2010 (12) TMI 101 - AT - Service Tax

Software - annual maintenance contract - assessee liable to provide maintenance service on application software system during the tenure of the agreement - Held that - In the case of SAP India Pvt Ltd. (2010 -TMI - 201706 - CESTAT, BANGALORE) a Division bench of this Tribunal classified similar activity as information technology service under Section 65 (53 (a) of the Finance Act, 1994 and held that the same was exigible to service tax under Section 65 (105) (zzzze) of the Act with effect 16/05/2008. Such service was not taxable prior to the said date. What was considered by the Honrable Supreme Court in Tata Consultancy Service (supra) was computer software, which is essentially different from application software. The software which is inbuilt in a computer, which is otherwise called operating software, is known as computer software in common parlance. The decision in Tata Consultancy Service (2004 -TMI - 4143 - Supreme Court) is applicable to such software. Such software, no doubt, involves intellectual property. Application software also involves this property. However, the legislature in its wisdom has chosen to differentiate application software from operating software (computer software) for the purpose of levy of service tax and, accordingly, the maintenance of application software has been specifically designated as information technology software.

Summary

Issues:
Taxability of service rendered to banks under management maintenance or repair service during a specific period under the Finance Act, 1994.

Analysis:
1. The primary issue in this case revolved around the taxability of the service provided by the appellant to banks under management maintenance or repair service during the period of dispute. The lower authorities demanded service tax from the appellant and imposed penalties. The service in question involved maintenance of application software licensed to the banks beyond the warranty period. The appellant argued that they were not liable to pay service tax during the disputed period as the service became taxable only later. Reference was made to a specific contract with one of the banks, highlighting that the service was related to information technology. The appellant also raised a plea of limitation against the demand for service tax, citing relevant case law. The JDR supported the lower authorities' findings and referred to a Supreme Court judgment stating that computer software is considered goods, hence applicable to management maintenance or repair service.

2. Upon examining the submissions, it was established that the service provided by the appellant to the banks was solely maintenance of application software already licensed and installed in the banks' computer systems. A previous Tribunal decision classified similar activities as information technology services, subject to service tax from a specific date. It was clarified that the Supreme Court judgment regarding computer software differed from application software, which was specifically designated as information technology software for service tax purposes. The legislative policy differentiated between operating software (computer software) and application software, necessitating compliance with the taxation framework. Given the appellant's case on merits and the applicability of the SAP case decision, further examination of issues, including limitation, was deemed unnecessary.

3. Consequently, the Tribunal set aside the impugned order and allowed the appeal in favor of the appellant, emphasizing the specific classification of application software under information technology services for tax purposes.