages are modified packaged software.
Under the Notification no. 6/2006 dated March 01, 2006, the exemption is given only to customized software, which is further qualified by the clause “that is to say custom designed software”. Though ‘customized software’ may have a wide meaning in common parlance, even then, by virtue of the restrictive clause in the notification, the eligibility to the exemption is restricted to only ‘custom designed software’. This is further reinforced by the intent as decipherable from the comparable service tax law in force, which says that ‘in the case of unbranded/customized software, the supplier develops the software’.
It was held that the software has to be developed from the basic building blocks, whereby a new software product should emerge as per the specific requirement of the client so as to qualify itself as custom designed software. Software just modified from already existing established software packages/modules, will not qualify as custom designed software.
The imported PADO and BPOS software packages were held ineligible to the exemption.
Ispat Alloys Ltd. v. UOI
The GOI had issued a notification exempting machinery and equipment for generation of electrical power (including generating sets) of capacity of 2.5MW or above but not exceeding 50MW, from payment of customs duty in excess of 35 per cent ad valorem for a period upto March 31, 1989. The GOI however withdrew the notification as the State is entitled to alter or withdraw a notification if the public interest requires it to do so.
The issue involved in this case was whether the petitioner was entitled to the benefit of exemption notification issued under the Customs Act, 1962 (“Customs Act,”) bearing notification no. 208/88-Cus, in respect of a consignment which arrived in the port of Bombay after rescinding of the notifications.
It was observed by the Bombay HC that the Notifications 208/88-Cus. and 159/88-Cus. granted exemption from customs duty in excess of 35 per cent of the customs duty and auxiliary duty of customs were issued in order to encourage the industrial units to install their own power plants for captive use. However, representations were received by the Government from local manufacturers of DG sets that due to the exemption from part of the customs duty and the whole of the auxiliary duty of customs, the imported equipment for Plaintiff’s power plant had become cheaper when compared to those indigenously manufactured. This was affecting the local manufacturers. Keeping in view the public interest of providing adequate incentive/ protection to the domestic power generation equipment manufacturers, the notifications were withdrawn. The State has been able to discharge the burden of proving the overriding public interest for premature withdrawal of the benefit.
The Bombay HC on being satisfied that the notifications were withdrawn in the public interest noted that the rule of promissory estoppels in such case. Accordingly, the writ petitions were dismissed.
Commr. of C. Ex., Hyderabad v. Hindustan Coca- Cola Beverages (P) Ltd.
The respondents were the manufacturers of aerated beverages which are excisable. They had water treatment plants in their factory for purifying and treating water which was captively consumed in the manufacture of aerated water. Some quantity of treated water was supplied to few retail outlets selling beverages such as coca-cola, thumbs–up etc., through vending machines. The treated water was supplied through canisters embossed with monogram “COCACOLA” or jerry cans/stainless steel tankers which do not contain any marking on them. The water supplied to the retail outlets was used to produce aerated beverages dispensed through vending machines. Revenue proceeded against the assessee on the ground that treated water so cleared was excisable.
The main issue in this case in whether treated water obtained after treatment and cleared in canisters bearing brand name “coca-cola” be subject to excise duty.
It was observed by the tax tribunal that the processes such as filtration, purification, labeling or relabeling of containers and repacking from bulk packs to retail packs etc., do not render this treated water marketable in the absence of its actual sales to buyers. This treated water had not been sold with any profit motive. In the absence of the essential ingredient of sale, the product cannot be said to be marketable. The processes undertaken for treatment of water did not result in the emergence of new product. Under such circumstances, the duty demand was held not to be sustainable.
Essar Steel Limited v. UOI
The main issue involved in this case was whether the levy of export duty on goods supplied from the Domestic Tariff Area (“DTA”) to the SEZ is justified under law? This issue revolves around the question if export duty can be imposed under the Customs Act by incorporating the definition of the term “Export” under the SEZ Act into the Customs Act?
