By TIOL News Service

MUMBAI, NOV 27, 2018: IN the first round of appeal [reference order-in-original dated 23.01.2012], the Tribunal had remanded the matter thus -

ST - Appellant engaged in providing software information technology (IT) solutions to their clients - demand of ST of Rs.82.79 crores confirmed against the appellant on account of 'maintenance and repair service' and 'information technology software service' - appellant contending that the transaction undertaken by them involves sale of software purchased from third parties, such as Oracle, Sybase, etc. on which VAT has been paid, sale of hardware and supply of customized software as per clients specification: HELD - It does not come out clearly how the ST liability has been computed - if the appellant has purchased from third parties and sold the same on payment of VAT and also supplied hardware on payment of VAT, the same would not be liable to ST - the liability to ST would arise only in respect of software which the appellant has developed as per customer's specifications and supplied to their customers - therefore, there is a need to go through the agreements entered into with the clients, bills raised for the services rendered and the goods supplied and the payments made towards ST liability under the category of "information technology service" - only after going through all these documents, correct ST determination can be done - matter remanded: CESTAT [para 4, 6]

We reported this order as - 2013-TIOL-2335-CESTAT-MUM.

In remand proceedings, the Commissioner by an o-in-o dated 29.11.2013 again confirmed the service tax demand totaling Rs.86,41,89,809/- along with interest and penalties galore while also deciding another SCN involving the same issue but for the subsequent period.

Both, the appellant and the AR made detailed submissions.

The Member (Technical), writing for the Bench, in the eighty-page order, reproduced vast portions of the findings from the order-in-original and also observed that the issues under consideration were also a part of the deliberations in the Conference of "Committee of Experts on International Co-operation in Tax Matters", Fifteenth Session at Geneva from 17 to 20 th October 2017; that the paper presented at the said Conference on "Software Payments as Royalties under Article 12" has considered the treatment of the payments received for transaction in software's. Liberally extracting the findings from the UN Art. 12 Commentary and the OECD Commentary, the Bench concluded that the approach of the adjudicating authority while dealing with the issues is in accordance with the international practices of treatment of software related transactions and, therefore, the finding of the Commissioner that the impugned services are classifiable under the category of ‘Information Technology Software Service' after 16.05.2008 and prior to that under ‘Intellectual Property Services' cannot be faulted.

As regards the sale of hardware, the contention of the appellant is that the same being sale of goods, it cannot be levied to service tax.

Here again, the Bench reproduced the findings of the adjudicating authority contained in paragraphs 36 and 37 of the o-in-o wherein it is held that the hardware has not been provided separately but as a complete solution to the issues of up-gradation of software developed by them for a specific plant for specific projects and, therefore, since supply of software is in relation to the provision of services, value of hardware needed to be added to the value of services in terms of section 67 of the FA, 1994.

Nonetheless, after extracting paragraph 19 of the apex court decision in Idea Mobile Communication Ltd. - 2011-TIOL-71-SC-ST, the Bench further held that the value of the goods for the provision of the taxable service cannot be excluded from the gross amount charged as consideration for the services provided just for the reason that Sales tax/VAT has been paid on the said goods and value is shown separately. However, the Bench observed that applicability of notification 12/2003-ST providing for abatement of the value of the goods needs to be considered by the adjudicating authority and for which purpose the matter is remanded.

As regards the demand of Service Tax under the category of ‘Intellectual Property Service' for the period prior to 16.05.2008, the Bench observed that the first SCN dated 19.10.2009 had been issued demanding service tax under the category of "Management, Maintenance & Repair Service" and, therefore, confirmation of demand under another category viz. IPR service cannot be justified and to that extent the matter was definitely not maintainable.

In the matter of services provided to the SEZ, the Bench opined that the exemption is available via refund mechanism in terms of notification 9/2009-ST, 17/2011-ST but since this was not considered by the adjudicating authority, the matter needs to be remanded.

On other issues, the Bench held as under -

++ Octroi charges - Are in nature of levy for transportation of goods and cannot be said to be part of value of taxable service; that since the adjudicating has not considered the issue, the matter needs to be remanded; appellant to produce evidences to establish that the amounts were paid towards octroi.

++ Services rendered in J&K - As per Finance Act, 1994, service tax is not payable in respect of services rendered in J&K; demand cannot be confirmed in r/o such services; Commissioner to re-quantify demand after factoring the services provided in J&K.

++ Limitation - During the entire period, the appellant was aware about leviability of service tax and in case they had any doubt, they could have sought clarification from the authorities concerned; without seeking any clarification and on their own deciding not to pay tax cannot be a bonafide reason; that there is a suppression of information in ST-3 returns. However, since in the entire demand made in SCN dated 19.10.2009, the category under which the demand is sought to be made and confirmed is different, the SCN demanding tax for the period prior to 16.05.2008 is not maintainable and, therefore, the ground of limitation loses relevance for the appellant as well as Revenue.

Conclusion: Demand of service tax is confirmed for the period after 16.05.2008; appellant is liable to pay interest in view of apex court decision in Kanhai Ram Thekedar - 2005-TIOL-76-SC-CT; penalty is imposable in view of Kerala High Court decision in Krishna Poduval - 2006-TIOL-77-HC-KERALA-ST; whether penalty can be levied simultaneously under sections 76 and 78 of the FA, 1994, Commissioner to reconsider the issue of penalty afresh.

In fine, the appeals are allowed and the matter is remanded for reconsideration of the issues (specified) and involving the period post 16.5.2008.

(See 2018-TIOL-3559-CESTAT-MUM)