By TIOL News Service

MUMBAI, MAR 08, 2016: THE appellant services many clients situated overseas by developing software for them, executing on-site software engineering consultancy and customizing their own products for licencees. The clients require regular upgrading and enhancement of software installed on their systems to enable optimum performance for which they enter into maintenance contracts with the appellant. The servicing is carried out by employees in the Software Technology Park facility who use the internet to access the remote system and work on the remote installations. It is the consideration received in accordance with these contracts that are in dispute.

The CCE, Pune-III confirmed the demand of tax for rendering of ‘maintenance and repair services' for the period from 15 th March 2005 to 31 st December 2007 and of ‘support services of business or commerce' for the period from 1 st May 2006 to 30 th September 2007. The appellant disputes the tax of Rs.37,32,184/- demanded for the former as well as the penalties imposed in the impugned order.

Before the CESTAT, the primary contention of the appellant is that the tax is not leviable in relation to software for the period to which the dispute pertains. According to them ‘information technology software service for use in the course or furtherance of business or commerce...' was made taxable by section 65(105)(zzzze) of FA, 1994 only from 16 th May 2008. Reliance is placed on the decision in SAP India Pvt. Ltd 2010-TIOL-339-CESTAT-BANG.

The AR placed reliance on the Circular 81/2/2005-ST dated 7 th October 2005 that superseded no 70/19/2003-ST dated 17 th December 2003; the clarification in the latter that maintenance of software was not taxable under section 65(105)(zzg) of FA, 1994 was held to be no longer valid after the decision of the Supreme Court in Tata Consultancy 2004-TIOL-87-SC-CT-LB holding that ‘canned' computer software is goods. Further reliance was also placed on the decision in Bharat Sanchar Nigam Ltd 2006-TIOL-15-SC-CT-LB .

The Bench after considering the submissions observed -

++ The articulation of legislative intent sought to be derived from this decision by the Central Board of Excise & Customs may not be tenable to the extent that it exceeds the compass of the cited decision. Therefore, the cited circular, relying as it does on the cited decision, does not permit for taxability of any software other than ‘canned software' and reliance on that circular cannot appreciably sustain the findings in the impugned order.

++ ‘Goods' are, therefore, and more particularly in the context of the new taxable entry of 2008, restricted to computer software, which appears to be interchangeable with proprietary software, whose maintenance alone is liable to be taxed prior to 16 th May 2008 under section 65(105)(zzg).

++ The decision of the High Court of Andhra Pradesh would, therefore, persuade us that software, other than ‘canned' would not be amenable to description as computer software which is essential to start up and run the core programs of a system. ‘Information technology software' is essential for smooth running of the business activities of the user. Thus the clients of the appellant in this case would be users of ‘information technology software' and hence any maintenance of that software would be taxable only after 16 th May 2008 as decided by this Tribunal in re SAP India Pvt. Ltd.

++ We find that the original authority has omitted to take into account the status of the appellant as the holder of a Letter of Permission under the Software Technology Park Scheme. The coverage of the activity of the appellant under the Export of Services Rules, 2005 also cannot be ignored. The appellant renders services that enhance the performance and efficiency of the systems on which the software that impacts the business of the overseas client is installed. The employees of the appellant would not be able to fulfill the contract without operating the software which is located outside India. Their physical location in India is merely an accident of economics. Undeniably, a part of the service is rendered outside the country which is sufficient for the appellant to derive the benefit of the exemption from tax as an exporter of service .

++ The demand under ‘maintenance or repair services' in the impugned order does not survive. The non-disputed demand is comparatively minor and, considering the promptitude displayed in paying the tax, we do not consider it necessary to uphold the penalties in view of section 73(3) of Finance Act, 1994.

The appeal was allowed.

(See 2016-TIOL-560-CESTAT-MUM)