Kasturi & Sons Ltd Vs Union Of India & others (Madras High Court)- Dated: 24-02-2011 – Service Tax
Maintenance of Software – Applicability before 1.6.2007 – Circular no. 81/2/2005-ST, Dated : October 7, 2005 – Held that: It is not the case of revenue that when the amendment was brought in the Finance Act, it was given retrospective effect and even the altered definition of the term, ‘goods’ in the amendment of 2007 in the Finance Act, 1994 under section 65(105)(zzg) also was not given retrospective effect and hence, it cannot be said that the impugned circular attempts to give effect to the provisions or explains the changes proposed in the Finance Act, 2005.
There was no occasion to consider the implications of the Finance Act 2003 to 2006 in respect of the terms ‘information technology’ and ‘maintenance of software’ and the decision rendered in Tata Consultancy Service v. State of Andhra Pradesh (Supreme Court) in the context of the said Act under Entry 54, List-II of VII Schedule to the Constitution cannot be cited for a clarification in respect of the Finance Act, 1994 which is a Parliamentary enactment.
The impugned circular is declared to have no application to the petitioner, as the same is opposed to the provisions of the Finance Act insofar as it relates to imposing of service tax on software relating to maintenance, repairing and servicing under the Finance Act, 1994 before the period of Finance Act, 2006.
Based on the impugned circular of the second respondent, the third respondent is insisting for payment of service tax on maintenance charges payable to the company in Denmark and therefore, the impugned circular is challenged on various grounds including that the same is ultra vires section 83 of the Finance Act, 1994 and section 37B of the Central Excise Act, 1944, that when the section itself takes away the maintenance of software from the purview of service tax, the second respondent cannot by virtue of such circular impose service tax, that it is ultra vires Article 265 of the Constitution of India, since it seeks to impose service tax through a circular which is not permissible in law and therefore, it affect Articles 19(1)(g) and 14 of the Constitution of India.
DATED : 24.02.2011
WRIT PETITION NO. 5534 of 2006 and WPMP.No.5976 of 2008
Kasturi & Sons Ltd.,
1. Union of India rep.
2. The Central Board of Excise & Customs
3. The Assistant Commissioner of Central Excise
Writ Petition filed under Article 226 of the Constitution of India praying for issuance of a Writ of Declaration as stated therein.
The writ petition is for declaration to declare the Circular dated 7.10.2005 issued by the second respondent, the Central Board of Excise and Customs as ultra vires section 83 of Finance Act, 1994 read with sections 37B and 65(19) of the Central Excise Act, 1944 and is in violation of Articles 14, 19(1)(g) and 265 of the Constitution of India insofar it relates to the petitioner.
2. The petitioner which is engaged in the business of publishing newspapers and periodicals had entered into a contract on 31.10.2000 with CCI Europe A/S Denmark for the supply of software for pagination system. That apart, an agreement for maintenance of software was also entered, by which the petitioner paid DKK 2,209,690 equivalent to Indian Rupees 1.66 crores (approximately). (a) The second respondent issued a circular on 17.12.2003 to the effect that the software service would be outside the purview of service tax and it is also stipulated in section 65(19) of the Finance Act, 1994 that it does not include Information Technology Services and as per the explanation to that Section, the maintenance of computer software is included in information technology service. (b) After the judgment was rendered by the Supreme Court in Tata Consultancy Service v. State of Andhra Pradesh [(2005) 1 SCC 308], wherein it was held that canned software amounts to tangible property and when the same is sold it would be liable for sales tax, the second respondent issued the impugned circular dated 7.10.2005 to the effect that software amounts to goods and therefore, the maintenance of software will attract maintenance charges liable for service tax. (c) Based on the impugned circular of the second respondent, the third respondent is insisting for payment of service tax on maintenance charges payable to the company in Denmark and therefore, the impugned circular is challenged on various grounds including that the same is ultra vires section 83 of the Finance Act, 1994 and section 37B of the Central Excise Act, 1944, that when the section itself takes away the maintenance of software from the purview of service tax, the second respondent cannot by virtue of such circular impose service tax, that it is ultra vires Article 265 of the Constitution of India, since it seeks to impose service tax through a circular which is not permissible in law and therefore, it affect Articles 19(1)(g) and 14 of the Constitution of India.
