Leviability of service tax on maintenance of software and certification services of ATM.

Case:-FINANCIAL SOFTWARE SYSTEMS PVT LTD Vs COMMISSIONER OF SERVICE TAX, CHENNAI

Citation:-2013-TIOL-1281-CESTAT-MAD

Brief Facts:-The appellants are engaged in sale of hardware and banking related application software under licence to use and also are rendering services in relation to maintenance of said software including its allied software modules to various banks. The scope of their activity as ascertained by the department based on statement of the Managing Director of the company as seen from the impugned order is as under:-

"A statement was recorded from Mr. Nagaraj V. Mylandla on March 27, 2006 Managing Director of FSS, who interalia stated that FSS was started in February, 1991 as a private limited company and is engaged in the activities of software development, software sales and software related activities such as customization, fixes, upgrades and new releases and the said software is banking related for transaction process like BASE24, Prognosis, Golden Gate, DCMS, MAPS, RECON, etc. BASE24 is a customized software developed by ACI Worldwide Inc and sold by FSS. They further stated, that the software is a central software used by banks for driving, authorization, and routing financial transactions within banks and outside banks like VISA and Mastercard and described the BASE24's function (software) is as under. When a customer intends to use an ATM to do a transaction, after inserting his card and PIN, the transaction locally checked by the ATM and then sent to BASE 24 installed at central location of the bank for advance checking of details of the concerned customer. BASE24 after checking the customer details sends transaction to core banking software like Finacle, FlexCube FNS for balance checking and response is sent back to BASE24. BASE24 in turn gives message to ATM for further course of action.

He further stated that the Prognosis, Golden Gate, DCMS, MAPS, RECON, etc. are ancillary softwares for various functions of BASE24; that Prognosis is system and application management software used to manage the BASE24 application; that Golden Gate is online application software; that DCMS is card and PIN generation software; that MAP is merchant accounting and payment software; that RECON is software for reconciling BASE24 transactions. He interalia stated that State bank of India, ICCI Bank, HDFC Bank, UTI bank, union Bank of India etc. all at Mumbai, Punjab National Bank and Oriental bank of Commerce, all at Delhi, Andhra Bank, Hyderabad, Indian Bank, Chennai are the major customers."

They were not paying service tax for such activity during the period 9.7.2004 to 30.4.2004.

They were also doing services, known as "ATM service" under which, they were certifying the security and reliability of the software used by Automated Teller Machines (ATM). They did not pay service tax on such services either for the period from 1.7.2003 to 30.4.2006. Revenue was of the view that appellants were liable to pay service tax on maintenance of software under the category "Management Maintenance or Repair Service" [section 65 (105) (zzg) and section 65 (64) of Finance Act, 1994] and services rendered in relation to ATMs under the category "Technical inspection and certification Services" [section 65 (105) (zzi) and section 65 (108) of Finance Act 1994] for periods as mentioned above and issued SCN demanding service tax on the above services and after adjudication an amount of Rs.1,95,97,383/- was confirmed in respect of maintenance of software and Rs.6,99,553/- was confirmed in respect of certification of the ATM services. Aggrieved by the order of the Commissioner, appellants have filed this appeal. Revenue has demanded service tax for the services of software maintenance under the category of "Management, Maintenance or Repair Service" as defined under section 65 (64) of Finance Act, 1994 brought into force w.e.f. 1.7.2003. This definition changed on 16.6.2005 and again on 1.5.2006. The original definition is reproduced herein below:-

(64) "Maintenance or repair" means any service provided by -

(i) any person under a maintenance contract or agreement; or

(ii) a manufacturer or any person authorised by him, in relation to, -

(a) Maintenance or repair, or servicing of any goods or equipment
The amendment made on 16.6.2005 is not relevant to the dispute at hand. The basic dispute at hand is whether software could be considered as ‘goods' as mentioned in Section 65 (64) above since 01-07-2003. The amendment made on 1.5.2006 is crucial inasmuch as it added an Explanation to specifically say that software is also ‘goods'. The said Explanation is reproduced below:

