Case Law Details
Mindtree Ltd Vs Commissioner of Service Tax (CESTAT Bangalore)
It was not intention of the Government to tax software services as information technology services including ‘Software Maintenance Services’ were excluded from ‘Business Auxiliary Services’; the explanation added in the definition of ‘Goods’ to include computer services if can only be prospective from 1.6.2007 and the Circular No.81 dated 7.10.2005 cannot override the statutory provisions and moreover, the same was struck down by Madras High Court in the case of Kasturi and Sons Ltd.: 2011 (22) STR 129 (Mad.); the same was followed by jurisdictional High Court of Karnataka in the case of M/s. IBM India Pvt. Ltd.: 2021 (47) GSTL 7 (Kar.); it was held that software maintenance is exigible to service tax only from 1.6.2007. He also submits that Revenue has erred in considering the total domestic revenue during the period July 2004 to November 2005, whereas in terms of the show-cause notice only the amount received for software maintenance should have been considered.
CESTAT held that the appellants are not required to service tax on software maintenance services during the period July 9, 2004 to November 30, 2005.
FULL TEXT OF THE CESTAT BANGALORE ORDER
The appellants M/s. Mind Tree are engaged in provision of IT related services and have obtained registration for providing ‘Management, Maintenance or Repair Service and Information Technology Software Service’. During the course of audit, the department observed that the appellants received an amount of Rs.6320.52 lakhs towards the services rendered under maintenance and repair of software service for the period 9.7.2004 to 30.11.2005; such service were liable to service tax from 1.7.2003; however, maintenance of computer software was exempted vide Notification No. 20/2003 from 21.8.2003 to 8.7.2004; CBEC vide Circular dated 17.12.2003 clarified that computer software was not leviable to be taxed under the service; when Hon’ble Supreme Court held in the case of Tata Consultancy Services that computer software was goods, the department vide Circular No.81 dated 7.10.2005 and Circular No.256 dated 7.3.2006 clarified that maintenance, repair and servicing of software were liable to service tax from 9.7.2004; the appellants who are engaged in providing maintenance and repair of software and in export of services started paying service tax from 1.12.2005 only. Therefore, department opined that the appellants are liable to pay service tax of Rs.644.69 lakhs with effect from 9.7.2004. During the course of audit, it was also observed that prior to 1.7.2008, a service provider of both exempted and taxable services was allowed the option either to maintain separate accounts of inputs services received under Rule 6(3)(c) of CENVAT Credit Rules, and in case such separate accounts are not maintained, they shall be entitled to utilise the CENVAT credit only to the extent of 20% of the service tax payable; the appellants though availed and utilised credit up to 20% of the tax payable, failed to pay the balance amount of 80% of total tax i.e. Rs.135.16 lakhs in cash for the period June 2007 to March 2008. A show-cause notice dated 19.4.2010 was issued and was confirmed by the Order-in-Original dated 6.5.2011. Learned Commissioner confirmed the both the demands along with penalty and interest. Hence, this appeal.
2. Learned counsel for the appellant submits that it was not intention of the Government to tax software services as information technology services including ‘Software Maintenance Services’ were excluded from ‘Business Auxiliary Services’; the explanation added in the definition of ‘Goods’ to include computer services if can only be prospective from 1.6.2007 and the Circular No.81 dated 7.10.2005 cannot override the statutory provisions and moreover, the same was struck down by Madras High Court in the case of Kasturi and Sons Ltd.: 2011 (22) STR 129 (Mad.); the same was followed by jurisdictional High Court of Karnataka in the case of M/s. IBM India Pvt. Ltd.: 2021 (47) GSTL 7 (Kar.); it was held that software maintenance is exigible to service tax only from 1.6.2007. He also submits that Revenue has erred in considering the total domestic revenue during the period July 2004 to November 2005, whereas in terms of the show-cause notice only the amount received for software maintenance should have been considered.
