"(1) ST/31267/2018 & ST/30296/2022 CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL REGIONAL BENCH AT HYDERABAD Division Bench Court – I Service Tax Appeal No. 31267 of 2018 (Arising out of OIA No. HYD-SVTAX-RRC-APP-031-18-19 (APP-I) dt.31.07.2018 passed by Commissioner of Customs & Central Tax (Appeals-I), Hyderabad) Sumtotal Systems India Pvt Ltd 2B, Maximus Towers, 7th Floor, Mind Space, Raheja IT Park, Madhapur, Hyderabad – 500 081 ......Appellant VERSUS Commissioner of Central Tax, Rangareddy - GST Posnett Bhavan, Tilak Road, Ramkoti, Hyderabad, Telangana – 500 001 ……Respondent and Service Tax Appeal No. 30296 of 2022 (Arising out of OIA No. HYD-SVTAX-RRC-APP-0074 & 0075-19-20 (APP-I) dt.22.01.2020 passed by Commissioner of GST & Central Excise (Appeals-I), Hyderabad) Sumtotal Systems India Pvt Ltd 2B, Maximus Towers, 7th Floor, Mind Space, Raheja IT Park, Madhapur, Hyderabad – 500 081 ......Appellant VERSUS Commissioner of Central Tax, Rangareddy - GST Posnett Bhavan, Tilak Road, Ramkoti, Hyderabad, Telangana – 500 001 ……Respondent Appearance Shri Vamsi Krishna, CA for the Appellant. Shri Pradeep Saxena & Shri A. Rangadham, ARs for the Respondent. Coram: HON'BLE MR. SOMESH ARORA (JUDICIAL) HON'BLE MR. A.K. JYOTISHI, MEMBER (TECHNICAL) FINAL ORDER No. A/30337-30338/2024 Date of Hearing: 13.06.2024 Date of Decision: 03.07.2024 (2) ST/31267/2018 & ST/30296/2022 [Order per: A.K. JYOTISHI] ST/31267/2018: M/s Sumtotal Systems India Pvt Ltd (hereinafter referred to as the Appellant) are engaged in the business of, inter alia, import of Information Technology Software Services (ITSS) from their principals in USA and resell the same under Reseller Agreement. On the basis of the audit conducted by the Department, it was observed that they have not been paying appropriate Service Tax on the import of services and that they have not discharged appropriate Service Tax on the correct gross value of service as envisaged under Section 67(1) of the Finance Act. A SCN dt.24.10.2017 was issued in respect of non-payment of Service Tax on import of services and certain short payment of Service Tax on legal services under reverse charge mechanism and accordingly, a demand of Rs.53,33,627/- was made for the period April 2015 to June 2016 which was confirmed on adjudication. On Appeal, the Commissioner (Appeals) vide impugned order gave part relief on account of profit margin and remanded the matter back to the Adjudicating Authority for modification of demanded amount and also set aside the extended period of limitation and imposition of penalty, for decision by the Adjudicating Authority in de novo proceedings. ST/30296/2022: 2. In this Appeal, the Appellants have come in Appeal against OIA dt.22.01.2020 arising out of OIO dt.28.06.2019 vide which the demand of Rs.50,44,097/- along with applicable interest and imposition of penalty under Section 76 was proposed for the period July 2016 to June 2017, out of which Rs.47,56,558/- was confirmed on adjudication. On Appeal, the entire order was upheld by the Commissioner (Appeals) in his impugned order. The Appellants are in Appeal against this impugned order. 3. In both these Appeals, the Commissioner (Appeals) have examined the issue of inclusion of reimbursable expenses and operating profit margin in the gross value for the purpose of charging Service Tax in the facts of the case and in fact, the Appeal ST/30296/2022 involves statement of demand in terms of Section 73(1)(A) for the period 2016-17 and 2017-18 subsequent to the earlier SCN dt.24.10.2017 for the period April 2015 to (3) ST/31267/2018 & ST/30296/2022 June 2016. Hence, we intend to take up both these Appeals together, even though there is some minor difference in the observations of the Commissioner (Appeals) in the impugned orders. In the OIA dt.22.01.2020, the Commissioner (Appeals) mainly relied on the earlier OIA dt.31.07.2018, which is the subject matter of Appeal ST/31267/2018 and has concurred with the observations and decision except for the fact that he has not remanded the matter back to the Original Adjudicating Authority for redetermination of demand in view of settled position by upholding the demand confirmed by the Adjudicating Authority to the extent of Rs.47,56,558/- as against demand of Rs.50,44,097/-. On the issue of revenue neutrality, he has found that in the given facts of the case they would not be entitled for any relief on account of revenue neutrality. He observed that demand cannot be dropped on account of revenue neutrality. As regards penalty, he observed that penalty imposed is under Section 76 and not Section 78 of the Finance Act, 1994. So revenue neutrality has no application. 