Appeal partially allowed on service tax for customized software & services abroad. Cenvat credit not allowable. Penalties set aside.

The Revenue's appeal was partially allowed regarding the demand of service tax on customized software under ITSS and under BAS for services performed abroad. The demand under IPS and MMR Service was dropped for the relevant periods. The Tribunal ruled that Cenvat credit was not allowable for the services provided. Penalties imposed were set aside due to the introduction of ITSS from 16-5-2008. The appeals were disposed of with modifications, directing re-quantification of demands within specified parameters.

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Issues Involved:
1. Demand of service tax on customized software under Information Technology Software Service (ITSS).
2. Demand of service tax under Intellectual Property Service (IPS).
3. Demand of service tax on Management, Maintenance or Repair (MMR) Service.
4. Demand of service tax under Business Auxiliary Service (BAS).
5. Revenue neutrality and eligibility for Cenvat credit.
6. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Issue-Wise Detailed Analysis:

1. Demand of Service Tax on Customized Software under ITSS:
The Revenue's appeal challenged the dropping of a demand amounting to Rs. 9,30,090/- on the supply of customized software to TATA Consultancy Services (TCS) for use by a customer in Nepal. The Commissioner had dropped the demand by considering that the software was supplied in media and not electronically, thus not falling under ITSS. The Tribunal found that the software was developed and supplied to TCS for the ultimate use of Nepal customers and ruled that service tax is liable on this activity as it is not a mass-produced and packaged software. Consequently, the Revenue's appeal was allowed, and the impugned order was modified.

2. Demand of Service Tax under Intellectual Property Service (IPS):
The Revenue also challenged the dropping of a demand amounting to Rs. 56,74,716/- under IPS for the period from 10-9-2004 to 28-2-2008. The Commissioner had dropped the demand, reasoning that the services were taxed under ITSS introduced from 16-5-2008. The Tribunal upheld this view, stating that the licence fee charged for the use of software, which remains the property of the assessee, is covered under ITSS. Thus, there was no justification for the demand of service tax under IPS for the period prior to 16-5-2008.

3. Demand of Service Tax on Management, Maintenance or Repair (MMR) Service:
The assessee challenged the demand for service tax on MMR Service for the period from October 2005 to May 2008. The Tribunal noted that the C.B.E. & C. circular of 2003, which excluded maintenance of software from service tax, was withdrawn only in 2007. Given the conflicting views and the fact that ITSS was introduced only from 16-5-2008, the Tribunal directed that the demand should be limited to the normal period of limitation. The matter was remanded to the original adjudicating authority for re-quantification of the demand within the normal time limit.

4. Demand of Service Tax under Business Auxiliary Service (BAS):
The assessee also contested the demand for service tax under BAS on amounts paid to subsidiaries and sub-contractors for customization and implementation of software. The Tribunal found that such services fall under BAS when performed on behalf of the assessee. However, since the service was performed abroad, the Tribunal examined the applicability of Section 66A of the Finance Act, 1994, read with the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. The Tribunal concluded that BAS is covered under Category C of the Rules, where the recipient of the service is in India. However, since ITS was excluded from BAS until 15-5-2008, the demand was upheld only from 16-5-2008 onwards. The matter was remanded for re-quantification of the demand.

5. Revenue Neutrality and Eligibility for Cenvat Credit:
The assessee argued that the service tax paid would be eligible for Cenvat credit, making the demand revenue-neutral. The Tribunal referred to the Larger Bench decision in Jai Yuhshin Ltd. and concluded that the activities involved (maintenance and customization of software) are output services under the Cenvat Credit Rules, 2004. Since neither service qualifies as an input service, Cenvat credit would not be allowable, and the plea of revenue neutrality was rejected.

6. Imposition of Penalties:
Penalties were imposed under Sections 76, 77, and 78 of the Finance Act, 1994, based on the confirmation of demand. The Tribunal, however, noted that service tax on ITSS was newly introduced from 16-5-2008 and upheld only a portion of the demands within the normal period of limitation. Consequently, the Tribunal found no justification for imposing penalties on the assessee.

Conclusion:
Both appeals were disposed of with modifications as detailed above. The Tribunal allowed the Revenue's appeal in part, upheld the assessee's contentions in part, and remanded the matter for re-quantification of demands within the specified parameters. Penalties imposed were set aside.

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