2017 (1) TMI 1235 - AT - Service Tax

Software maintenance services - demand on the ground that such software maintenance activity would fall under the category of management, maintenance or repair service - whether the service is taxable and appellant liable to pay service tax from 09.07.2004? Held that - reliance placed in the case of Phoenix IT Solutions Ltd. Versus Commissioner of Central Excise, Visakhapatnam 2011 (1) TMI 642 - CESTAT, BANGALORE , where it was held that maintenance of software became taxable only from 1-6-2007 - the activity of software maintenance provided by the appellant, which is subject matter of the dispute in this appeal, has become taxable only with effect from 01.06.2007. This being the case as the period of dispute is prior to this date, the impugned order will not sustain - appeal allowed. Software maintenance services - period from April 2007 to March 2008 - Held that - for the period prior to 01.06.2007, the activity of software maintenance provided by the appellant to APEPDCL will not be liable to service tax liability. However, for the period subsequent to 01.06.2007, said activity will definitely be liable to service tax under the management, maintenance, repair services - the issue has already been in agitation and that periodical SCN have been issued to the appellant, issue being one of interpretation, the imposition of penalty under section 76 on the appellant is hereby set aside - The matter is remanded to the original authority for the limited purpose of calculating the tax liability of the appellant for the said services for the period 01.06.2007 till 31.03.2008 - matter on remand. Appeal partly allowed and part matter on remand.

Issues involved:
1. Dispute over demand of service tax on software maintenance services.
2. Interpretation of tax liability for software maintenance services provided to electricity companies.
3. Applicability of service tax on software maintenance activities.
4. Imposition of penalty under sections 76 and 77 of the Act.

Issue 1: Dispute over demand of service tax on software maintenance services:
The appellant, engaged in providing services to electricity companies, including Andhra Pradesh Electricity and Power Distribution Company Ltd., was embroiled in a dispute regarding the demand for service tax on software maintenance services provided to APEPDCL from 01.10.2006 to 01.03.2007. The department contended that such services fell under the category of management, maintenance, or repair service, making the appellant liable for service tax from 09.07.2004. However, the appellant argued that the software maintenance activity should only be taxable from 01.06.2007, citing a previous tribunal decision in their favor (Phoenix IT Solutions Ltd., Vs CCE, Visakhapatnam). The Tribunal analyzed the relevant legal provisions and held that software maintenance became taxable only from 01.06.2007, thus setting aside the impugned order.

Issue 2: Interpretation of tax liability for software maintenance services provided to electricity companies:
The Tribunal examined the nature of the software maintenance services provided by the appellant to APEPDCL. The appellant emphasized that the development of software was outside the purview of service tax until 16-5-08, while maintenance and repair activities were taxable under management, maintenance, or repair services. The Tribunal noted that the absence of a clear bifurcation between development and maintenance costs in the agreement led them to consider the services as maintenance only. Relying on legal precedents and the clarification issued by the department, the Tribunal concluded that the service tax liability for software maintenance services arose only from 01.06.2007, rejecting the retrospective application of tax from 09-07-04.

Issue 3: Applicability of service tax on software maintenance activities:
The Tribunal delved into the legal aspects concerning the imposition of service tax on software maintenance activities. Referring to the decision in the case of Martin Lottery Agencies Ltd., the Tribunal emphasized that the introduction of new tax concepts should not have retrospective effect unless explicitly stated. Considering the appellant's submission that the liability could only arise after 01-06-07, the Tribunal held that the explanation appended to the Finance Act, 1994, did not warrant retrospective application of service tax from 09-07-04. Consequently, the Tribunal ruled that software maintenance services were taxable only from 01-06-07, in line with legal principles and precedents.

Issue 4: Imposition of penalty under sections 76 and 77 of the Act:
Regarding the imposition of penalties under sections 76 and 77 of the Act, the Tribunal examined the circumstances and found no merit in imposing penalties on the appellant. The Tribunal set aside the penalty under section 76, considering the issue of interpretation and remanded the matter to the original authority for calculating the tax liability for the period 01.06.2007 to 31.03.2008. The Tribunal dismissed the department's appeal against the imposition of penalties under sections 77 and 78, as the discussions and conclusions did not support the imposition of penalties. Consequently, the Tribunal disposed of the appeals with specific directions and outcomes for each case involved.

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