3. In the counter affidavit filed by the respondents, it is stated that the services done by outsourcing agencies are to be treated as business auxiliary service as defined under section 65(19) of the Finance Act, 1994 as substituted by the Finance (No.2) Act, 2004 and the definition information technology service includes computer software, system networking, data processing, etc., after the amendment effected in the Finance Act, 2006 and after 1.5.2006 only the services relating to designing or developing of computer software or system networking or computerized data processing or any other services primarily in relation to operation of computer systems are excluded and therefore, it does not mean that it is not taxable under maintenance or repair service. Therefore, according to the respondents, the maintenance branch of information technology was brought into the purview of service tax structure by the amendment made to section 65(19) by Explanation (b) in Finance Act, 2004. (a) After the amendment, in respect of import of service, section 66A(1) provides that any service specified in section 65(105) is taxable service provided that the person has established a business or has a fixed establishment from which the service is provided or has his permanent address or usual place of residence in a country other than in India and that the same is received by a person who has his place of business or usual place of residence in India. (b) To attract service tax, the contracted agreement need not necessarily be maintenance contract or agreement. By the circular it is only the scope of explanation to the amendment to the Finance Act which has been indicated and that is well within the statutory powers and therefore, the contention of the petitioner that it is ultra vires is erroneous. (c) The present circular which supersedes all other earlier circulars and communications other than the orders issued under section 37B of the Central Excise Act, 1944 was due to the decision of the Government to give a comprehensive review of all clarifications issued since the introduction of service tax in the year 1994 and the circular only reflects the interpretation of law and the current practice followed in the department and it does not override the legal provisions. (d) As per the circular, the petitioner is liable to pay service tax on the maintenance contract for the service received by it from the foreign service provider and therefore, the contention that the circular is ultra vires the provisions of the Finance Act or the Central excise Act, 1944 and also the Constitution of India is unfounded. (e) It is stated that the impugned circular does not impose any tax liability but only explains the scope of changes made by virtue of the amendments in the Finance Act, 2004 and therefore, the question that it is violative of Article 265 of the Constitution of India does not arise. It is also stated that alternative remedy is available to the petitioner and without availing the same, the present writ petition has been filed and therefore, on the said ground also, the writ petition is liable to be dismissed.
4. Under the impugned circular issued, the second respondent relied upon the judgment of the Supreme Court in M/s.Tata Consultancy Services v. State of Andhra Pradesh [(2004) 178 ELT 22 (SC) = (2005) 1 SCC 308] and observed that software being goods, any service in relation to maintenance or repairing or servicing of software is liable for service tax under section 65(105)(zzg) read with section 65(19) of the Finance Act, 1994 and hence, the circular is in super cession of earlier circulars.
5. Under the contract entered on 31.10.2000 with a foreign dealer for supply of software, the petitioner entered a maintenance contract paying annual maintenance charges to the foreign dealer and by virtue of the impugned circular issued by the second respondent the petitioner would be bound to pay service tax in respect of maintenance of software.
6. Admittedly, it is under the Finance Act, 2007, with effect from 1.6.2007, the term goods has been expressly made to include computer software. But earlier in the Finance Act, 2003 in which the terms, business auxiliary service and maintenance or service were introduced for the first time. There was specific exclusion of information technology service including maintenance of computer software from the purview of business auxiliary service. The term, business auxiliary service as introduced in the Finance Act, 2003 with explanation contained therein is as follows: “65 (19) “business auxiliary service” means any service in relation to,-
(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or
(ii) promotion or marketing of service provided by the client; or
(iii) any customer care service provided on behalf of the client; or
(iv) any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public relation services, and includes services as a commission agent, but does not include any information technology service.
Explanation.– For the removal of doubts, it is hereby declared that for the purposes of this clause “information technology service” means any service in relation to designing, developing or maintaining of computer software, or computerized data processing or system networking, or any other service primarily in relation to operation of co9mputer systems.”
7. That was also followed in the Finance Act, 2004, with effect from 10.9.2004 and that status has been followed till the Finance Act, 2007, as stated above. Therefore, the liability for payment of service charge from 2007 which has been imposed by way of statutory incorporation is not in dispute. But the question for consideration is, till passing of the Finance Act, 2007 in the light of specific exemption of information technology from the purview of ‘business auxiliary service’ under the respective Finance Acts, whether the impugned circular issued by the second respondent can have the effect of imposing the liability of service tax or otherwise and whether the circular issued by the second respondent can be read in supercession of the statutory provisions of the Finance Acts in the respective financial years.