It was observed by the High Court of Gujarat (“Gujarat HC”) that the term “export” as has already been defined in the Customs Act for the purposes of said act, there is no question of adopting or applying the meaning of the said term under another enactment for any purpose of levying duty under the Customs Act. Even in the absence of a definition of the term in the subject statute, a definition contained in another statute cannot be adopted since a word may mean different things depending upon the setting and context. Section 51 of the SEZ Act providing that the Act would have overriding effect does not justify its adoption of a different definition in the Act for the purposes of another statute. A non-obstante clause only enables the provisions of the Act containing it to prevail over the provisions of another enactment in case of any conflict in the operation of the Act containing the non-obstante clause.
In the present case, the movement of goods from the DTA into the SEZ was treated as an export under the SEZ Act, , which does not contain any provision for levy of export duty on the same. On the other hand, export duty is levied under the Customs Act on export of goods from India to a place outside India and the said act does not contemplate levy of duty on movement of goods from the DTA to the SEZ. Therefore, there is no conflict in applying the respective definitions of export in the two enactments for the purposes of both the acts and therefore, the non-obstante clause cannot be applied or invoked at all.
It was held that the levy of export duty on goods supplied from the DTA to the SEZ is not justified.
Service Tax
Commissioner of Central Excise v. Mahaveer Generics
The assessee was appointed as the consignment agent by CIPLA. Under the said agreement the assessee had an authority to appoint dealers, stockists and distributors. It contended that their activities did not fall within the purview of the category of C & F agent but would come under the purview of “Commission Agent’s Service”. The jurisdictional authority rejected the assessee’s prayer.
The issue was when the assessee was rendering the service of receiving, storing and distributing the goods manufactured by M/s. CIPLA Ltd., whether it was not acting as clearing and forwarding Agents and so was not providing taxable service?
It was held that any person engaged in private service either directly, or indirectly which is connected with the clearing and forwarding operations in any manner to any other person would come within the purview of the said definition. It is also to be noted that the consignment agent has also been brought in by inclusive clause. The principal namely, M/s. CIPLA Ltd., has appointed the assessee as “consignment agent”. With regard to the price determination it has been mentioned in the Agreement that principal as well as the consignment agent after mutual consultations and considering the market conditions shall fix the price of the product which would be sold accordingly. The Principal has authorized the consignment agent to appoint stockists, dealers, agents on its behalf. Further, the assessee was responsible to carry out the activity of getting the goods stored by clearing them and then forwarding them to the stockists and dealers. Thus by reading different clauses conjunctively it can be seen that clearing and forwarding operations is a compendious expression of nature of services rendered by Principal to the Agent and in the instant case the assessee in question does not stop at rendering only the services of Commission Agency but also extends beyond the same and thus would come within the category of “clearing and forwarding agents” as the operations are in the said nature.
In certain circumstances there may be a situation where only commission agency work is carried out and in a situation as is existing in the present case the assessee may also indulge or carry on with not only with the work of commission agent but also with the clearing and forwarding as a Consignment Agent and thus both these activities might overlap and on account of such overlap, it cannot be said that the assessee would fall only under the category of commission agent and claim to distance himself from coming within the ambit and purview of C&F agent. Thus, it was held by the Karnataka High Court that the activity carried on by the assessee in question would fall within the purview of “Clearing and Forwarding Agent”.
CAE Flight Training (India) Private Limited v. Commissioner of Service Tax
M/s CAE Flight Training (India) Pvt. Ltd., Bangalore, (“CFTI”), the applicant, is engaged in providing various Flight Training Services at its facility in Bangalore. It intends to provide aircraft specific “Type Rating Training” to the trainee pilots as part of its flight training services. CFTI has been approved by the Directorate General of Civil Aviation (“DGCA”) on a provisional basis to conduct aircraft-specific type rating training courses. CFTI has claimed that once the trainee pilots have completed the type rating training with it they will be issued a Certificate of Course Completion by CFTI which must be produced under the terms of Para 5 of Section J Schedule II of the Aircraft Rules, 1937. Based on the aforesaid facts the applicant has sought a ruling by the AAR on the following questions:
1. Whether CFTI can be considered as an institute imparting training which is specifically excluded from the definition of 'Commercial coaching and training centre' as defined under Section 65(27) of the Finance Act, as an establishment which issues a certificate recognized by law for the time being in force?
2. Whether CFTI can be considered 'Vocational Training Institute' so as to be exempted from tax under the category of 'Commercial Training & Coaching Service' as provided under Notification No. 24/2004 dated 10.9.2004 (“2004 Notification”)?
