Maintenace or Repair of Software--Taxable only from 16.05.2008--SAP India Ltd

Maintenance and Repair of Software – taxable only from 16.05.2008, when IT Software Service was introduced – 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.




M/s SAP INDIA PRIVATE LIMITED Vs THE COMMISSIONER OF CENTRAL EXCISE BANGALORE-III COMMISSIONERATE




Settled law that a new taxable service will not attract levy of Service Tax under any pre-existing entry: 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 Karnataka High Court's judgment in Commissioner Vs. Turbotech Precision Engineering Pvt. Ltd- 2010-TIOL-498-HC-KAR-ST is relevant. The 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 High Court.
Case Law Referred:

Tata Consultancy Service Vs. State of Andhra Pradesh - 2004-TIOL-87-SC-CT-LB - refererred
Bharat Sanchar Nigam Limited Vs. Union of India - 2006-TIOL-15-SC-CT-LB - refererred
Infosys Technologies Ltd. Vs. Special Commissioner and Commissioner of Commercial Taxes and another - 2008-TIOL-509-HC-MAD-CT- refererred
Dr. Lal Path Lab Pvt. Ltd. Vs. CCE, Ludhiana - 2006-TIOL-1175-CESTAT-DEL (upheld by the High Court of Punjab & Haryana vide - 2007-TIOL-533-HC-P&H-ST - refererred
Federal Bank Ltd. Vs. Commissioner - 2009-TIOL-1597-CESTAT-BANG
IBM India Pvt. Ltd. Vs. CST, Bangalore - 2010-TIOL-167-CESTAT-BANG - refererred
Karnataka High Court's judgment in Commissioner Vs. Turbotech Precision Engineering Pvt. Ltd. - 2010-TIOL-498-HC-KAR-ST - followed


This appeal filed by the assessee is directed against the Commissioner's order confirming demands of Service Tax of Rs.20,89,72,647/- against them in adjudication of show-cause notice dated 26.10.2006 for the period from July, 2004 to January, 2006, appropriating earlier payment of Rs.6,29,80,109/- of the assessee towards such demand, demanding interest on tax under Section 75 of the Finance Act, 1994 and imposing penalties on the assessee under Sections 76 to 78 of the Act. We have examined the records. In the aforesaid show-cause notice, it was alleged that the assessee had rendered "maintenance or repair" services, taxable under Section 65(105)(zzg) read with Section 65(64) of the Finance Act, 1994, to different clients under agreements during the aforesaid period. It was also alleged that the assessee had not cared to get registered with the Department in respect of the said service or to file Service Tax returns or to pay Service Tax, all with intent to evade payment of the tax. On this basis, it was further alleged that Service Tax was leviable on the maintenance charges collected from the clients under the aforesaid agreements by invoking the extended period of limitation under Section 73(1) of the Finance Act, 1994. For the same reasons, penalties were proposed on the assessee. The demand of Service Tax and other proposals in the show-cause notice were contested in a detailed reply filed by the assessee. It was in adjudication of this dispute that the Commissioner passed the impugned order.


2.0 We have heard both sides and considered their submissions. The levy of Service Tax on 'maintenance or repair' service was introduced w.e.f. 01.07.2003. At the outset, we shall reproduce the definition of "maintenance or repair" given under Section 65(64) of the Finance Act. Prior to 16.06.2005, this definition stood as follows:-


"Section 65(64) "maintenance or repair" means any service provided by –
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorized by him,

in relation to maintenance or repair or servicing of any goods or equipment, excluding motor vehicle."

There was an amendment to the definition, which took effect on 16.06.2005. The amended definition read as under:-


"(64) "maintenance or repair" means any service provided by –
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorized by him,
in relation to

(a) maintenance or repair including reconditioning or restoration, or servicing of any goods or equipment, excluding motor vehicle; or
(b) maintenance or management of immovable property."