4. The Appellants had, in the Appeal ST/31267/2018 has paid up an amount of Rs.20,51,418/- towards their liability of Rs.53,33,627/-, however, the remaining amount of demand has been contested by them on the grounds that they had followed the correct valuation for the purpose of discharging Service Tax liability on import of services from their principals. They have mainly relied on the fact that as per Reseller Agreement, they are importing ITSS from their principal and reselling the same in the Indian market. As per the Agreement, the price to be charged by the principal from them is worked out backward, i.e., starting from the price charged by them from their Indian customer, out of which they are required to exclude costs incurred by them in selling, marketing, etc., and also entitled to retain a margin of 5% as per the mechanism agreed by them in their Reseller Agreement. The mechanism for determining the price for import of service is that, after the sales are made to the local customer in India, the Appellants retain their own cost incurred to make the product reach the customer along with a margin of 5% and the balance amount is repatriated to the principal in the USA. This balance amount was being deemed by them as purchase price and on which, though initially they had not paid any Service Tax on reverse charge basis, but later they have paid up the applicable Service Tax as indicated in the SCN for appropriation. (4) ST/31267/2018 & ST/30296/2022 5. On Appeal, in the impugned order, Commissioner (Appeals) examined their documents and came to the conclusion that the mechanism followed for working out the gross value for the purpose of discharging Service Tax liability on reverse charge basis is not correct. According to him, in terms of Reseller Agreement dt.01.04.2015, the Appellants were to finance the expenditure incurred in marketing and servicing of such products/services in India and that the Appellants were to remit to the principal, consideration for the services imported on the basis of certain pricing formula. The Commissioner (Appeals) has also observed that the services provided to the Appellant is from the principal situated abroad, who are also the parent company of the Appellants/member of the group of companies. The Reseller Agreement also provides for repatriation of consideration for the principal as per the pricing methodology referred in Schedule-B of the Agreement. The said pricing method seeks to remit to the principal a consideration on the basis of a resale price intended to ensure that the reseller would obtain an arms-length profit margin consistent with OECD guidelines applicable and also to look after the operating/marketing expenses in relation to marketing, selling and servicing of the said IT products/services in India. Therefore, he concluded that the Appellants could not have been considered to be agents of the principal as had wrongly been held by the Original Authority as the Agreement established that there was principal-to-principal relationship between the parties to the Agreement, even though admittedly the Appellant is also a company within the same group as the principal who has chosen to sell IT services/products solely through the Appellant in whose continued existence and business said principal is evidently intended. Therefore, because of these reasons, there is a provision in the Agreement to provide for guaranteed operating profit and more so for the reimbursement of operating expenses incurred by the Appellants in India and relate their consideration to sale price in India. 6. Further, he has relied on Section 66(A) and Section 68(2) of the Finance Act, 1994 read with Rule 7 as well as Rule 2(e) of Point of Taxation Rules, 2011, to come to the conclusion that the leviability to Service Tax on the services imported arises with respect to the actual date of payment of consideration and since the Appellants have made payments in cash or made book adjustments only on the dates subsequent to the resale of such services by the Appellant, the price was determinable on the day the (5) ST/31267/2018 & ST/30296/2022 Appellants were required to pay Service Tax in accordance with Section 66(A) read with Section 68(2) of the Finance Act, 1994. Based on this, he held that the expenses incurred on behalf of the principal provided by the Appellant till such price was determined in the course of resale of such services were to be considered to have been incurred in the course of provision of service and that the same being reimbursable in character and charged to and borne by the principal are to be included in the taxable value in accordance with the provisions of Section 67 of the Finance Act, 1994. 7. On the issue of inclusion of “operating profit margin” in the gross value for the purpose of charging Service Tax, he held that the amount of operating profit margin, by its nature, is required to be excluded from such taxable value. In brief, he considered the exclusion from the gross value charged by the reseller-Appellant from the customer in India is partly covered within the gross value and therefore, liable for Service Tax and partly not covered in the gross value, i.e., on account of operating profit margin. Therefore, this required recalculation of the amount confirmed/ demanded and therefore, the Appeal was set aside to that extent and sent back for de novo consideration to the Original Authority. 