2.1 Learned counsel submits that as regards the second issue of availment of CENVAT credit that the appellant has limited the utilisation of credit to 20% only as per Rule 6(3) of CENVAT Credit Rules and the only dispute is regarding payment of balance 80% in cash; the appellants have utilised the balance of 80% of the CENVAT credit after 1.4.2008 and paid the duty; it was held by the apex court in Eicher Motors : 1999 (106) ELT 3 (SC) that there is no difference between payment by cash or credit. Further, he submits that CBEC vide Circular F.No.137/72/2008-CX4 dated 21.11.2008 clarified that:
“As no lapsing provision was incorporated and that the existing Rule 6(3) of the Cenvat Credit Rules does not explicitly bar the utilisation of the accumulated credit, the department should not deny the utilisation of such accumulated Cenvat Credit by the taxpayer after 1.4.2008. Further, it must be kept in mind that taking of credit and its utilisation is a substantive right of a taxpayer under value added taxation scheme. Therefore, in the absence of a clear legal prohibition, this right cannot be denied.”
2.2 He relies upon the decisions rendered in the case Idea Cellular Ltd. vs. CCE, Thane: 2019 (6) TMI 903-CESTAT-MUMBAI and DHL Logistics Pvt. Ltd. vs. CCE, Thane-II: 2015 (38) STR 621 (Tri.-Mum.).
2.3 Learned counsel for the appellant submits also that the demand is time barred as there was no wilful suppression or misstatement of fact with an intent to evade payment of duty; the appellant was under bona fide belief that maintenance of software services was not liable to service tax and therefore, did not indicate the same in the returns; moreover, the issue is revenue neutral and mere non-payment of service tax cannot be equate to duty evasion. He relies upon:
- Chemphar Drugs and Liniments: 1980 (40) ELT 276
- Nirlon Ltd. vs. CCE, Mumbai: 2015 (320) ELT 22 (SC)
- Bharat Hotels Ltd. vs. CCE: 2018 (2) TMI 23 – Delhi High Court
- Uniworth Textiles Ltd. vs. CCE, Raipur: 2013 (288) ELT 161 (SC)
3. Learned AR for the department reiterates the findings of Order-in-Original and Order-in-Appeal and submits that in terms of Rule 6(3), the appellants are required to pay balance 80% of tax by way of cash only.
4. Heard both sides and perused the records of the case. As regards the first issue of demand on ‘software maintenance services’, we find that Karnataka High Court has settled the issue in favour of the appellants in the case of M/s. IBM (India) Pvt. Ltd. (supra) following the Madras High Court decision in the case of M/s. Kasturi and Sons (supra). We find that Hon’ble Madras High Court has observed as follows:
“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 computerised data processing or system networking, or any other service primarily in relation to operation of computer 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 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 assessable 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.”
4.1 In view of the same, we find that the issue is no longer res integra and we hold that the appellants are not required to service tax on software maintenance services during the period July 9, 2004 to November 30, 2005.
4.2 As regards the second issue of availment of CENVAT credit, we find that the appellants have utilised Cenvat credit up to 20% of the tax payable during the period June 2007 to March 2008. During that period, tax of Rs.135.16 lakhs was to be paid without utilising the Cenvat credit. However, they have paid the same after 1.4.2008 by utilising the balance of credit of 80% from the year 2007-2008. The appellants have submitted letter dated 21.4.2009 as follows:
4.3 We find that the learned counsel for the appellant contends that 80% of the credit which was not permitted to be utilised in a specific year can be utilised in the subsequent years and there is no bar regarding the same. On going through the Circular F.No.137/72/2008-CX4 dated 21.11.2008, we find that it is clarified that such credit will not lapse and can be utilised later. We find that CESTAT has gone into the issue in the case of Idea Cellular : 2019(6) TMI 903 (CESTAT-MUM.).