'Management' was also brought within the net of Service Tax w.e.f. 01.05.2006 and, consequently, the service came to be known as "management, maintenance or repair" service. There were some amendments to this service also from time to time, but we are not concerned with the same.

3.0 As per Section 65(105)(zzg) of the Finance Act, "taxable service" means any service provided to any person by any person in relation to maintenance or repair, in so far as the period of dispute in this case is concerned. Referring to the above definitions and the changes made thereto from time to time, both sides have advanced their respective viewpoints on the interpretation of the provisions as applicable to "maintenance or repair of computer software". The learned Counsel for the appellant has pointed out that Business Auxiliary Service (BAS for short) was also introduced as a taxable service on 01.07.2003 and, significantly, its definition under Section 65(19) of the Act excluded maintenance of information technology software. It has been argued that a service specifically excluded from the definition of a taxable service (BAS), should ipso facto remain outside the purview of levy of Service Tax. The learned Counsel means to say that, as long as information technology software maintenance stood excluded from the purview of BAS, it would not be chargeable to Service Tax. The learned Counsel has contextually relied on the Board's Circular No. 70/19/2003-ST dated 17.12.2003 wherein it was clarified that "maintenance of Software is not chargeable to Service Tax". In this connection, it has been submitted by the learned Special consultant for the Revenue that the Circular dated 17.12.2003 was superseded by Circular No. 81/2/2005-S.T., dated 07.10.2005 wherein maintenance or repair or servicing of software was held to be exigible to Service Tax under Section 65(105) (zzg) read with Section 65(64) of the Finance Act, 1994. In this connection, the learned Consultant has also referred to the Hon'ble Supreme Court's decision in Tata Consultancy Service Vs. State of Andhra Pradesh wherein their lordships held that software (whether canned/branded), in any medium, should be "goods". In this connection, he has also pointed out that one of the members of the Constitution Bench had gone to the extent of holding that even customized software would satisfy the attributes of "goods". It is further submitted that this view was followed with approval in the case of Bharat Sanchar Nigam Limited Vs. Union of India  , which, in turn, was followed by the Madras High Court in the case of Infosys Technologies Ltd. Vs. Special Commissioner and Commissioner of Commercial Taxes and another . He has also contextually referred to two Notifications, No. 20/2003-ST dated 21.08.2003 and No. 7/2004-ST dated 09.07.2004. The first Notification exempted from levy of service tax the taxable service provided to a customer by any person in relation to maintenance or repair of computers, computer systems or computer peripherals. The second Notification rescinded the first thereby rendering the said service chargeable to Service Tax. Contextually, we note that the impugned demand of Service Tax is for a period from 09.07.2004. According to the learned Special Consultant, maintenance or repair of computers and computer systems would include maintenance or repair of software also as clarified by the Board in its Circular dated 17.12.2003. The learned counsel has opposed this view. According to him, computers or computer systems would not per se include software. According to him, Notification No. 20/2003-ST ibid purported to exempt maintenance or repair of only computer hardware from payment of Service Tax. In this view, according to the counsel, neither of the two Notifications will have any bearing on the taxability of maintenance or repair of software.

3.1 The learned Counsel for the appellant has also relied on the following decisions in support of his plea that what is specifically kept out of the levy by the Legislature cannot be subjected to tax:-


(i) Dr. Lal Path Lab Pvt. Ltd. Vs. CCE, Ludhiana - 2006 (4) STR 527(Tri.-Del.) = 2006-TIOL-1175-CESTAT-DEL (upheld by the High Court of Punjab & Haryana vide [2007 (8) STR 337(P&H)] = 2007-TIOL-533-HC-P&H-ST
(ii) Federal Bank Ltd. Vs. Commissioner - 2009 (15) STR 279 (Tri.-Bang.) = 2009-TIOL-1597-CESTAT-BANG (upheld by the Kerala High Court vide (2010) 34 VST 27 (Ker).