It was held that CFTI was given a provisional approval for conducting Type Rating Courses. The candidates who receive training from CFTI would be subjected to examination/test by DGCA approved examiners. It is based on the results of these examinations and fulfillment of other prescribed conditions that the DGCA would endorse the type rating of aircraft in the license of the trainee pilots. In the present circumstances therefore the Certificate of Course Completion issued by CFTI cannot said to be a certificate which is recognized by law for the time being in force.
As regards the second issue, the 2004 Notification defines the expression “vocational training institute” as a commercial training or coaching centre which provides vocational training to enable the trainee to seek employment or undertake self-employment, directly after such training or coaching. Thus, only in cases where trainee can seek employment directly after the training can the institute be considered to be covered by the exemption.
A person can fly an aircraft and consequently seek employment with an Airlines company only after his license has been endorsed with the aircraft rating for the said aircraft by the DGCA. Merely undergoing training with a Type Rating Training Organization without endorsement of the license by a competent authority will not enable a pilot to fly an aircraft or seek employment. The training does not directly result into an employment or even enable the trainee to undertake self employment. The activity which enables the Commercial Pilot’s License holder to get the employment is the endorsement on the license by the DGCA. Therefore CFTI cannot be considered as a “vocational training institute” for the purpose of exemption from service tax under the category of “commercial training and coaching service”.
Commissioner of C. Ex., Bhopal v. MP state dairy co-op. Federation
The respondent federation gets some charges for providing consultancy to various milk unions. The issue was whether the aggregate of such charge giving rise to value of the taxable service received by the respondent be taxable under the category of “Management Consultancy Services”.
It was held by the tax tribunal that the services commercially provided is the characteristic of the levy. The present case is of a nodal agency of the State of Madhya Pradesh which is contributing to the purpose of milk production in the state, regulating various activities of the unions. The respondent is an organ of the state without being commercially engaged in providing Management Consultancy Services, assists the milk unions of the State. Record does not reveal that other than the guidance and instruction to the milk unions of the State, the respondent has ever guided or issued instructions to any other agency in a commercial manner or as a commercial venture. Therefore, service tax is not leviable upon the respondent.
Muthoot Fincorp Ltd. v. Commissioner of C. Ex., Vishakapatnam
Western Union Money Transfer (“Western Union”) is a branded service provided globally by Western Union financial Services Inc., a foreign company. Weizmann Forex Ltd. (“WFL”) is the representative of Western Union in India and the appellant is the sub-representative to provide the service through their established network of offices in various locations. The appellant is given compensation of 50 per cent of the fee received by the WFL for each consumer transaction from Western Union. Show cause notices were served upon the appellants demanding Service Tax under the category of “Business Auxiliary Service”.
The sub-representation agreement entered between WFL and the appellant indicate that the ultimate beneficiary of the entire transaction is Western Union. It is undisputed in this case, that a person approaches Western Union situated outside India for transfer of fund to a beneficiary in India, the appellant arranges to deliver the said money to the beneficiary on verification of identity. It is undisputed that the appellant herein does not charge any amount as commission or fee from the recipients of the amount. The said Western Union charges fee from the person who is situated outside India and pays WFL some amount as commission and WFL pays the current appellant a part of the amount as compensation. In the whole transaction it can be seen that the services rendered by the appellant of money transfer is directly to Western Union. Hence, it was held that the appellant is providing the services whose beneficiaries are outside India.
The tax tribunal also referred to a clarification given by the CBEC vide its Circular No. 137/307/2007 dated February 24, 2009 regarding the applicability of the provisions of the Export of Services Rules, 2005. The clarification provides that it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. It is an admitted fact that the benefits of the services rendered by the appellant accrued to a person (the remitter) who is situated outside India and to Western Union, who is also situated outside India. Hence, it was held that the services rendered by the appellant are to be treated as exported and accordingly, services provided by the appellant are exempt. AuthorsAtul Dua (atul.dua@sethdua.com) is a Senior Partner and Manish Gaurav (manish.gaurav@sethdua.com) is a Senior Associate, with Seth Dua & Associates, Solicitors & Advocate, India.