2020 (12) TMI 637 - AT - Service Tax

Classification of services - Information Technology Software Service or Franchise Service? - licence fee paid to SAP AG, Germany, for grant of non-exclusive licence to use, market and sub-license the software, third party database and third-party software to end user in the territory, on reverse charge basis - HELD THAT - The appellant is making payment to SAP, Germany in terms of Article 6.1, 6.2 and 3.7.2 of the agreement between them, which is payment towards license fee for use of software by the client in India for the software developed by SAP, Germany and 3rd party database / software and also towards support services for software which is essentially for upgradation of the software and for fixing technical difficulties encountered while using the software. Amount paid under Article 3.7.2 is for use of SAP software by appellant itself to SAP, Germany. We find that the services squarely covered in the forecorners of the definition of Information Technology Software Service as defined under Section 65(105)(zzzze) of the Finance Act, 1994, which was brought on statute w.e.f. 16.05.2008. Further, the same activity of the appellant was earlier classified under Consulting Engineer Service for the period 07.07.1997 to 27.02.1999 which was upheld by this Tribunal in BHARAT SANCHAR NIGAM LTD. (BSNL) VERSUS UNION OF INDIA 2006 (3) TMI 1 - SUPREME COURT thereafter, there was exemption from March, 1999. Subsequently, for the period 16.10.1997 to 31.03.1998 the said activity was classified as Management Consultant Service. Further, admittedly the appellant is paying service tax under the head Information Technology Software Service w.e.f. 16.05.2008 which is not disputed by the Department. It is an accepted principle laid down by the Apex Court in COMMR. OF C.E. CUSTOMS SER TAX VERSUS M/S FEDERAL BANK LIMITED 2016 (3) TMI 354 - SUPREME COURT wherein affirming the order of the Kerala High Court that there was new head of service tax noticed and unless the same is carved out from the existing entry, the service tax under the said head cannot be said to be exigible prior the date of its enactment under any other existing head. The service in question is not taxable under the head franchisee service rather taxable under Information Technology Software Service - Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Classification of service tax on license fee paid to SAP AG, Germany under the head "Franchise Services".
2. Applicability of reverse charge mechanism for service tax.
3. Legal presumption regarding taxable entries prior to the introduction of a new tax category.
4. Interpretation of activities as franchise services or licensing of software.
5. Payment of service tax under the correct category.

Analysis:
1. The issue in this case revolves around the classification of service tax on the license fee paid to SAP AG, Germany. The Revenue classified the services received as "Franchisee service" and demanded service tax for the period from April 2006 to March 2008. The appellant argued that the payments made were for licensing of software and continuous upgradation, not falling under the definition of "franchisee service."

2. The appellant contended that the services became taxable under the head "Information Technology Software Service" from May 2008, and they have been paying service tax under this category since then. The Counsel emphasized that the nature of the activities should align with the classification of services rendered, citing past demands under different categories and subsequent clarifications.

3. The legal presumption regarding taxable entries before the introduction of a new tax category was a crucial point of contention. The appellant argued that since a specific entry for Information Technology Software Service was added in May 2008, there was no taxable entry covering their services before that date, relying on established legal principles.

4. The Counsel highlighted the distinction between franchise services and licensing of software, emphasizing that the appellant was not selling the software but granting a license. They argued that the appellant acted as an agent, not a franchisee of SAP AG, Germany, and therefore, the demand for service tax under the "Franchisee Services" category was not justified.

5. The Tribunal analyzed the payments made by the appellant to SAP AG, Germany under different articles of the agreement, concluding that the services fell under the definition of Information Technology Software Service introduced in 2008. The Tribunal referred to past classifications and exemptions, ultimately allowing the appeals and setting aside the impugned orders, directing the appellant to be taxed under the correct category of service.

This comprehensive analysis of the judgment delves into the intricate legal arguments, interpretations of tax categories, and the evolution of service tax classifications in the case, leading to a favorable decision for the appellant.