3.2. The learned Counsel has further submitted that maintenance or repair of software became taxable only w.e.f. 16.05.2008 when Information Technology Software service was introduced under Section 65 of the Finance Act, 1994. It has been argued that, prior to the said date, such service was not taxable. In this connection, the learned Counsel has claimed support from IBM India Pvt. Ltd. Vs. CST, Bangalore - 2010 (17) STR 317(Tri.-Bang.), = 2010-TIOL-167-CESTAT-BANG wherein it was held that Enterprise Resource Planning (ERP), advice, implementation services were not subject to Service Tax under the head 'Management Consultant' service and the same were taxable under the new category of 'Information Technology Software' service, introduced w.e.f. 16.05.2008.

3.3 In the face of the above arguments of the counsel, the learned Special Consultant for the Revenue has referred to a technical literature on the subject. He has quoted from "SOFTWARE ENGINEERING - A PRACTITIONER's APPROACH" (Fourth Edition) by Roger S. Pressman. It has been submitted that maintenance of computer software can be categorized as corrective, adaptive, perfective and preventive depending on the nature of the activity. These categories of software maintenance are covered by the so-called "ERP maintenance and upgradation activities". It is submitted that these services are normally rendered after release or installation of the software in the customer's computer system. The learned Consultant has submitted in response to queries from the Bench that, in the ERP regime, maintenance of software would consequentially follow planning and implementation. It is submitted that ERP implementation may require some maintenance. Broadly speaking, according to the learned Consultant, the aforesaid categories of maintenance are done once the installed/implemented software goes "live”, The gist of submissions of the learned Consultant is that whatever the technocrat does for maintenance of computer software is what the law-maker intended to bring within the ambit of "maintenance or repair" service in relation to computer software. It is this view which is sought to be supported by the Board's Circular dated 17.12.2003 and the decisions of the Hon'ble Supreme Court in Tata Consultancy Services (supra) and BSNL (supra) cases.

4. The learned Counsel has also raised the plea of limitation against the impugned demand of Service Tax. In this connection, it has been pointed out that certain ongoing proceedings of the department, which are presently at various stages, would indicate that the Department is yet to take a definite view with regard to levy of Service Tax on computer software maintenance. In this connection, he has referred to show-cause notice No. 2923/2007 dated 13.04.2007 which sought to levy Service Tax under the head "management consultant's service" from the assessee in respect of software licencing, maintenance, consulting and training for the period from 01.04.2004 to 30.09.2004 and March, 2006. This show-cause notice is said to be pending adjudication.



4.1. The learned Counsel has also pointed out that, in respect of the same activities (software licensing, maintenance, consulting and training), the Department demanded Service Tax under the head "management consultant's service" for the period 01.04.2001 to 31.03.2004 by show-cause notice dated 06.05.2005, which was adjudicated upon against the assessee in order-in-original No. 58/2006 dated 26.09.2006. The order of adjudication was set aside by this Tribunal by Final Order No. 261/2007 dated 23.02.2007, against which the Department's appeal No. 133/2007 is pending before the High Court of Karnataka. The learned Counsel has further pointed out that a similar issue for the period 01.04.2000 to 31.03.2001 arising out of show-cause notice No. 2970/2005 dated 06.05.2005, is also pending before the Hon'ble High Court. It has also been pointed out that, like show-cause notice No. 2923/2007 dated 13.04.2007, a subsequent show-cause notice No. 177/2008 dated 21.10.2008 involving the period 01.04.2007 to 31.03.2008 and involving the same issue is also pending adjudication. The gist of all these submissions is that the 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. In this scenario, according to the learned counsel, it cannot be said that anything was suppressed by the assessee with intent to evade payment of Service Tax under the head "maintenance or repair service" during the period of dispute (July, 2004 to January, 2006). Therefore, according to the learned counsel, the extended period of limitation is not invocable in this case.

4.2. The learned Special Consultant for the Revenue has submitted that, though it would appear from show-cause notice No. 2923/2007 dated 13.04.2007 that it covers a small portion of the period of dispute involved in the instant case, there is nothing on record to show that any part of the subject-matter of show-cause notice dated 26.10.2006 is a part of the subject-matter of the above show-cause notice. Therefore, according to him, it is not open to the assessee to resist invocation of the extended period of limitation in the present case on the strength of any of the ongoing proceedings arising out of other show-cause notices.

