2023 (2) TMI 944 - AT - Service Tax

Tribunal upholds service tax levy on software supply, penalties imposed for statutory breaches

M/s. United India Insurance Co. Ltd. Versus Commissioner of GST & Central Excise, Chennai

The tribunal upheld the levy of service tax on the supply of software, ruling that the taxable event occurred after the introduction of the tax statute. ... Taxability - Extended period of limitation - Activity of providing application software technology i.e. ‘Core Insurance Solution’ for use in the business of UIIC - supply of the said service even prior to its Introduction in the taxing statute - extended time limit could be invoked or not for the issue of SCN when the entire issue involved the interpretation of law relating to taxability - levy of penalty. Whether the point of taxation for the right of use of a IT software would be the date on which it is downloaded or after the commissioning of the software? HELD THAT:- It is not disputed that the software was downloaded in December 2007 while the said service was brought under the tax net only on 16/05/2008 - From a reading of Section 65 (105) (zzzze) of the Finance Act, 1994, it is clear that the receipt of supply of software, through a download of it by UIIC for their use, from SSPSL would be covered under Section 65(105)(zzzze), if the service is found taxable during the relevant time. Since the Point of Taxation Rules 2011 came into effect only from 1/03/2011, it will not be of help in determining the relevant issue. Any person who purchases goods or services does it with the intention of using it. It is the common parlance understanding that a service can be said to have been delivered when it is done/ completed in a manner that would render its purpose satisfied to the person who sought it. In the context of the Information Technology Software Service, merely downloading the software onto his computer would not be of help to the said person, unless he can use it - The ‘right to use information technology software supplied electronically’ would hence only commence at this point and is the critical event on which the liability to pay tax would get fastened as per the facts and circumstances of this Agreement. This being so the service has been supplied only after Information Technology Software Service was brought under the tax net and is hence subject to the levy. The Appellants reference to the Apex Court decision in Association of Leasing and Financial Services Companies [2010 (10) TMI 4 - SUPREME COURT] or the Circular / Letter DOF No. 334/1/2008-TRU dated 29.2.2008 does not come to their help as it does not deal with the determination of the point of taxation and only refers to the taxability of the service per se. It is the Appellants view that the assessments in the case were provisional at the time of audit. The Appellant was also eligible to take credit of tax paid under reverse charge. This being so and considering that the matter involved an interpretation of law relating to taxability, extended time for issue of Show Cause Notice could not be evoked nor a penalty imposed. Just because assessments are provisional would not be an impediment in the finalisation of matters that are not covered by the provisional assessment. Matters that are complete in themselves and are not affected by the terms of the provisional assessment need not be kept pending - the Apex Court in its judgment in the case of The Chairman SEBI Vs. Shriram Mutual Funds and Anr. as reported in [2006 (5) TMI 191 - SUPREME COURT] has held that, penalty is attracted as soon as the contravention of the statutory obligations as contemplated by the Act and Regulations is established and hence the intention of the parties committing such violations becomes wholly irrelevant. The Adjudicating Authority has in the impugned order given clear reasons as to why the allegations of suppression of facts and intention to evade tax has been arrived by him for invoking the extended time limit. It has been held by Constitutional Courts that appellate bodies cannot be unmindful of the great weight to be attached to the findings of facts of the Original Authority who has first hand knowledge and is in a position to assess the facts and the credibility of circumstances from his own observation. Appeal dismissed. Issues Involved:1. Whether service tax was payable on the supply of the said service even prior to its introduction in the taxing statute.2. Whether the extended time limit could be invoked for the issue of SCN when the entire issue involved the interpretation of law relating to taxability.3. Whether in the facts and circumstances penalty is sustainable.Detailed Analysis:Issue 1: Service Tax Payability Prior to Introduction in Taxing StatuteThe appellant argued that the information technology software was supplied electronically from abroad by SSPSL and downloaded in December 2007, prior to the introduction of the service in the Finance Act 1994. They contended that no tax could be levied on the supply before the levy came into force. The Revenue countered that mere downloading of the software does not constitute the completion of the service. They argued that other incidental activities, such as installation and training, were completed only after the service was brought under the tax net on 16/05/2008. The tribunal held that the right to use the software, as per the End User License Agreement (EULA) signed on 27/05/2008, constituted the taxable event. Hence, the service was supplied after the introduction of the tax and was subject to the levy.Issue 2: Extended Time Limit for Issuing SCNThe appellant claimed that the extended time limit for issuing the Show Cause Notice (SCN) could not be invoked as the issue involved the interpretation of law relating to taxability. They also argued that the assessments were provisional at the time of audit, and they were eligible to take credit of tax paid under reverse charge. The Revenue contended that the appellant had suppressed material facts by not filing details of services received from persons outside India in the ST3 returns. The tribunal agreed with the Revenue, stating that the adjudicating authority had provided clear reasons for invoking the extended time limit due to suppression of facts and intention to evade tax.Issue 3: Sustainability of PenaltyThe appellant argued that the penalty was not sustainable as the entire exercise was revenue-neutral, and they could not have achieved any purpose to evade the duty. They cited the judgment of the Hon'ble Madras High Court in Commissioner of Central Excise, Chennai - IV Vs. Tenneco RC India Pvt. Ltd. The Revenue referred to the Apex Court judgment in Dharampal Satyapal Vs. Commissioner of Central Excise, New Delhi, which stated that availability of MODVAT cannot be a defense for not paying duty. The tribunal upheld the penalty, stating that the intention of the parties committing the violations is irrelevant once the contravention of statutory obligations is established. The tribunal also emphasized the importance of the findings of facts by the Original Authority and found no procedural impropriety or disproportionality in the penalty imposed.Conclusion:The tribunal dismissed the appeal, upholding the impugned order, and ruled against the appellant on all three issues. The judgment was pronounced in court on 22.02.2023.