2010 (11) TMI 1042 - AT - Service Tax

Levy of service tax - Information technology software service - maintenance or repair services - taxable u/s 65(105)(zzg) r/w Section 65(64) - invoking extended period of limitation u/s 73(1) - penalties u/s 76 to 78 - HELD THAT - 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' u/s 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.

Issues Involved:
1. Levy of Service Tax on "maintenance or repair" services.
2. Interpretation of the definition of "maintenance or repair" under the Finance Act, 1994.
3. Taxability of maintenance or repair of computer software.
4. Applicability of Circulars and notifications.
5. Invocation of the extended period of limitation.
6. Classification of services under the correct taxable head.
7. Relevance of technical literature and judicial precedents.
8. Validity of penalties imposed.

Issue-wise Detailed Analysis:

1. Levy of Service Tax on "maintenance or repair" services:
The appeal contests the Commissioner's order confirming demands of Service Tax amounting to Rs. 20,89,72,647/- for the period from July 2004 to January 2006. The order also appropriated an earlier payment of Rs. 6,29,80,109/- made by the assessee towards this demand, demanded interest under Section 75 of the Finance Act, 1994, and imposed penalties under Sections 76 to 78 of the Act. The demand was based on the allegation that the assessee rendered "maintenance or repair" services taxable under Section 65(105)(zzg) read with Section 65(64) of the Finance Act, 1994, without registration, filing returns, or paying Service Tax.

2. Interpretation of the definition of "maintenance or repair" under the Finance Act, 1994:
The definition of "maintenance or repair" under Section 65(64) was examined in its pre and post-amendment forms. Prior to 16.06.2005, it included services provided under a contract or agreement in relation to maintenance or repair of any goods or equipment, excluding motor vehicles. Post-amendment, it included maintenance or management of immovable property as well.

3. Taxability of maintenance or repair of computer software:
The appellant argued that maintenance of information technology software was excluded from Business Auxiliary Service (BAS) and hence should not be chargeable to Service Tax. They relied on Circular No. 70/19/2003-ST dated 17.12.2003, which clarified that "maintenance of Software is not chargeable to Service Tax." The Revenue countered this by citing Circular No. 81/2/2005-ST dated 07.10.2005, which held that maintenance or repair of software was exigible to Service Tax under Section 65(105)(zzg) read with Section 65(64).

4. Applicability of Circulars and notifications:
The Revenue referred to the Supreme Court's decision in Tata Consultancy Service vs. State of Andhra Pradesh, which held that software, in any medium, should be considered "goods." They also cited Notifications No. 20/2003-ST and No. 7/2004-ST, which exempted and then rescinded the exemption of service tax on maintenance or repair of computers, respectively. The appellant contended that these notifications were irrelevant to the taxability of software maintenance.

5. Invocation of the extended period of limitation:
The appellant argued against the invocation of the extended period of limitation, citing ongoing proceedings and show-cause notices that indicated the Department had not taken a definitive view on the levy of Service Tax on computer software maintenance. They provided a tabulated summary of these notices and their current status to support their plea.

6. Classification of services under the correct taxable head:
The appellant argued that maintenance or repair of software became taxable only w.e.f. 16.05.2008 under the newly introduced Information Technology Software service. They cited the decision in IBM India Pvt. Ltd. vs. CST, Bangalore, which held that ERP implementation services were taxable under the new category of Information Technology Software service.

7. Relevance of technical literature and judicial precedents:
The Revenue referred to technical literature on software maintenance, categorizing it into corrective, adaptive, perfective, and preventive maintenance. They argued that these activities fall within the scope of "maintenance or repair" service. The Tribunal noted that maintenance of software has a wider connotation than maintenance of tangible goods and that the expression "maintenance or repair" when used in connection with computer software has a broader import.

8. Validity of penalties imposed:
Given the Tribunal's conclusion that the maintenance charges collected by the appellant were not liable to Service Tax under the head "maintenance or repair service" during the disputed period, the penalties imposed were also set aside.

Conclusion:
The Tribunal held that the maintenance charges collected by the appellant from their customers during the period from 09.07.2004 to 31.01.2006 were not liable to 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 were classified as Information Technology Software service, taxable only from 16.05.2008. Consequently, the demand of Service Tax and the connected penalties were set aside. The appeal was allowed, and the impugned order was set aside.

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