4.3. Shri Ramanan has further referred to the statements of Shri Venkatesh Bhat (Assistant Finance Manager of the appellant company) in this context. Shri Venkatesh Bhat, in his statements, had not referred to any of the show-cause notices issued prior to 26.10.2006 and also had not indicated that the company was not liable to pay Service Tax under the head "maintenance or repair service" in respect of the services rendered by them to various licensees to whom software packages were granted by the company. Shri Venkatesh Bhat also stated that they had estimated the amount of Service Tax payable under the head "maintenance or repair service" for the period from October, 2005. He also stated that the company had started paying Service Tax from October, 2005 and also that they had obtained registration in respect of the said service. In one of his statements, Shri Venkatesh Bhat had also agreed that, with the rescission of Notification No. 20/2003-ST, they were liable to pay Service Tax on "maintenance or repair service" in relation to computer software. According to the learned Consultant, where the liability was accepted atleast for the period from October, 2005, the appellant is not entitled to resist the demand of Service Tax on the ground of limitation. It is also submitted that the material fact was not disclosed by the assessee at any stage during the period of dispute. They did not file any return during the said period covering the maintenance charges collected by them from their customers in respect of the software maintenance. Moreover, they had not taken steps to obtain registration with the Department in respect of the service. Necessary steps were taken only after the investigations by DGCEI commenced. In the circumstances, there can be no valid objection to invocation of the extended period of limitation.

5.0. We have given careful consideration to the submissions. A profile of the activity undertaken by the appellant was given by the learned Special Consultant for the Revenue. Accordingly, what was done by the appellant in terms of the relevant agreements (end-user licence agreements) was rendering of various services in relation to the software already installed in computer systems and made operational. According to a literature filed by the learned Special Consultant, ERP maintenance is defined as post-implementation activities undertaken from the time the system goes live until it is retired from production. Another piece of literature produced by him is Chapter 27.2.1 (Software Maintenance) from "Software Engineering - A Practitioner's Approach" ibid. We shall usefully reproduce a part of the said para herein:

"Software maintenance is, of course, far more than "fixing mistakes". We may define maintenance by describing four activities [SWA76] that are undertaken after a program is released for use:

• corrective maintenance

• adaptive maintenance


• perfective maintenance or enhancement


• preventive maintenance or reengineering


Only about 20 percent of all maintenance work is spent "fixing mistakes". The remaining 80 percent is spent adapting existing systems to changes in their external environment, making enhancements requested by users, and reengineering an application for future use. When maintenance is considered to encompass all of these activities, it is relatively easy to see why it absorbs so much effort. "

It would appear from the above literature that, after the release and implementation of software package, under the ERP regime, the appellant used to provide a variety of maintenance services to their licensees. These services used to be provided mostly to upgrade the software or enhance its efficiency so as to meet the requirements of the customer. Obviously, the evolving technological environment would require perfective measures to upgrade the software. As we understand, these measures are covered by the terms "adaptive maintenance" and "perfective maintenance" mentioned in the above literature. "Corrective maintenance" and "preventive maintenance" are two other categories of maintenance of software. It would appear from the literature that, in so far as computer software is concerned, "maintenance" is an expression of wider connotation unlike maintenance of tangible goods (for instance, maintenance of a vehicle), maintenance of a factual situation (for instance, maintenance of status quo ordered by a court) etc. The wider implications of "software maintenance" are easily decipherable from the literature supplied by the learned Special Consultant.

