Services related to development and various other activities have been brought into service tax net with effect from 16-5-2008. However, there were certain issues either due to clarification by the board or some misunderstanding of the department about the decision of the Honorable Apex Court in the matter of Tata Consultancy Services Vs. State of Andhra Pradesh (TCS) reported in 2008 -TMI - 4143 - Supreme Court, department was issuing show causes notices (SCN) for raising demand of service tax on various activities related to software such as repair and maintenance of software, testing and inspection of software etc.

In a recent case, the appellant company was engaged in software development and other software services. Department has issued SCN demanding service tax on the following grounds:

The testing of software is liable to Service Tax under the category of "Technical Inspection & Certification Service" as defined in Section 65(108) of the Finance Act, 1994 (Service Tax).

The appellant has contested the demand on the following grounds:

Software development and testing is an integral part of software development process. He said that the appellant is basically engaged in software development and when the software is developed, it has always to be tested and this testing is an integral part of the software development. He said prior to 10.09.2004, the activity was exempted under Notification No. 4/99-ST. Presently also, even by definition, the software engineering is exempted in terms of the definition given in Section 65 of the Act particularly under definition of "taxable service"

Observation and decision of honorable Tribunal On a very careful consideration of the entire issue, we find that software engineering itself is completely exempt from Service Tax at all times even at present. When software engineering itself is not liable to tax, software testing, which is an integral part for such development, cannot be brought under tax net in the guise of Technical Inspection & Certification service.

(For full text of judgment - visit 2008 -TMI - 4141 - CESTAT BANGALORE)

Software testing exemption: as integral part of software engineering, testing cannot be taxed as inspection and certification service. Software testing integral to software development cannot be treated as taxable under Technical Inspection & Certification Service; because software engineering is exempt from service tax, ancillary testing performed as part of development cannot be reclassified as a taxable inspection or certification service.