8. Therefore, on fact, it is clear that till the advent of the Finance Act, 2007, the information technology which included maintenance of computer software, had been outside the purview of ‘business auxiliary service’, especially under section 65 and the term, ‘goods’ in the Finance Act, 2007 has included computer software under section 65(105) (zzg). However, under the impugned circular the second respondent placed reliance on the judgment of the Supreme Court in Tata Consultancy Service v. State of Andhra Pradesh [(2005) 1 SCC 308] to conclude that software being goods, any service relating to maintenance, repairing and servicing of the same is also liable for service tax. The Supreme Court in that case decided about the term, ‘goods’ in the light of Andhra Pradesh General Sales Tax Act and framed the question as follows: “The appellants provided consultancy services including computer consultancy services. As part of their business they prepared and loaded on customers’ computers custom-made software (“uncanned software”) and also sold computer software packages off the shelf (“canned software”). The canned software packages were of the ownership of companies/persons who had developed those software. The appellants were licensees with permission to sub-license those packages to others. The canned software programs were programs like Oracle, Lotus, Master Key, N-Export, Unigraphics, etc. The question raised in this appeal was whether the canned software sold by the appellants could be termed as “goods” and as such was asses sable to sales tax under the Andhra Pradesh General Sales Tax Act,1957.” and ultimately answered as follows:
” There is no error in the High Court holding that branded software is goods. In cases of both branded and unbranded software the software is capable of being abstracted, consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even unbranded software, when it is marketed/sold, may be goods. However, this aspect is not being dealt with here and no opinion is expressed thereon because in case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise.”
9. While deciding the same, there was no occasion to consider the implications of the Finance Act 2003 to 2006 in respect of the terms information technology and maintenance of software and the decision rendered in Tata Consultancy Service v. State of Andhra Pradesh [(2005) 1 SCC 308] in the context of the said Act under Entry 54, List-II of VII Schedule to the Constitution cannot be cited for a clarification in respect of the Finance Act, 1994 which is a Parliamentary enactment.
10. The Supreme Court held in Kerala Finance Corporation v. Commissioner of Income-tax [(1994) 4 SCC 375] in the context of section 119 of the Income-tax Act that the circulars issued cannot override the provisions of the Act and the relevant portion of the judgment is as follows:
” 14. The fact that the circular to which Shri Salve has referred is one which had been issued in exercise of powers conferred by Section 119 of the Act has no significance insofar as the point under consideration, namely, whether the circular can override or detract from the provisions of the Act, is concerned, inasmuch as what Section 119 has empowered is to issue orders, instructions or directions for the ,proper administration, of the Act or for such other purposes specified in sub-section (2) of the section. Such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provision of law enacted by Parliament. Such a contention cannot seriously be even raised.”
15. The impugned circular has been issued by virtue of the powers conferred under section 37B of the Central Excise Act, 1944 which is as follows:
” 37-B.Instructions to Central Excise Officers.- The Central Board of Excise and Customs constituted under the Central Boards of Revenue Act,1963 (54 of 1963), may, if it considers it necessary or expedient so to do for the purpose of uniformity in the classification of excisable goods or with respect to levy of duties of excise on such goods, issue such orders, instructions and directions to the Central Excise Officers as it may deem fit, and such officers and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the said Board: Provided that no such orders, instructions or directions shall be issued-
(a) so as to require any Central Excise Officer to make a particular assessment or to dispose of a particular case in a particular manner; or
(b) so as to interfere with the discretion of the [Commissioner of Central Excise (Appeals)] in the exercise of his appellate functions.”
