The Supreme Court has dismissed the plea of the excise department to levy service tax on IBM India’s application software — enterprise resources planning software system (implementation service). A bench headed by justice SH Kapadia rejected the plea of the commissioner of central excise alleging that IBM had failed to pay service tax on its enterprise resources planning (ERP) software system (implementation service) used to facilitate the flow of information between all business functions inside the boundaries of its clients’ organisations and manage the connections with outside stakeholders.

Challenging the sectoral tribunal’s order that dismissed its plea, the department said that the ERP software system is an application which falls under the taxable category of management consultant service.

Stating that IBM India Pvt Ltd has not designed or developed any ERP software, the department said, “The adaptation and operationalisation of ERP software do not involve any activity in relation to operation of computer system. Hence, the classification under the information technology service/business auxilliary service is erroneous. On the contrary, the activities undertaken by IBM in relation to ERP software fully confirm to the definition of management consultant service.”

As regards ERP planning and advice, the company was discharging service tax liability under the management consultancy services, government counsel Binu Tamta said, adding that the ERP implementation service, however, would be liable to service tax.

IBM denied the charges saying that it was liable to pay tax on the service with effect from May 2008 under the new category of information technology software services and not under the management consultancy services.

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