"Explanation." For the removal of doubts, it is hereby declared that for the purposes of this clause, -

(a) "goods" includes computer software;

(b) "properties" includes information technology software;"

Appellant Contentions:-The appellant submits that prior to 1-5-2006, software was never considered as "goods" and its maintenance was never considered to be covered by the scope of entry under section 65 (64). However, when the Hon'ble Apex Court gave the decision in the case of TATA Consultancy Services Vs Union of India - 2004 (178) ELT 22 (SC) = (2004-TIOL-87- SC-CT-LB), Revenue started interpreting that software also is goods. The said decision of the Hon'ble Apex Court was on the question whether sales tax was payable on software sold in canned form and the Apex Court gave a ruling that sale of software available off the shelf also known as "canned software" could be considered as ‘goods'. Thereafter, CBEC was of the view that maintenance of software also would fall under the entry in section 65 (64) and accordingly Board issued clarification vide F.No.81/2/2005-ST dt. 7.10.2005 clarifying that service tax should be demanded on maintenance of software also and the present proceedings were initiated due to such clarification. The ld. Counsel submits that they were not selling any "canned software" but customized software and the charges levied are basically for upgrading the software and also for attending to problems during its installation. Counsel explained at length the difference between canned software and the software sold by the appellant. Further, she points out that the activities carried out by the appellant are more appropriately covered by Information Technology service as defined under Section 65(108) which came into force w.e.f 16-05-2008. She points out that Board had clarified vide circular No.70/19/2003-ST dt. 17.12.2003 that service tax will not be leviable on maintenance of computer software. She argues that Explanation inserted in section 65 (64) cannot have retrospective effect going by the principle laid down by the Apex Court in the case of Union of India Vs Martin Lottery Agencies Ltd. - 2009 (14) STR 593 (SC) = (2009-TIOL-60-SC-ST). She also points out that during the period under dispute Information Technology Service was specially mentioned in section 65 (19) defining Business Auxiliary Service for the purpose of keeping such service outside the scope of levy of service tax. When there was a conscious intent to keep the services of the type rendered by appellant outside the scope of service tax as seen from Explanation, which was in force in section 65 (19) of Finance Act, 1994 during the relevant time, it is not reasonable to demand service tax from the appellant giving a new interpretation with retrospective effect to the word goods used in the definition of the service for "Management Maintenance or Repair Service" to levy tax thereon. She points out that the Tribunal has already decided that during the relevant period maintenance of software should not be subjected to service tax and she relied on the following decisions:-

1) Kasturi & Sons Ltd. Vs UOI 2011 (220) STR 129 (Mad.) = (2011-TIOL-240-HC-MAD-ST)

2) Phoenix IT Solutions Ltd. Vs CCE 2011 (22) STR 400

3) SAP India Pvt. Ltd. Vs CCE 2011 (21) STR 303 = (2010-TIOL-1569-CESTAT-BANG)

In respect of second category of service, her contention is that this service was specifically brought into levy w.e.f. 1.5.2006 under the head of "ATM Operation Maintenance and Management services" under Section 65 (9b) and therefore prior to that date, the said service could not have been taxable.

Respondent Contentions:-Respondent relies on the decision of the Apex Court in the case of TATA Consultancy Service (supra) to buttress the argument that software is ‘goods' and his argument is that as long as it is accepted that software was goods, its maintenance was squarely covered by the definition under Section 65 (64). He submits that Explanation added w.e.f. 2006, is only by way of a clarification. Because, the law interpreted by the Hon'ble Apex Court was applicable always. He also points out that the Apex Court was of the view that there is not much difference between the canned software and other software used by individual users. In respect of the service relating to ATM, he is relying on the definition of "Technical and Scientific Consultancy" as given in Section 65 (108) and the taxing entry at section 65 (105) (zzi). The said definition is reproduced as under:-

(105) (zzi) "taxable service" means any service provided, -

to any person, by a technical inspection and certification agency, in relation to technical inspection and certification;

65 (108) "technical inspection and certification" means inspection or examination of goods or [process or material or information technology software] or any immovable property to certify that such goods or [process or material or information technology software] or immovable property qualifies or maintains the specified standards, including functionality or utility or quality or safety or any other characteristic or parameters, but does not include any service in relation to inspection and certification of pollution levels;

It is very clear that the certification of the services also would be covered during the relevant time. The amendment made in 2006 brought in more aspects of services relating to ATM under service tax levy but certification of the ATM services and security of the services was covered by the definition as it existed at section 65 (108) of the Finance Act, 1994 prior to 2006 itself.

