Ambiguity in service tax levy on software

EXPERT EYE

There is a service tax on "maintenance or repair" services provided by any person under a contract in relation to maintenance or repair of any goods or equipment, excluding motor vehicle.

There are some very cogent doubts about the proper wording of and leviability of tax on computer software and exemptions issued on the above service tax of vague clarifications.

This activity was exempted by notification no 20/2003 -ST dt 21.8. 2003. The notification exempted the taxable service provided to a customer by any person in relation to maintenance or repair of computers, computer systems or computer peripherals, from the service tax leviable.

The government clarified through letter no 256/9/2003-CX.4 dated 21.8.2003 that organisations engaged in design, development and maintenance of software and which, enter into annual maintenance contracts for maintenance of their software, are exempt.

The grounds are four. (a)It said that in the instant case repair is not of tangible goods but, that of intangible programmes /software which are in installed condition and thus the maintenance and repair of software is not maintenance and repair of 'goods'.

(b)Further an exemption has been granted to maintenance or repair services in relation to computer, computer systems and computer peripherals vide Notification No. 20/2003-S T, dated 21-8-2003.

As such, computer software which forms a part of computer systems would be covered under this notification. (c) Under the category of 'consulting engineer' vide Notification No. 4/99-S.T., dated 28-2-99 taxable service provided to any person by a consulting engineer in relation to computer software is exempted.

This notification has also since been rescinded vide notification no 23/2004 ST dated 10.9.2004. (d) The definition of "Business Auxiliary Service" also specifically provides that; inter alia, maintenance of computer software is covered in the IT service, which is excluded from the scope of business auxiliary service. It has to be noted also that the exemption notification no 20/dated 21.8.2003 has been rescinded by notification no 7/2004 dated 9.7.2004.

But the position does not change merely because of the absence of the exemption. We have to read the clarification vide letter no 256/9/2003 CX -4 quoted above which says in the instant case the repair is not of tangible goods but that of intangible programme /software which is in installed condition and thus the repair and maintenance of software is not maintenance and repair of goods. The letter concludes that on the above considerations, maintenance of software is not chargeable to service tax.

Between 9.7.2004 and 7.10.2005 doubt continued. Now on 7.10.2005 a new circular no 81/2/2005-ST has been issued superseding all previous circulars and pointing out that in the case of Tata Consultancy vs State of AP, 2004 (178) ELT, 22 (SC), the Supreme Court has held that software, branded or unbranded, are goods. So the circular says that software is dutiable under the heading of maintenance or repair service.

This circular is open to challenge on two grounds, First, in the valuation section 67(vi) the expression used is ,"the cost of parts of other material, if any, sold to the customer during the course of providing maintenance or repair service" which shows that what is envisaged here is where parts and material is necessary, that is tangible goods .

Second, in the main definition given in Section 65 (64) (a) is,"maintenance or repair including reconditioning, or restoration, or servicing of goods or equipment, excluding motor vehicle".

These are all tangible products. So relying on the principle of Noscitur a Sociis, that is, words take the colour of the associated words, the meaning here can be only that the product must be a tangible object.

Software is intangible , though goods after the Tata Consultancy judgment.

So the new circular of 7th October is not enough to include software as dutiable. An amendment of the definition in Section 65 (64) is necessary. Though the circular is binding on the Departmental officers, it is not binding on the taxpayers.

So to avoid litigation, more clarity and definitiveness must be incorporated in the definition which needs to be amended if the intention is to include computer software.

smukher2000@yahoo.com