Microsoft’s tax win to aid others exporting services from India

In a deci­sion that nul­li­fied a R400-crore ser­vice tax demand on Microsoft India and could bring sim­i­lar relief to scores of Indi­an com­pa­nies pro­vid­ing mar­ket­ing and tech­ni­cal sup­port ser­vices to over­seas firms, the Del­hi Cus­toms, Excise and Ser­vice Tax Tri­bunal (CESTAT) has ruled that such ser­vices are not taxable.

The CESTAT rul­ing on Sep­tem­ber 23 has cat­e­gor­i­cal­ly said that mar­ket­ing and tech­ni­cal sup­port ser­vices giv­en to over­seas enti­ties could be treat­ed as “export of ser­vices” although these ser­vices are actu­al­ly per­formed with­in India and involved mar­ket research on Indi­an con­sumers. It is an estab­lished pol­i­cy that exports are not taxable.

Although the Microsoft case involves ser­vices ren­dered by the Indi­an firm to one of its over­seas asso­ciates, the tri­bunal rul­ing is applic­a­ble to all Indi­an firms pro­vid­ing ser­vices to for­eign enti­ties, irre­spec­tive of whether they are relat­ed parties.

Tax experts said the devel­op­ment has a favourable impact on IT and IteS firms, apart from export-ori­ent­ed units and cer­tain Indi­an tele­com group com­pa­nies hav­ing a pres­ence abroad. The tri­bunal rul­ing strikes down the rev­enue author­i­ties’ view that for busi­ness aux­il­iary ser­vice pro­vid­ed by an Indi­an enti­ty to be an export of ser­vice, it nec­es­sar­i­ly has to be ‘used’ out­side India.

For Microsoft India, which had a 2005 July agree­ment with Microsoft Oper­a­tions of Sin­ga­pore for prod­uct sup­port and mar­ket­ing ser­vices in India, the rul­ing inval­i­dates a R400-crore tax demand slapped on it in 2008. Had the order been in the rev­enue department’s favour, accu­mu­lat­ed inter­est could have raised the demand sharply.

Experts described the rul­ing relat­ing to Microsoft’s appeals filed in 2008 and 2010 as “momen­tous”.

The rul­ing sup­ports the view that mar­ket­ing sup­port ser­vices pro­vid­ed to a prin­ci­pal locat­ed out­side India qual­i­fy as export of ser­vices and are not liable to ser­vice tax. It states that ser­vice though pro­vid­ed in India is deliv­ered and used out­side India. The rul­ing is tru­ly sig­nif­i­cant as there are sev­er­al ongo­ing dis­putes on whether mar­ket­ing sup­port activ­i­ties qual­i­fy as export of ser­vices and this deci­sion should have tremen­dous prece­dence val­ue,” said Saloni Roy, senior direc­tor, Deloitte in India.

The three-mem­ber tri­bunal order is the result of a ref­er­ence to a third mem­ber due to a dif­fer­ence of opin­ion between the judi­cial and tech­ni­cal mem­bers of the bench that heard the mat­ter ear­li­er. It is not imme­di­ate­ly clear if the rev­enue author­i­ties would appeal against the deci­sion at the high court.

The rev­enue depart­ment had con­tent­ed that since the mar­ket­ing and prod­uct support

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