Applicability of service tax on testing and analysis of IT software w.e.f 16/05/2008.

PJ/Case Law/2013-14/2021

Case:- COMMISSIONER OF CENTRAL EXCISE, PUNE Vs AZTECSOFT LTD.

Citation:- 2013-TIOL-1541-CESTAT-MUM

Brief facts:-The appellant, M/s. Aztecsoft Ltd., Pune, were engaged in providing services relating to testing and analysis of computer software for their clients located in India and abroad during the period 01/07/2003 to 31/03/2008. However, they did not take any service tax registration nor did they discharge any service tax liability. Accordingly, two show-cause notices were issued to the appellant, one dated 20/10/2008 demanding service tax of Rs.6,27,69,689/- for the period July 2007 to March 2008 and another notice dated Feb 2008 demanding service tax of Rs.15,12,19,673/- for the period 01/07/2003 to 31/03/2007. The notices proposed to recover interest on the above demands apart from imposing penalties. Both these notices were adjudicated by the impugned order and the Ld. Commissioner dropped the demands on the ground that testing IT software was not part of the technical testing and analysis service until 2008 and the activity of development of IT software itself was excluded from the scope of service tax until 2008 and therefore, the service tax demand cannot be sustained.

Appellant’s contentions:- The Hon'ble apex Court in the case of TCS Vs. State of Andhra Pradesh, 2004 (178) ELT 22(SC) = (2004-TIOL-87-SC-CT-LB) had held that “software in India” is goods for the purpose of levy of sales tax. Similarly, the CBEC vide Circular No.81/2/2005-ST dated 07/10/2005 had clarified that maintenance or repair of software was leviable to service tax under the maintenance or repair service. Therefore, testing of software, being goods, would come within the purview of technical testing and analysis with effect from 01/07/2003 onwards. The reliance placed by theCommissioner on the Stag Software Pvt. Ltd. case (cited supra) was not correct as the Tribunal in that case committed an error in interpreting the judgment of the Hon'ble apex Court in the case of TCS by holding that only canned software can be goods.

Respondent’s contentions:- The Ld. Counsel for the respondent submitted that testing of IT software was made specifically taxable from 16/05/2008 under the category of technical testing and analysis service and therefore prior to that date the said activity was not leviable to service tax. He also submitted that testing of software was integral to and forming part of software design and development activity and IT software services were brought under the tax net with effect from 16/05/2008 and therefore, the adjudicating authority has correctly dropped the demand. He also relied on the decision of this Tribunal in the case of Stag Software Pvt. Ltd., (cited supra) andRelq Software Pvt. Ltd., Vs. CST, Bangalore, reported in2009 (14) STR 779 = (2008-TIOL-2573-CESTAT-BANG) and the decision of the Hon'ble High Court of Karnataka in the same case reported in2011 (23) STR 449 (Kar).

Reasoning of judgment:- According to Hon’ble judge Prior to 16/05/2005 Section 65(106) of Finance Act, 1994 defined technical testing and analysis as follows:

“Technical testing and analysis means any service in relation to physical, chemical ,biological or any other scientific testing or analysis of goods or material or an immovable property but does not include any testing or analysis service provided in relation to the human beings or animals."

The said definition was amended in the Finance Act, 2008 and the amended definition reads as follows:

“Technical testing and analysis means any service in relation to physical, chemical, biological or any other scientific testing or analysis of goods or material or information technology software or any immoveable property but does not include any testing or analysis service provided in relation to the human beings or animals”.

Information technology service was brought under the service tax net with effect from 16/07/2008. Consequently, the activity of testing and analysis of IT software was also brought into the tax net by amending the definition. If IT software was already included within the scope of technical testing and analysis service, there was no need for any amendment to be specifically made in Section 65(106). In the budget instructions issued vide letter 334/1/2008-TRU dated 29/02/2008, in para 4 thereof, it has been specifically stated that service provided in relation to information technology (IT) software for use in the course or furtherance, of business or commerce has been specifically included in the list of taxable service vide Section65 (105) (zzzze). In para 4.1.7, it has been stated that following consequential amendments in other taxable services are also being made, namely, to include testing and analysis of IT software services under technical testing and analysis service (Section 65(105) (zzh). Similar amendments were made in the scope of business auxiliary service, technical inspection and certification service, management, maintenance or repair of properties, consulting engineer's service, etc. to bring activities relating to IT software in the tax net in the aforesaid categories. This Tribunal in the case of Relq Software Pvt. Ltd. (cited supra) had also held that testing and analysis of IT software would be effective only from 16/05/2008 when the said activity was specifically included under technical testing and analysis service. The said decision of the Tribunal was also upheld by the Hon'ble High Court of Karnataka in the same case cited supra.

In view of the above position, hon’ble judge were of the considered view that testing and analysis of IT software would be leviable to service tax only with effect from 16/05/2008 and therefore, there is no infirmity in the impugned order passed by the adjudicating authority. Thus, the appeal filed by the Revenue is devoid of merits and is dismissed.

Decision:- Appeal was dismissed.

Comments:- The essence of this case is that the Information technology service was brought under the service tax net with effect from 16/07/2008. Consequently, the activity of testing and analysis of IT software was also brought into the tax net by amending the definition. If IT software was already included within the scope of technical testing and analysis service, there was no need for any amendment to be specifically made in the definition of technical testing and analysis service. Thus, testing and analysis of IT software would be leviable to service tax only with effect from 16/05/2008.

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PJ/Case Law/2013-14/2021

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