16. The scope of such power came to be decided by this Court in Lakshmi Machine Work Ltd., vs. Union of India [(1992) 57 ELT 211 (Mad)] to the effect that the Circular cannot interfere with the powers of the quasi-judicial authority in applying the statutory provisions. J.Kanakaraj,J. (as He then was) observed in this regard as follows: ” 19. The last point which has to be decided is whether the first and third respondents have jurisdiction to issue such circulars which bind the quasi-judicial authorities without leaving any room for exercising their quasi-judicial powers. The respondents can take umbrage, only under Section 37(B) of the Act. Sri K.Parasaran argues that Section 37(B) should be to the classification of excisable goods or with reference to levy of duties of excise on such goods. In other words, it is argued that the words “all such goods” are relatable only to the classification of excisable goods. If the argument of the revenue with regard to the scope of Section 37(B) is accepted, it will only mean that the second respondent can give any direction to any of the statutory authorities and direct them to impose duty in a particular manner. I am clearly of the opinion that could not have been the intention of the legislature. The quasi-judicial authorities are certainly supposed to apply the charging provisions to the facts of a case and find out whether the goods are assess sable and if so what would be the asses sable value. Certainly Section 37(B) does not enable the second respondent to give a direction that in respect of advances/deposits, notional interest is definitely chargeable and includible in the asses sable value in all cases, notwithstanding the fact whether the same had an effect on the price, directly or indirectly or did not have such an effect. …..”
17. While it is admitted by the respondents in the counter affidavit that there has been exemption in respect of maintenance of computer software prior to 2006, it is not even their case that in 2007, when the amendment was brought in the Finance Act, it was given retrospective effect and even the altered definition of the term, goods in the amendment of 2007 in the Finance Act, 1994 under section 65(105)(zzg) also was not given retrospective effect and hence, it cannot be said that the impugned circular attempts to give effect to the provisions or explains the changes proposed in the Finance Act,2005.
18. The judgment in Collector of Central Excise, Vadodra vs. Dhiren Chemical Industries [(2002) 2 SCC 127] on which reliance was placed by the learned counsel for the respondents, wherein it was held that the circular issued by the Central Board of Excise and Customs giving different interpretation for some of the words, would bind the revenue has no application to the facts of the present case. Here, it is not a case of different interpretation of the circular, but it is a case where the circular sought to explain the statutory provisions.
19. Again, in State of Kerala v. Kurian Braham (P) Ltd., and another [(2008) 3 SCC 582], the Supreme Court, in the light of the Central Excise Act, 1944 and the Kerala General Sales Tax Act, 1963 and the Central Sales-tax Act, 1956, considered the nature of commodity taxed regarding the turnover of field latex in the hands of the asessee and the assessment was made on the ground that centrifuge latex obtained by processing field latex is a different commodity based on a circular issued by the Board in order to sustain the impugned notification and found on fact as follows: ” 22. We find no merit in the above contentions. At the outset, it may be stated that in the case of field latex there is 60% water and 40% is the rubber content. On the other hand, centrifuged latex produced from field latex reverses the ratio whereby the rubber content is increased to 60% and the water content is reduced to 40%. Basically, field latex is raw rubber whereas centrifuged latex is a product. This is the rationale behind giving or setting-off/deduction under Notification dated 13-11-2007.”
20. Again, the judgment relied upon by the learned counsel for the respondents in Union of India vs. Azadi Bacho Andolan (2004) 10 SCC 1] was in the context of the circular issued in violation of section 119 of the Income-tax Act relating to the residence nature of a Company which was sought to be assessed and it was held that the powers of Central Board of Direct Taxes in issuing directions in the form of circular under section 119 of the Income-tax Act to set things on course by eliminating avoidable wastage of time, talent and energy of the assessing officers discharging the onerous public duty of collecting revenue and that is not the case on hand.
21. Further, the judgment of this Court in W.P.No.9835 of 2010, etc. batch dated 14.9.2010 on which reliance was placed by the learned counsel for the respondents is of no help to the case of the respondents. They were all cases where individual show-cause notices and summons were issued to individual assessees based on the circular. In such circumstances, finding that individual assessees can file their objections and against the decision the appeal remedy is available, the writ petitions came to be dismissed. But, here it is a challenge to the circular which cannot be compared to the circumstances that existed in the above said batch of writ petitions.
22. In such view of the matter, the impugned circular is declared to have no application to the petitioner, as the same is opposed to the provisions of the Finance Act insofar as it relates to imposing of service tax on software relating to maintenance, repairing and servicing under the Finance Act, 1994 before the period of Finance Act, 2006. No costs. Connected miscellaneous petition is closed.