Case Law Details

Case Name : Principal Commissioner of Service Tax Vs IBM India Pvt. Limited (High Court Of Karnataka)
Appeal Number : CEA No. 08 of 2016
Date of Judgement/Order : 04/02/2021
Related Assessment Year :
Courts : All High Courts (6436) Karnataka High Court (342)

Principal Commissioner Of Service Tax Vs IBM India Pvt. Limited (High Court of Karnataka)

Respondent is engaged in providing services with regard to maintenance and repair of computer software. Vide Notification dated 21.08.2003, the maintenance services related to computers, computer systems or computer peripherals were exempt from payment of service tax. The Central Board of Direct Taxes (CBDT) issued a circular dated 17.12.2003 by which it was clarified that the maintenance of repair of computer software would not be liable to service tax inasmuch as the same does not amount to maintenance or repair of tangible goods. The Notification dated 21.8.2003 was withdrawn by a Notification dated 09.07.2004 and thereafter, the liability to pay service tax to services relatable to maintenance and repair of computer software were made effective from 01.06.2007.

The tribunal vide order dated 23.07.2015 by placing reliance on decision of the Madras High Court held that software maintenance is exigible for levy of service tax only with effect from 01.06.2007 whereas, the period in question is from 09.07.2004 to 06.10.2005.

Admittedly as per the stand taken by the respondent themselves before the High Court of Madras, it is evident that activity of maintenance of computer software was exempt from the provisions of the Act prior to 2006. We are in agreement with the view taken by the High court of Madras. It is pertinent to mention here, that in the show cause notice itself no allegations of fraud collusion, misstatement or suppression of facts have been stated against the respondent, therefore, the demand is barred by limitation under Section 73 of the Finance Act, 1994 as well. For the aforementioned reasons, the substantial questions of law are answered in against the appellant and favour of the respondent.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

This appeal under Section 35G of the Central Excise Act, 1944 (hereinafter referred to as the Act for short) has been filed by the appellant against the judgment dated 23.07.2015 passed by the Customs, Excise and Service Tax Appellate Tribunal (hereinafter referred to as ‘the tribunal’ for short). The subject matter of the appeal pertains to the period from 09.07.2004 till 06.10.2005. The appeal was admitted by a bench of this Court vide order dated 22.04.2020 on the following substantial questions of law:

“(i) Whether, in the given facts and circumstances of the case, the Tribunal is correct overlooking the facts and then overruling the statutory provisions enacted by Parliament?”

“(ii) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the demand is raised beyond the normal period of limitation, resulting in undue gains to the Respondent?”.

2. Facts leading to filing of this appeal briefly stated are that the respondent is engaged in providing services with regard to maintenance and repair of computer software. Vide Notification dated 21.08.2003, the maintenance services related to computers, computer systems or computer peripherals were exempt from payment of service tax. The Central Board of Direct Taxes (CBDT) issued a circular dated 17.12.2003 by which it was clarified that the maintenance of repair of computer software would not be liable to service tax inasmuch as the same does not amount to maintenance or repair of tangible goods. The Notification dated 21.8.2003 was withdrawn by a Notification dated 09.07.2004 and thereafter, the liability to pay service tax to services relatable to maintenance and repair of computer software were made effective from 01.06.2007. Thereafter, a show cause notice dated 22.09.2009 was issued to the respondent by which service tax to the tune of Rs.3 ,41 ,63 ,132/- for a period from 09.07.2004 to 06.10.2005 was demanded. The respondent submitted a reply to the aforesaid notice. However, vide order dated 25.08.2009, the adjudicating authority held the respondent liable payment of service tax to the tune of Rs.3 ,41 ,63 ,132/- for a period from 09.07.2004 to 06.10.2005 along with interest and penalty to the extent of 100% in terms of Section 78 of the Finance Act. The respondent challenged the validity of the aforesaid order in an appeal before the tribunal. The tribunal vide order dated 23.07.2015 by placing reliance on decision of the Madras High Court held that software maintenance is exigible for levy of service tax only with effect from 01.06.2007 whereas, the period in question is from 09.07.2004 to 06.10.2005. It was further held that the demand is barred by limitation as it has been raised beyond the period of limitation and it was also held that no allegation of any suppression or misstatement can be cast upon the respondent as there was a doubt with regard to levy of the tax in question. In the result, the appeal preferred by the respondent was allowed. In the aforesaid factual background, this appeal has been filed.

3. Learned counsel for the appellant submitted that the exemption was withdrawn with effect from 09.07.2004 therefore, the respondent was liable to pay service tax for the period from 09.07.2004 to 06.10.2005. It is further submitted that during the course of audit of the records of the assessee it was found that they were providing software maintenance services and they haven to paid the service tax. It was further contended that the assessee have failed to apy the service tax in respect of services which were taxable under Section 68 and 70 of the Act. Therefore, the extended period of limitation would apply.

4. On the other hand, learned counsel for the respondent has referred to decision of the High Court of Madras in ’IKASTURI AND SONS VS. UNION OF INDIA’‚ (2011) 22 STR 129 (Mad.) and submitted that the issue involved in this appeal is no longer res integra and in any case, the demand raised by the appellant was barred by limitation.

5. We have considered the submissions made by learned counsel for the parties and have perused the record. For the facility of reference, paragraphs 6, 7 and 8 of the decision rendered by High Court of Madras in KASTURI AND SONS is reproduced for the facility of reference:

6. Admittedly, it is under the Finance at, 2007, with effect from 1.06.2007, 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;

(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 computer systems.

7. That was also followed in the Finance Act, 2004 with effect from 10.09.2004 and that status has been followed till the Finance At, 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 super cession of the statutory provisions of the Finance Act in the respective financial years.

8.Therefore, on fact, it is clear that ill 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 vs. 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 farmed the question as follows:

The appellants provided consultancy services including computer consultancy services. As part of their business they prepared and laded 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, 1947.

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 softwaren 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 eng dealt with here and no opinion ins expressed thereon because in case of unbranded software other questions like situs of contract of sale and / or whether the contract is service contract may arise.”

6. Learned counsel for the appellant was unable to point out that the aforesaid decision was challenged before the Supreme Court by the appellant. It is also pertinent to mention here that in para 17 of the aforesaid judgment, the stand of the appellant has been recorded, which reads as under:

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 in 2007, when the amendment was brought in the Finance At, 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 o the provisions or explains the changes proposed in the Finance Act, 2005.

7. Thus, admittedly as per the stand taken by the respondent themselves before the High Court of Madras, it is evident that activity of maintenance of computer software was exempt from the provisions of the Act prior to 2006. We are in agreement with the view taken by the High court of Madras. It is pertinent to mention here, that in the show cause notice itself no allegations of fraud collusion, misstatement or suppression of facts have been stated against the respondent, therefore, the demand is barred by limitation under Section 73 of the Finance Act, 1994 as well. For the aforementioned reasons, the substantial questions of law are answered in against the appellant and favour of the respondent.

In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.

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