STPI Charges For SOFTEX Certification And NOCs Liable To Service Tax: CESTAT Hyderabad

On 25 August, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad held that charges collected by Software Technology Parks of India (STPI) from software exporters for certifying SOFTEX forms, issuing No Objection Certificates (NOCs) and providing related assistance constitute consideration for taxable Business Support Services and are liable to Service Tax.

Technical Member P. Anjani Kumar and Judicial Member Angad Prasad dismissed two appeals filed by STPI against Service Tax demands, including a demand of over Rs. 5.15 crore for the period from 2007-08 to 2011-12, along with interest and penalties. The Bench observed:

“The mere fact that an activity is regulated by law or that an organisation has been authorised by Government to perform the activity does not, by itself, convert every such activity into a sovereign function.”

STPI had challenged the demands on the ground that certification of SOFTEX forms, issuance of NOCs and related activities were functions assigned to it under the Foreign Trade Policy, the Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) circulars. It argued that, as these activities were performed under a regulatory framework, the charges collected could not constitute consideration for a taxable service.

The Tribunal rejected the contention and held that STPI's administrative supervision by the Central Government and statutory authorisation to undertake particular activities did not automatically make those activities sovereign functions. It noted that STPI is an autonomous society and not a Government Department. It further held:

“A distinction has to be maintained between an activity which can only be performed by the State in exercise of sovereign authority and a service rendered by an autonomous body for facilitating the business operations of its clients or members.”

The Bench noted that STPI's services directly assisted software exporters in conducting their business, completing regulatory requirements and realising foreign exchange from exports. It also examined the nature of the amounts collected for SOFTEX certification and other services.

It found that STPI had not shown the charges to be compulsory fees imposed under any law and payable to the Government. Instead, STPI maintained the amounts in a separate fund and used them for its administrative and establishment expenses.

The Bench also held that STPI's exclusive authority to perform certain certification work did not, by itself, establish the sovereign character of the activity. It said the relevant question was whether the amount collected constituted a compulsory Government levy or payment for a specific service rendered to an identifiable beneficiary. On this aspect, the Tribunal observed:

“Exclusivity or statutory authorisation to perform a particular activity is not, by itself, decisive. The relevant question is whether the amount collected is a sovereign/statutory extraction or consideration for an identifiable service rendered to a beneficiary.”

It added that there was a “clear and direct relationship” between the work undertaken by STPI, the software exporting units receiving the benefit and the charges collected from them. It ultimately held:

“The charges collected by STPI are not shown to be compulsory statutory levies payable into the Government Treasury. They represent consideration collected for services rendered to the concerned business entities and, therefore, the duties are appropriately taxable under Business Support Service.”

The Bench also upheld the Department's invocation of the extended limitation period, noting that STPI was registered under the Service Tax law and paid Service Tax on several other services, but had not declared the disputed receipts in its Service Tax returns. Therefore, it found no sufficient reason to interfere with the extended period or the penalty imposed.

Accordingly, the CESTAT dismissed both appeals and upheld the Service Tax demands against STPI.

For Appellant/STPI: B.L. Narasimhan, Advocate

For Revenue: A. Rangadham, Authorised Representative