5.1. The question now arises as to whether maintenance or repair service as it was introduced on 01.07.2003 as a taxable service under section 65 (64) read with Section 65 (105) (zzg) can be held to have covered maintenance or repair of software. In the case of Tata Consultancy Services (supra), BSNL (supra) and Infosys Technologies (supra), the view taken was that software in any media would also be "goods". The question whether maintenance or repair of software was a taxable service within the ambit of Section 65 (64) of the Finance Act, 1994 was not apparently considered in any of those cases. That software (branded or customised) has the attributes of "goods" is just a postulate for us and we shall proceed accordingly. Maintenance or repairs of goods will not normally result in upgradation of its value or functional capacity or efficacy to higher levels than what originally existed. But maintenance of software, as per technical literature, can improve its applicability to new functional areas to benefit the customer thereby enhancing its functional capacity/efficacy and value. Perhaps, the only category of maintenance referred to by the learned Special Consultant, which may compare with maintenance of tangible goods, is corrective maintenance. Other categories like adaptive maintenance and perfective maintenance (enhancement) cannot be limited to the scope of maintenance of goods. Therefore, in our considered view, the expression "maintenance or repair", when used in connection with computer software, has a wider import than when used in connection with tangible goods. In this view of the matter, we would now have a look at the new levy introduced on 16.05.2008.

5.2. "Information technology software" is seen defined under Section 65 (53a) of the Finance Act, 1994 as follows:-
65(53a) "information technology software" means any representation of instructions, U data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment;

5.3. As per Section 65 (105)(zzzze) "taxable service" means any service provided or to be provided to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including-
(i)………………..
(ii)………………..
(iii) adaptation, upgradation, enhancement, implementation and other similar services related to information technology software;
(iv) providing advice, consultancy and assistance on matters related to information technology software , including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a data base, advice on proprietary information technology software ;
(v) ……………….
(vi) …………….. (underlinings added).

5.4 The above new taxable service pertains to information technology software. The debate before us was, by and large, in relation to computer software. The Circulars and case-law cited before us were also in the context of discussion on computer software. The new levy w.e.f. 16.05.2008 is in relation to information technology software. The question is whether the computer software and information technology software were treated differently or as same by the legislature. At this juncture, our mind travels to an explanation added to Section 65(64) of the Finance Act, 1994. This explanation which was added w.e.f. 01.06.2007 reads as follows:-

"For the removal of doubts, it is hereby declared that, for the purposes of this clause. "goods" includes "computer software". .

This explanation was amended w.e.f. 16.05.2008 as follows:-
"For the removal of doubts, it is hereby declared that for the purposes of this clause -
(a) "goods" includes "computer software”
(b) "properties" includes” information technology software". (underlining added)

In this context, we think, we must also reproduce the full text of Section 65(64) as it stands post-16.05.2008.
"Section 65(64) "maintenance or repair" means any service provided by-


(i) any person under a maintenance contract or agreement; or
(ii) a manufacturer or any person authorized by him,
in relation to, --
(a) management of properties, whether immovable or not;
(b) maintenance or repair of properties , whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any goods , excluding a motor vehicle." (underlining added)

5.5. Going by the explanation (supra), we find from the above text of Section 65(64) that maintenance or repair of information technology software is specifically covered under sub-clause (b) whereas maintenance or repair of computer software is specifically covered under sub-clause (c). It is obvious that the legislature has understood information technology software to be distinct and different from computer software. The Circulars and decisions cited before us, all, discuss computer software. 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.

5.6 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 Karnataka High Court's judgment in Commissioner Vs. Turbotech Precision Engineering Pvt. Ltd. (dated 15.04.2010) in CEA No. 4/2007 = 2010-TIOL-498-HC-KAR-ST 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.

6. For the reasons already noted, 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.

7. Before concluding this order, we have also to state that the Circulars of the Board or the decisions of the Hon'ble Supreme Court in the cases of Tata Consultancy Services (supra) and Bharat Sanchar Nigam Limited (supra) have no bearing on the services rendered by the appellant to their customers during the period of dispute. Also, having held in favour of the appellant on the substantive issue on merits, we have not found it necessary to deal with the limitation issue.

8. The impugned order is set aside and this appeal is allowed.