Reasoning of Judgement:- Considered the arguments from both sides. We find that the issue whether maintenance of computer software could be subjected to service tax under the entry of Management, Maintenance or Repair services prior to 1.5.2006 was examined by the Hon'ble Madras High Court in the case of Kasturi & Sons Ltd. (supra) and ruled that such demand is not maintainable. The decision of the Apex Court in the case of Martin Lottery Agencies Ltd. (supra), also is very emphatic to say that Explanation added under in taxation statutes causes adverse consequences to tax payers could have only prospective effect. Therefore case of Revenue as far as the first issue, is not maintainable.

In the case of certification of ATM services, the activity was squarely covered by the definition that existed during the relevant time. The fact that a new service was introduced for ATM service covering various other activities in relation to ATM service cannot be interpreted to mean that prior to that date certification service was not taxable. Their plea of bonafide belief regarding non-taxability of their activity is not based on any legal decision either. So there is no merit in their prayer that extended period of time cannot be invoked for demanding tax short paid in respect of this matter. Therefore, their appeal in the matter of this issue is rejected. Now the penalties imposed by the impugned order are to be considered. There is a penalty of Rs. 1000/- imposed under section 77 of Finance Act, 1994 for having not taken license under the required category of service. Further there are penalties of Rs. 100 per day up to 18-04-2006 and Rs. 200 per day from 18-04-06 or 2% of the service tax amount as detailed in the operating clause (6) of order part of the impugned order. Further a penalty of Rs. Two crores is imposed under section 78. Now that it is held that the demand is maintainable only for Rs. 6,99,553/-, there is definitely a need to relook at the quantum of penalties imposed. We consider it proper to sustain the penalty of Rs. 1000/- imposed under section 77. The Courts have been of the view that imposing simultaneous penalties both under section 76 and 78 for this type of short payment is not justified as held by Hon Delhi High Court in Bajaj Travels Ltd. Vs. CST - 2012 (25) S.T.R. 417 (Del.) = (2011-TIOL-896-HC-DEL-ST).This line of approach has been confirmed by the legislature by amendment of section 78 w.e.f 10-05-2008. Further this is a case where the penalty adjudged is coming down drastically from Rs. Two crores to Rs. 6,99,553/-. So it is very obvious that paying 25% of the penalty originally adjudged would have been caused serious difficulties to the appellant. Further the option to pay 25% of the tax demanded as penalty has not been given in this case by the adjudicating authority. So following the decision of the Hon. Delhi High Court in the case of K. P. Pouches (P) Ltd Vs. UOI - 2008 (228) E.L.T. 31 (Del.) = (2008-TIOL-240-HC-DEL-CX) we give the appellant an option to pay tax upheld by this order along with appropriate interest and 25% of tax amount as penalty within thirty days of receipt of the order. If such payment is not paid within 30 days of receipt of the order the penalty that will be payable will be Rs.6,99,55,23/-

Decision:-Appeal partly allowed.

Comment:- There were two issues involved in this case. The first was regarding maintenance and repair of software. It was being contended that as it has been held that software can be considered as goods, its repair and maintenance was leviable to service tax. However, the appeal was allowed on the premise that explanations that are added in statues that have adverse consequences should be applied prospectively. As regards the issue of leviability of service tax on certification of reliability and security of the ATM software, it was held that merely because ATM services were brought into service tax net subsequently it cannot be said that prior to its introduction, the certification services in relation to ATM software is not leviable to service tax under “Technical and Scientific Services”.

Comments

PJ/Case law/2013-14/1911

Post a Comment

Query