Software maintenance service tax demand fails where no charging notification existed and circular-based levy was quashed

Maintenance and repair of computer software was examined for service tax liability after rescission of the exemption for maintenance or repair of computers, computer systems and computer peripherals. The analysis noted that software had earlier been treated as part of computer systems, but the rescission notification did not itself bring the service into levy through a specific charging entry. A later circular treating software maintenance as taxable had been quashed by the jurisdictional High Court because service tax could not be imposed by circular. On that basis, the demand, interest and penalties were held unsustainable for the disputed period.

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Issues: Whether maintenance and repair of computer software was liable to service tax during the disputed period after rescission of the exemption notification, and whether the demand, interest and penalties could be sustained on the basis of departmental circulars.

Analysis: Notification No. 20/2003-ST had granted exemption to maintenance or repair of computers, computer systems and computer peripherals, and the contemporaneous circular treated software as part of computer systems. Although Notification No. 07/2004-ST rescinded the exemption, the services were not brought into levy by a specific charging notification. The later circular dated 07.10.2005 treated software maintenance as taxable, but that circular had been quashed by the jurisdictional High Court on the ground that service tax could not be levied by circular. In these circumstances, the Tribunal found that the disputed period remained covered by legal uncertainty and that the demand could not be sustained.

Conclusion: The demand, interest and penalties were held unsustainable and the Department's appeal was rejected.

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