“5.1. A plain reading of the above provisions indicate that while Rule 6(1) provides that the manufacturer or provider of output service is not entitled for the credit of such quantity of input or input services which are used in the manufacture of exempted goods or exempted service except in the circumstances mentioned in the sub-rule (2) of the said Rules. Sub-rule (2) of Rule 6 provides for maintenance of separate records in respect of inputs, input services substantiating use of input and input services for taxable and exempted goods or services. Sub-rule (3) of Rule 6 provides that in case separate accounts are not maintained, the manufacturer or provider of services shall follow either of the conditions stipulated in sub-rule (3) of Rule 6. It is pertinent to note that after the amendment the only change that could be seen in respect of sub-rule (3) is to the extent of payment in respect of exempted goods produced or exempted services provided. While there is a cap on the utilisation of credit attributable to exempted goods or services, there is no cap whatsoever on the availment of CENVAT credit and there is no mention of any lapse of credit after utilisation of credit of 20% prior to 1.4.2008 or after payment of requisite percentage of value after 1.4.2008. Just because the services provided by the appellants have become taxable with effect from 1.4.2008, it cannot be said that the credit already availed and accrued shall lapse. As submitted by the appellants, we find that sub-rule (3) of Rule 6 begins with a word ‘Notwithstanding anything contained in sub-rules and (2)’. The only inference that can be drawn from the non obstante clause is that the provisions of Rule 3 have an overriding nature. Non obstante clause requires to be inferred in which Supreme Court has held in the case of G.M. Kokil and Appeal No. ST/86814/2013 MUM 18 Others (supra) wherein it was held that “it is well known that non obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment.” The learned counsel for the appellants submitted that provisions of sub-rule (5) have been held by the Tribunal in the cases cited by him (supra), on the above lines. In the case of V.M. Salgaonkar Brothers (supra), the Tribunal held that “it can be noticed that Rule 6(5) starts with non obstante clause ‘notwithstanding’, which would indicate that the provisions of Rule 6(3) are not applicable for the provisions of Rule 6(5) of CENVAT Credit Rules, 2004.” As a corollary one can infer that in the instant case, the provisions of Rule 6(3) also starting with a non obstante override the provisions of sub-rules (1) and of Rule 6. Therefore, we find that the provisions of sub-rule (3) of Rule 6 is very clear that if the provider of output services does not maintain separate accounts, the only restriction is placed is on the extent of utilisation of credit and there is no provision which provides that the balance of credit, if any, shall lapse.
We find that Tribunal has taken a similar view in the case of Nicolas Piramal (India) Ltd. (supra).
….
5.5. Learned counsel for the appellants have relied upon Circular No.137/72/2008-CX4 dated 21.11.2008 and submitted that the said Circular was followed by the Tribunal in various cases cited by him as above. Learned Principal Commissioner (AR) vehemently states that the Circular is not in existence and not available on the website http://www.cbic.gov.in; the said purported circular was taken from a private website and is not admissible unless it is established to be correct; he submits a list of all circulars issued by CBIC taken from the website of CBIC; circulars are serially numbered and the list of circulars does not reflect the said circular having been issued by CBIC. Learned counsel for the appellants submits that the circular has been taken from the website of www.taxmanagementindia.com and was Appeal No. ST/86814/2013 MUM 20 signed by Shri Gowtham Bhattacharya, Commissioner of Service Tax; Madurai Commissionerate has issued Trade Notice No.14/2009 dated 13.3.2009, Service Tax No.6/2009; the said circular was followed by the Tribunal in various decisions. We find that as per our discussion above, there is no provision in the Rules for the credit availed to lapse once the conditions therein have been fulfilled. Therefore, we find that despite the circular the issue is clear. We find that this Bench in the case of DHL Logistics Pvt. Ltd. (supra) has held that:
“5.1 As regards the denial of Cenvat credit to the extent of 2.85 crore, on the ground that the appellant did not maintain separate accounts towards utilization of credit in respect of both taxable and exempt services and also utilization of credit in excess of 20%, it is noted that the cap of 20% is applicable on the service tax payable and not on the service tax credit actually availed.
