Software product updates invoiced before May 16, 2008 not liable for service tax on ITSS

CESTAT Bangalore held that service tax cannot be levied on software product updates where invoices and payments were made prior to 16.05.2008, before service tax became applicable to Information Technology Software Services (ITSS). The tribunal ruled that taxable service provisions cannot extend to periods when service tax was not liable. Following precedent from Carrier Point v. Commissioner, contracts concluded before tax levy dates do not attract service tax. The tribunal found no suppression of facts warranting extended limitation period, as appellant could not be expected to declare pre-levy transactions. Appeal allowed, impugned order set aside.

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Issues Involved:
1. Liability of Service Tax on software updates provided under contracts signed before 16.05.2008 but valid beyond this date.
2. Applicability of pro-rata basis for Service Tax calculation.
3. Allegation of suppression of facts and invocation of extended period for demand.
4. Rejection of refund claim on the amount paid under protest.

Detailed Analysis:

1. Liability of Service Tax on Software Updates:
The appellant, M/s. Oracle India Pvt. Ltd. (OIPL), entered into contracts for software updates before 16.05.2008, with payments and invoices issued prior to this date. The Department contended that Service Tax was due on the portion of services provided post-16.05.2008, as the Information Technology Software Service (ITSS) became taxable from this date. The appellant argued that the taxable event occurred when the contract was signed and payments were made, which was before the tax was introduced. The Tribunal agreed with the appellant, citing precedents like Bajaj Alliance General Insurance Company Ltd. and Reliance Industries Ltd., which established that Service Tax is applicable based on the date of the agreement and payment, not on the service period.

2. Applicability of Pro-rata Basis for Service Tax Calculation:
The Department's method of calculating Service Tax on a pro-rata basis for services extending beyond 16.05.2008 was challenged. The Tribunal found no statutory provision supporting this approach. The appellant cited Circular No.B.11/1/2002, which clarified that no Service Tax is payable on membership fees collected before the tax's introduction, supporting their argument against the pro-rata division.

3. Allegation of Suppression of Facts and Invocation of Extended Period:
The Department invoked the extended period under Section 73(1) of the Finance Act, 1994, alleging suppression of facts by the appellant. The Tribunal found that the appellant had disclosed all relevant information during the audit in 2008 and that the show-cause notice was issued only after the appellant filed for a refund. The Tribunal concluded that there was no suppression or mis-declaration, and thus, the extended period could not be invoked.

4. Rejection of Refund Claim:
The appellant's refund claim for the amount paid under protest was initially rejected on the grounds that the issue was still under investigation. Since the Tribunal decided in favor of the appellant regarding the main issue of Service Tax liability, the refund claim was remanded to the original authority for reconsideration, ensuring the appellant is given an opportunity to be heard.

Conclusion:
The Tribunal set aside the impugned orders, allowing Appeal No.ST/3061/2011 and remanding Appeal No.ST/717/2012 for fresh consideration of the refund claim. The decision emphasized that Service Tax could not be levied on contracts signed and payments made before the tax's introduction, rejecting the pro-rata basis for calculation and the invocation of the extended period for demand.

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