Software Maintenance

[Submitted by CA. K. A. Asmath Khan
B.Com., ACA
Secunderabad]

October 13, 2006

I think, by this time many of the software companies would have received notices from the central excise and service tax department requesting them for deposit of taxes on income received from Software maintenance.  So I have considered this an opportunity to express my views on this:

Maintenance or Repair Service:

This service was brought to Service tax w.e.f.01-07-2003 and made that the activity of repairs and maintenance carried on goods are liable to service tax. The definition has undergone change every year either by omission of wordings or addition of new words.

Taxable service in the context of 'Maintenance or Repair' is defined as "any service provided or to be provided in or in relation to [management[1]] maintenance or repair of goods". 

The Central Government has issued a Notification No.20/2003-ST dated 21-08-2003, providing exemption "in relation to taxable services provided to a customer in relation to maintenance or repair of computers, computer systems or computer peripherals from the service tax leviable thereon."

This Notification covers only maintenance or repair of computers, compute systems or computer peripherals and no where in the notification expression of the software is mentioned.  The Notification was silent about the part of 'software'.

Central Board of Excise & Customs (CBEC) with respect to applicability of service tax on Annual Maintenance contracts for maintenance of software has clarified vide its circular No. 70/19/2003-ST dated 17-12-2003 that:

"In the instant case repair is not of tangible goods but that of intangible program/software which is in installed condition and thus the maintenance and repair of software is not maintenance and repair of 'goods'. 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-ST dated 21.8.2003. As such computer software would form a part of computer systems would be covered under this notification

In the above circular CBEC has expressed clearly that software being intangible property maintenance or repair of it does not amount to 'maintenance or repair of goods' therefore not liable to service tax.

In the above circular reference of the Notification No.20/2003-ST dated 21-08-2003 and the expression of the phrase 'computer software would form a part of computer system' are only incidental in nature and for more clarity on the non applicability of the 'maintenance or repair service' to software.

Notification No.20/2003-ST dated 17-12-2003, was with drawn vide Notification No.07/2004-ST dated 09-07-2004, by which maintenance or repair of computers, computer systems and peripherals thereof are made liable to service tax. 

After with drawing the Notification, CBEC was not issued any clarification, or circular as to the applicability of tax on software maintenance and keep mum till 06-10-2005.

On 07-10-2005, CBEC has issued a circular bearing No.81/2005-ST dated 07-10-2005, stating in the case of  TCS Vs. State of Andhra Pradesh it was held that, software is goods and therefore maintenance of it is liable to service tax under the category of 'maintenance or repair service'. At the same time it is also necessary to draw  attention to para 6 of Circular No.81/2/2005, dated 7^th October 2005, where in it is said that "These instructions are issued taking into account the said decision of the Supreme Court , and in supersession of all earlier clarifications / circulars issued on the above subject." From the wordings of the Circular it is clear that Circular No.81/2/2005 has an overriding effect on any of the earlier Circular/Clarifications issued by the Department. 

The circular has not specified the date from which the service of software maintenance is liable to service tax, unless the expression is clear it is the date from which circular is issued. Therefore it is possible to argue that Circular No.81/2/2005 will have only prospective effect and not retrospective.  In this regard we can rely on the following decisions:

(1)        H.M. Bags Manufacturer Vs. Collector of Central Excise - 1997(94) ELT 3 (SC), where in it was held that:

"Board Circulars to be prospective from the date such circular is published of notified."

(2)        Paper Products Ltd Vs. CCE 1999 (112) ELT 765(SC)

"Any change in the department's stand through amendments or fresh circular, the period prior to the change would be governed by the earlier circular"

(3)        MRF Ltd Vs. CCE 2003(155) ELT 374 (CESTAT-Bang)

"Circular with drawing earlier instructions of the Board will have only prospective effect and any clarification cannot be retrospective effect"

So we can contend that Notification No.20/2003 was issued only in relation to computers and computer system and not for computer software. Circular No.70/19/2003-ST dated 17-12-2003 issued by the CBEC, clearly states that software was not liable to tax.  This circular was in force up to 06-10-2005. Therefore if at all software companies are liable to pay taxes then it is only from 07-10-2005 on wards not prior to that.