What is restricted is only utilisation of the credit and not taking the credit per se; the credit taken could be carried forward. When the cap was removed on 1-4-2008, the appellant was eligible to utilise the credit also. In the present case what is involved is the utilisation of credit in excess of 20% of the tax payable during the impugned period which was permitted. Therefore, utilising the credit in excess of the limit would attract only interest liability. The entire service tax itself cannot be denied to the appellant. This position has been clarified by the C.B.E. & C. vide a circular dated 21-11-2008 cited supra and the Ministry clarified as follows:
“Prior to 1-4-2008 [before the amendment in Rule 6(3)] the option available to the taxpayer, under Rule 6(3), was that, he was allowed to utilize credit only to the extent of an amount not exceeding 20% of the amount of service tax payable on taxable output service. However, there was no restriction in taking Cenvat credit and also there was no provision about the periodic lapse of balance credit. This resulted in accumulation of credit in many cases.
W.e.f. 1-4-2008, under the amended Rule 6(3), the following options are available to the taxpayers not maintaining separate accounts;”
………….
As stated earlier, many taxpayers had accumulated Cenvat credit balance as on 1-4-2008. The matter to be considered was whether this credit balance should be allowed to be utilized for payment of service tax after 1-4-2008.
As no lapsing provision was incorporated and that the existing Rule 6(3) of the Cenvat Credit Rules does not explicitly bar the utilization of the accumulated credit, the department should not deny the utilization of such accumulated Cenvat credit by the taxpayer alter 1-4-2008. Further, it must be kept in mind that taking of credit and its utilization is a substantive right of a Appeal No. ST/86814/2013 MUM 21 taxpayer under value added taxation scheme. Therefore, in the absence of a clear legal prohibition, this right cannot be denied.” In view of the above clarification given by the Board, recovery of the Cenvat credit wrongly taken cannot be sustained. What can be demanded is only interest on the wrongly availed credit from the date of utilisation of credit till 14-2008 when the assessee became entitled for the credit. Therefore, the adjudicating authority has to re-examine the matter in the light of the C.B.E. & C. circular dated 21-11-2008.
It is seen from the above that Tribunal has concluded the issue independently and sought to reinforce the decision on the basis of the purported circular. Therefore, we find that the existence or otherwise of the circular is inconsequential. However, it is not clear as to why Madurai Commissionerate has issued such a Trade Notice based on the Circular and as to whether the same was withdrawn subsequently. However, as we find that the appellants claim to the unutilised credit is correct on merits, we do not find any reason to go into the circular.”
4.4 In view of the above, we hold that the appellants are entitled to utilise the balance 80% of the credit availed before 1.4.2008 after 1.4.2008. Having come to this conclusion, the appellant’s action in paying service tax which fell due during 2007-2008 after 1.4.2008 is to be seen as a delayed payment. Accordingly, the appellants are required to pay interest at the applicable rate in terms of Section 75 of the Finance Act, 1994. The appellants are well established service tax registrants and therefore, we are of the considered opinion that the lapse of non-payment of service tax during the relevant period cannot be taken lightly. Though we hold that the appellants are entitled to utilise the balance credit after 1.4.2008, they will be liable to pay penalty under Section 76 of the Finance Act, 1994, as applicable during the relevant period.
5. In view of the above, we allow the appeal partially and order the following:
(i) Demand of service tax of Rs.644.69 lakhs on maintenance and repair of software service for the period 9.7.2004 to November 2005 and the demand of service tax of Rs.135.16 lakhs for the period June 2007 to March 2008 are set aside.
(ii) We hold that the appellants are required to pay applicable interest on the service tax demand of Rs.135.16 lakhs from the date on which such service tax was due till the date of actual payment.
(iii) The appellants are required to pay penalty under Section 76 of the Finance Act, 1994 on the above amount of Rs.135.16 lakhs. Other penalties imposed are however set aside.
(Order pronounced in the Open Court on 22/02/2022.)
