Whether development, installation and maintenance of software falls under BAS or IT services?

PJ/Case Law/2014-15/2390

Case:-SKF INDIA LTD Vs COMMISSIONER OF CENTRAL EXCISE, PUNE-I

Citation:-2014-TIOL-1924-CESTAT-MUM

Brief facts:-The appeal is directed against Order-in-Original No: PI/COMMR/ST/2012 dated 27/01/2012 passed by the Commissioner of Central Excise, Pune - I. Vide the impugned order, the learned adjudicating authority has confirmed a service tax demand of Rs. 5,39,06,150/- against the appellant M/s SKF Ltd. by classifying the services received by them under ‘Business Auxiliary Service' and confirming service tax demand on reverse charge basis along with interest thereon and also imposing equivalent amount of penalty under Section 78 of the Finance Act, 1994. The period of demand is from 18/04/2006 to 15/05/2008. Aggrieved of the same the appellant is before Tribunal.

Appellant’s contention:-The learned consultant for the appellant submits that the demand has two parts. The first part of the demand relates to Rs. 3,76,03,804/- in respect of IT services received by the appellant from M/s. SKF, Sweden and the second part of the demand consist of an amount of Rs. 1,63,04,213/- is in respect of various expenditure incurred by the appellant towards foreign currency purchase, professional management fees, group management programmes, engineering software support services, etc. Both these demands have been put under one category of ‘Business Auxiliary Services'. While the show cause notice does not specify under which clause of ‘Business Auxiliary Service' the aforesaid services would fall, the adjudicating authority has in the order grouped them under the category of ‘customer care services'. The learned consultant has submitted a copy of the agreement entered into with SKF, Sweden in respect of the provision of services and as can be seen from the preamble to the agreement, it is for development and supply of software products by SKF, Sweden to the appellant in India. It also includes supply of personnel for information and computer technology, IT infrastructural development, education & control, providing telecommunication and network facilities and support, development, purchasing, technical services apart from development and maintenance of software for the appellant.

The learned consultant submits that as per the definition of ‘Business Auxiliary Services' as it stood at the relevant time, ‘Business Auxiliary Services' specifically excluded IT software services from its purview and ‘information technology software service' was brought under service tax w.e.f. 16/05/2008. Clause 65(105) (zzze) defines ‘Information Technology Services' as follows:

“(zzzze) to any person, by any other person in relation to information technology software for use in the course, furtherance, business or commerce include,-

(i) development of information technology software,

(ii) study, analysis, design and programming of information technology software,

(iii) adaptation, upgradation, enhancement, implementation and other similar services related to information technology software,

(iv) providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the start-up phase of a new system, specifications to secure a database, advice on proprietary information technology software,

(v) acquiring the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products,

(vi) providing the right to use information technology software supplied electronically;

From a reading of the above definition it would be amply clear that services received by the appellant from SKF, Sweden would fall squarely within the definition of IT Services leviable to service tax w.e.f. 16/05/2008 and therefore, the impugned demand for the period prior to 16/05/2008 is clearly unsustainable in law.

As regards the service of ECS charges, wind-chill charges, group management programme, BST charges, Hotel booking charges, foreign currency purchase fees, management fees, data cost, and so on, these are also related to IT software procured by the appellant from the foreign entity and this would also not fall within the purview of Business Auxiliary Service as concluded by the adjudicating authority.

He also relies on the decision of this Tribunal in the case of UTI Technology Services Ltd. vs. Commissioner of Service Tax 2012 (26) STR 147 - 2012-TIOL-73-CESTAT-MUM, where, insimilar set of circumstances, it was held that classification of installation, commissioning and system integration of IT systems etc. would fall within the category of ‘Information TechnologyServices'. The ratio of the said decision squarely applies to the facts of the present case. Accordingly he prays for setting aside the impugned order and allow the appeal.

Respondent’s contention:-The learned Additional Commissioner (AR) appearing for the Revenue, on the other hand, reiterates the findings of the adjudicating authority. It is his contention that these services received by the appellant would qualify as ‘customer care services' and, therefore, would be leviable to service tax under ‘Business Auxiliary Services' and therefore, he pleads for upholding the impugned order.

Reasoning of judgment:-We have carefully considered the submissions made by both the sides. From a perusal ofthe agreement entered into between the appellant and SKF, Sweden, it is clear that the saidagreement provided for development, maintenance and installation of software systems bythe foreign entity to the appellant and supply of information, data, providing training, etc. Inthe IT software field, Information Technology Software service was specifically excluded fromthe scope of ‘Business Auxiliary Services' and the same was made taxable only w.e.f.16/05/2008 when a separate entry for ‘Information Technology Software Services' wasintroduced in the statute book. Therefore, we agree with the appellant's contention that theservices received by the appellant fall within the category of ‘Information Technology Services'and therefore, would not be liable to service tax for the period to 16/05/2008.

As regards the contention of the Revenue that it is a customer care service, this contention is devoid of any merit for the reason that, in respect of customer care service there would be three persons involved, the principal service provider, the customer and the intermediary in between who undertakes the service on behalf of the principal, the service provider. In the present case, on perusal of the agreement, it is seen that there are only two parties involved SKF, Sweden and SKF, India and there is no third party involved. Further, the service received by the SKF India, the appellant herein, is for its own use and not for providing any service to any other party. Therefore, the argument of the Revenue that the services received would fall within the ambit of ‘customer care' is totally bereft of any logic and devoid of any merit.

As regards the demand of Rs. 1.63 crores for the various services received, even though the appellant had explained the nature of the services and the payments made before the adjudicating authority in their letter dated 09/02/2011, the adjudicating authority has not considered these submissions at all while passing the impugned order. In any case, we notice that the various services received do not come anywhere near the definition of ‘business auxiliary service' or ‘customer care service' as has been held in the impugned order. Thus, we find that the impugned order is clearly unsustainable in law. Accordingly, we set aside the impugned order and allow the appeal.

Decision:- Appeal allowed.

Comment:- The analogy of the case is that IT service definition is includes development, design, programming, implementation etc. of information technology software. Installation, development and maintenance of software will more aptly fall under information technology services. Moreover, IT services were specifically excluded from the defination of BAS and the IT services became taxable with effect from 16.05.2008. Therefore, the service of development of software classifiable under IT services cannot be made taxable under BAS prior to 16.05.2008. Consequently, the appeal was allowed.

Prepared by:- Monika Tak

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PJ/Case Law/2014-15/2390

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