2018 (4) TMI 150 - AT - Central Excise

Classification of software - Finacle Software developed and customized for banks - whether the Finacle software supplied by the applied to various banks, merits to be classified under 8523 8020 as Information Technology Software and charged to Excise duty? - Held that - for the period from March 2006 upto 15.05.2008 excise duty is to be paid only for the value of the Finacle software in packaged form i.e. recovered in the form of licence fee - w.e.f. 16.05.2008 the appellant is liable to payment of service tax under the definition of ITSS. The definition of ITSS under Section 65(105) (zzze) includes the transfer of right to use as well as other services carried out by the appellant. Since the service tax has been paid by the appellant w.e.f. 16.05.2008, the appellant is required to make payment of excise duty on the value of the software but the same, if paid, can be allowed as cenvat credit of input services for discharge of service tax on ITSS. Whether such software is in the nature of customised software i.e. designed, developed for a specific user or client OR whether it is in the nature of packaged software or canned software i.e. software developed to meet the needs of a variety of users and which is intended for sale or capable of being sold off the shelf? - Held that - in respect of Finacle software, there is an element of supply of software developed to meet the needs of a variety of users. Since Finacle software is not developed, ab initio, for supply to each and every customer, such software falls within the category of packaged or canned software. Such software cannot be considered as customized software designed and developed for a specific user. Benefit of N/N. 22/2009 dt. 07.07.2009 - Held that - the software licence only allows the purchaser of the software to use the Finacle software. Since the transfer of licence is not for the purposes cited in the notification, the appellant will not be eligible for the benefit of the notification. Time limitation - Held that - department was not aware of the fact since 16-05.2008, demand not hit by time limitation. The issue is remanded to the adjudicating authority for requantifying the demand - appeal allowed by way of remand.

Summary

Issues Involved:

1. Classification of Finacle software under Central Excise Tariff.
2. Nature of Finacle software - customized vs. packaged/canned.
3. Applicability of Central Excise duty and Service Tax.
4. Overlap and double taxation concerns.
5. Eligibility for exemption notifications.
6. Validity of demand and penalties.
7. Time-barred demand argument.

Detailed Analysis:

1. Classification of Finacle Software under Central Excise Tariff:
The core issue was whether Finacle software should be classified under heading 8523 8020 as Information Technology Software, liable for Excise duty. The adjudicating authority concluded that Finacle software is packaged or canned software, thus subject to Excise duty.

2. Nature of Finacle Software - Customized vs. Packaged/Canned:
The appellant argued that Finacle software is customized for each bank, not capable of being sold off the shelf, and thus should be exempt from Excise duty. The adjudicating authority, however, determined that despite customization, the software is essentially packaged, as it is sold to multiple users and not developed ab initio for each customer.

3. Applicability of Central Excise Duty and Service Tax:
The appellant contended that their activities fall under Information Technology Software Service (ITSS) as per Section 65(105) (zzze) of the Finance Act, 1994, and they were paying service tax accordingly from 16/05/2008. The adjudicating authority maintained that the Finacle software is subject to Excise duty under Tariff Heading 8523, and service tax applies to additional services provided.

4. Overlap and Double Taxation Concerns:
The appellant argued against double taxation, stating that once service tax is paid, Excise duty should not be levied on the same value. The adjudicating authority noted that the value recovered as a license fee for the software is subject to Excise duty, while additional service charges fall under ITSS and are liable for service tax.

5. Eligibility for Exemption Notifications:
The appellant claimed exemptions under various notifications (No.6/2006-CE, No.22/2009-CE, No.17/2010-CE, No.14/2011-CE, and No.11/2016-CE). The adjudicating authority denied exemption under Notification No.6/2006, as the software was not deemed customized. However, exemptions under successor notifications were acknowledged, provided conditions were met.

6. Validity of Demand and Penalties:
The adjudicating authority upheld the demand for Excise duty and imposed penalties, stating that the software was packaged and liable for duty. The appellant’s argument for set-off of service tax paid against Excise duty was noted, allowing for potential cenvat credit.

7. Time-Barred Demand Argument:
The appellant argued that the demand was time-barred since the Department was aware of their service tax payments from 16/05/2008. The adjudicating authority dismissed this argument, stating that the appellant's activities warranted the demand within the permissible period.

Conclusion:
The Tribunal modified the impugned orders and remanded the issue to the adjudicating authority for re-quantification of the demand, considering the detailed observations. The authority was directed to reassess penalties after providing the appellant an opportunity for a hearing. The judgment was pronounced on 09-02-2018.