2010 (9) TMI 289 - AT - Service Tax

Software maintenance and upgrade charges in 2004-06: treated as IT software service, not repair; tax demand set aside.

The dominant issue was whether software maintenance charges for the period 09.07.2004 to 31.01.2006 could be taxed as 'maintenance or repair service' ... Demands of Service Tax - computer software - maintenance or repair - Effective date of levy - taxable u/s 65(105)(zzg) read with Section 65(64) of the Finance Act, 1994 - demanding interest on tax u/s 75 of the Finance Act, 1994 and imposing penalties on the assessee under Sections 76 to 78 of the Act - whether maintenance or repair service as it was introduced on 01.07.2003 as a taxable service u/s 65 (64) read with Section 65 (105) (zzg) can be held to have covered maintenance or repair of software. Department issued show-cause notices not only for certain periods prior to and after the period of dispute involved in the case, but also for a part of the period of dispute demanding Service Tax from the assessee under the head 'management consultancy service', in respect of the same activities viz. software licensing, maintenance, consulting and training. It has been pointed out that software maintenance was also sought to be taxed under the head 'management consultancy service' for different periods when 'maintenance or repair service' was also a taxable service under Section 65 of the Finance Act, 1994. HELD THAT:- No material has been placed before us, other than the literature supplied by the learned Special Consultant for the Revenue, to show that activities of the kind undertaken by the appellant during the material period would be encompassed in the ERP regime. To our mind, these are activities very much within the coverage of sub-clause (zzzze)(iii) of Clause 105 of Section 65 of the Finance Act, 1994. Any incidental advice, consultancy or assistance given by the service provider will be squarely covered by sub-clause (zzzze)(iv). It is pertinent to note that adaptation, upgradation, enhancement, implementation, etc. of information technology software are expressly covered by the definition of 'information technology software' service and that these very operations have also been specified as different categories on software maintenance in the literature supplied to us. Thus there is almost total convergence between the technical literature on software and the definition of information technology software service given under Section 65(1 05) (zzzze) of the Finance Act, 1994. It is settled law today that a new taxable service covered by specific entry under Section 65 of the Finance Act, 1994 will not attract levy of Service Tax under any pre-existing entry. In this connection, the High Court in Turbotech Precision Engineering Pvt. Ltd.[2010 (4) TMI 344 - KARNATAKA HIGH COURT] is relevant. The Hon'ble High Court has held that the case of the assessee fell under the definition of 'works contract' and hence it could not be classified as 'consulting engineer's service'. It may be noted that 'works contract' came to be introduced as a taxable service w.e.f. 01.06.2007 only. The service rendered by the above company was for a period prior to the said date. The Revenue wanted to levy Service Tax under the pre-existent head 'consulting engineer service', which was negatived by the Hon'ble High Court. Thus, we hold that the maintenance charges collected by the appellant from their customers during the period from 09.07.2004 to 31.01.2006 are not liable to be subjected to levy of Service Tax under the head 'maintenance or repair service' under Section 65 (105) (zzg) read with Section 65 (64) of the Finance Act, 1994. The services rendered by the appellant to their customers are in the nature of information technology software service which was made taxable w.e.f. 16.05.2008 only. Such service is not to be subjected to levy of Service Tax under any other entry. Therefore, the demand of Service Tax and the connected penalties are only liable to be set aside. Issues: Whether maintenance charges collected during 09.07.2004 to 31.01.2006 for services in relation to computer/software are liable to Service Tax under 'maintenance or repair' service as defined in Section 65(64) read with Section 65(105)(zzg) of the Finance Act, 1994.Analysis: The statutory definition of 'maintenance or repair' under Section 65(64) and the definition of taxable services under Section 65(105) are examined, including amendments and the later introduction of a distinct 'information technology software' service under Section 65(105)(zzzze) effective 16.05.2008. The explanation to Section 65(64) distinguishes 'computer software' and 'information technology software' and the amended sub-clauses post-16.05.2008 treat maintenance/repair of information technology software under a separate sub-clause. Technical literature on software maintenance shows categories such as adaptive and perfective maintenance which involve upgradation, enhancement and implementationactivities that align with the statutory description of information technology software services. Established principle that a service covered by a later specific entry is not taxable under a pre-existing, broader entry is applied to the statutory scheme and amendments.Conclusion: Maintenance charges collected during the period 09.07.2004 to 31.01.2006 are not taxable under 'maintenance or repair' service as defined in Section 65(64) read with Section 65(105)(zzg); the activities fall within the definition of information technology software service which was made taxable only w.e.f. 16.05.2008. The demand of Service Tax and connected penalties are set aside in favour of the assessee.Ratio Decidendi: Where legislature creates a specific taxable entry for information technology software services, activities of adaptation, upgradation, enhancement and implementation of software are to be treated under that specific entry and cannot be taxed under the earlier general 'maintenance or repair' entry for periods prior to the specific levy.