8. On the issue of imposition of penalty, etc., the main argument of the Appellant is that the whole issue is revenue neutral and therefore, in view of certain judgments like Jay Yushin Ltd Vs CCE, New Delhi [2000 (119) ELT 718 (Tri-Del)] and Jet Airways India Ltd Vs CST, Mumbai [2016 (44) STR 465 (Tri-Mum)], there is no case for imposition of penalty under Section 78, as also for invoking extended period of limitation. However, Commissioner (Appeals) could not find sufficient material on record to indicate that this was a revenue neutral case and therefore, directed the Original Authority to consider this aspect also in de novo proceedings based on the documents furnished as well as the factual position and legal citations relied upon. 9. Heard both sides and perused the records. 10. We find that the short question that needs to be decided is whether in terms of Reseller Agreement, the amount which was being repatriated after deducting profit margin and costs incurred in the course of reselling the ITSS is the correct value in terms of Section 67 or otherwise. On going through the Reseller Agreement as well as observations made by (6) ST/31267/2018 & ST/30296/2022 Commissioner (Appeals) and submissions made by the Appellants, it is obvious that they have been incurring certain expenses, which used to be offsetted and reimbursed to them by their principal, who has supplied them the said services. It is not in dispute that the price at the time of import could not have been worked out as the same is linked to the price which is ultimately realized from their customer in India. In so far as the exclusion of operating profit margin from the gross value is concerned, it is now a settled issue in terms of Impugned Order, as no dispute has been raised by the Revenue on this count. As regards inclusion of operating/ marketing expenses, it would be in the nature of reimbursement and therefore, post amendment in 2015 in terms of explanation (ii) to Section 67, any reimbursable expenditure/costs incurred by service provider and charged in the course of providing or agreeing to provide taxable services is liable to be included in the consideration. Therefore, in terms of Reseller Agreement, they cannot exclude this amount from the gross value charged from their customer, which forms basis for computing their value on which they are determining the price which is charged by their principal abroad to them for providing ITSS. Since in terms of RCM provisions, the Appellants are to be treated as service provider, therefore, the gross value would obviously include any reimbursable expenditure/costs by them since it would be deemed that they are service provider for the purpose of discharging Service Tax and therefore, Section 67 will be applicable. 11. We further note that while in the OIA dt.31.07.2018, the matter has been remanded back for redetermination of fact as to whether revenue neutrality is available as defense against invocation of extended period or imposition of penalty, for the subsequent period, in the OIA dt.22.01.2020, the Commissioner (Appeals) has found that revenue neutrality is not at all available for the Appellants in the facts of the case as a defense against invocation of extended period or imposition of penalty. We find that both the SCNs have been issued within the normal period of limitation. Therefore, the ground of revenue neutrality has no relevance. Therefore, the only course left in these Appeals is to redetermination of demand as ordered by the Commissioner (Appeals) in the OIA dt.31.07.2018. Further, in Appeal ST/30296/2022, the penalty has been imposed under Section 76 and there is no invocation of extended period and therefore, there is no requirement for re-calculation of demand or examining the issue of revenue neutrality. (7) ST/31267/2018 & ST/30296/2022 12. Thus, in view of the discussions above, in respect of Appeals ST/31267/2018 & ST/30296/2022, we do not find any infirmity in the Orders of the Commissioner (Appeals), especially with regard to the inclusion of operating/marketing expenses in the gross value for the purpose of discharging Service Tax. In so far as invocation of extended period and imposition of penalty is concerned, we find that the same is to be decided by the Adjudicating Authority in de novo proceedings having regards to facts and cited case laws. 13. Accordingly, both the Appeals are dismissed. (Pronounced in the Open Court on 03.07.2024) (SOMESH ARORA) MEMBER (JUDICIAL) (A.K. JYOTISHI) MEMBER (TECHNICAL) Veda "