The Hindu Business Line : A case of `cerebral' damage in cellular world!

Saturday is not a day when you would like to tax yourself with something too cerebral. But this is something special: The case of Nokia that came up before the Delhi tribunal recently. The dispute was whether what the company did was consulting or cerebral. The 88,000-character order dated January 23 uses `consulting' 78 times, while `cerebral' finds but less than half-a-dozen mentions. So, you know which one wins, but first, the story.

One fine morning, the taxman got information that Nokia India Ltd, New Delhi "was providing taxable services as consulting engineers without getting registered with the Service Tax Department and were not paying the service tax." Acting on the tip-off, officers of the Anti-evasion Branch of the Central Excise Commissionerate, visited the company premises in February 2001 to ascertain the nature of services provided to customers.

Nokia's Financial Controller explained to them that the company was a 100 per cent subsidiary of Nokia Networks Oy Finland and that it was implementing and commissioning the GSM equipment purchased by various cellular operators in India. Customers included BPL Cellular, Tata Cellular, Skycell, Spice Cell, Facel and so on. Nokia's service contracts with the customers were for implementing and commissioning of the equipment.

Equipment and services explained

Cellular equipment consisted of Mobile Switching Centre (MSC) installed at the operators' premises and Base Station Controller (BSC) installed at different locations. Qualified engineers in Nokia's employ implemented and commissioned the equipment. Implementing one switch normally took 3-4 weeks. Services provided for installing and commissioning included "system design, installation, supervision, training of operator's engineers, consultancy and technical assistance services."

Customers got into another agreement too, called technical support agreement. This was for maintenance of equipment purchased from Nokia Networks Oy. This enabled customers to call up Nokia's help desk for help. In response, a qualified engineer suggested a remedy; when the remedy did not work, the engineer had to visit the premises of the customers to rectify the fault. The contract covered replacement of card modules, if needed; both hardware and software problems were covered under the technical support agreement.

When asked why service tax hadn't been paid, Nokia said that the work carried out by its staff was "in the nature of actual execution of jobs and not in the nature of advisory or consultancy services." Nokia also argued that the statutory definition of `consulting engineer', which referred to professionally, qualified engineers or an engineering firm, did not apply in its case.

Tax demand

Not satisfied with the company's explanation, the Department raised, in 2002, a demand of service tax of Rs 7,03,10,717 along with interest and penalty. Nokia defended itself though letters that as per the contract with GSM cellular companies, Nokia performed integrated and comprehensive installation activities involving installation, commissioning and testing of telecommunication equipments. And that it was not responsible for designing or drawing the technical specifications, and was not engaged in providing any advisory services.

Nokia pointed out that under the agreement, it had to perform specific repair services for its customers in cases of breakdowns and malfunctions of equipment, so as to restore the functionality of equipment and the software. "The agreement can be termed as a contract for performance of maintenance and repair activities akin to a maintenance contract," said the company. We are rendering work as a contractor and not in capacity of consulting engineers, said Nokia. The expression `technical assistance', which was not defined in the Act, should be understood in the context of advice and consultancy, averred the company.

In October 2003, Additional Commissioner passed an order confirming the demand of service tax. He imposed a penalty of Rs 3,00,000. A further penalty of Rs 14,00,00,000 was also imposed for suppression and concealment of value and service tax payable.

When the case came up before him, the Commissioner (Appeals) said that the nature of services provided by Nokia, viz., `training, consultancy, technical assistance and other activities of work/services provided for consideration', fell under the category of technical assistance and that these were within the category of services of `consulting engineer.'

Hardware repair and software support, operation and maintenance and assistance, help desk and emergency support weren't within the scope of repair and maintenance, as Nokia claimed, but definitely in the nature of providing technical assistance, said the Commissioner.

He said that the words `technical assistance in any manner' incorporated in the definition of consulting engineers given in the Act were of a wide dimension.

"Their meaning was not bogged down to intellectual advice, but rather involved technical assistance in actual execution of job, training of personnel so as to make them technically competent to handle the sophisticated telecommunication equipment."

Services provided by Nokia were highly technical in nature, which could be accomplished by highly trained, competent and qualified engineers, said the order. `Huge amount of fee/charges was collected' by Nokia, and the same `was not commensurate with the wages paid to an ordinary technician,' reasoned the Commissioner. However, demand for tax and penalty was each reduced to Rs 3,40,63,905, in the October 2004 order of the Commissioner of Central Excise (Appeals), Delhi. Aggrieved, Nokia appealed before the Customs, Excise and Service Tax Appellate Tribunal, Principal Bench, New Delhi.

Cerebral vs consulting

There, before Justice R.K. Abichandani, President, and Mr K.C. Mamgain, Member, Nokia submitted that the phrase `technical assistance' in the definition of `consulting engineer' was to be read so as to take colour from the words `advice' or `consultancy' with which it occurred in the definition clause. "The word `consult' implied a conference of two or more persons or an impact of two or more minds in respect of a topic in order to enable them to evolve a correct, or at least a satisfactory solution," argued Nokia. It said that the consultancy job was cerebral and involved advising the client or finding a workable response to an emergent problem.

This is just the first occurrence of `cerebral', on page 9 of 41. Let's fast forward to page 39, to read an interesting snatch where the Tribunal discussed Nokia's argument that `technical assistance' should he confined to mere consultative assistance where purely cerebral function was involved. "This would, in our opinion, be totally an unrealistic approach in the field of consultative engineering," said the tribunal. "Advice and consultation of a saint sitting under a banyan tree may mainly involve thought processes and discourses with no physical activity on the part of the saint towards assisting the recipient in the implementation of advice and, therefore, be purely a cerebral function, but that would be altogether different from the advice and consultancy of a qualified professional consultant engineer who has to render professional advice and consultancy to his client in respect of material objects that may require technical assistance for making such advice meaningful and effective."

Pamela Hansford Johnson said, "Sainthood is acceptable only in saints." Taxman would agree. Saints may, however, be perturbed by the plea of the Bard's Romeo: "O, then, dear saint, let lips do what hands do." Again, George Orwell can make saints sleepless when quipping, "Saints should always be judged guilty until they are proved innocent." To Nokia, though, Samuel Beckett may provide some relief: "We are not saints, but we have kept our appointment." Have they?

Tailpiece

"I was a respectable consultant... "

"Was?"

"Yes, till service tax came in!"

http://Detaxification.blogspot.com

D. Murali

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