Service tax on maintenance of Computer Software – Board issues clarification – impossible to implement
While the issue has been debated at length in the columns of TIOL, the DGST and at least one Chief Commissioner had issued conflicting instructions. A quick recap.
Once upon a time Board vide Circular No. 70/19/2003-S.T., dated 17-12-2003 emphatically stated that “It is to clarify that maintenance of Software is not chargeable to Service Tax.” The logic was that software was not “goods” Then came the TCS judgement and an alert Board revised its view and held that maintenance or repair or servicing of all computer software is taxable under section 65 in Circular No. dated 7 th October 2005. While reporting this, DDT had suggested, in order to avoid silly litigation, the Board should clarify that this circular has only prospective effect. Otherwise overactive officers are sure to shoot off Show Cause Notices. But Board has not given any such clarification. Let us hope the department will not initiate action, especially for the last five years alleging suppression that the assessees had suppressed the fact that Board is going to issue the clarification - -10 10 2005
Board, as usual, has been silent, but that is not a virtue that the DG, Service Tax is famous for. He issued a clarification. In his letter F.No. V/DGST/21/M&R/Misc-01/2005 dated 13th October 2005; the DG wanted Service Tax to be collected from 1.7.2003. A day after the DG issued his letter, the Chief Commissioner, Hyderabad shot off a letter to his commissioners in C, No. IV /16/255/2005.-CC(HZ)Service Tax dated 14.10.2005 that maintenance or repair of software IS chargeable to service tax under Section 65(105)(zzg) read with Section 65(64) of the Finance Act, 1994 with effect from 1.7.2003. However, in view of the exemption available vide Board's circular No.70/19/2003-ST dated 17.12. 2003 and Notification no.7/2004 dated 9.7.2004 ST dated 9.7.2004, demands Can be raised from 9. 7. 2004, the date on which Notification No.20/2003-ST dated 1.08.2003 was rescinded vide Notification No. 7/2004 dated 9.7.2004.
Now finally Board has issued its clarification. Board’s clarification is in agreement with the Hyderabad Chief Commissioner. The Board’s clarification reads,
“This exemption was rescinded by notification No. 7/2004-ST dated 9.7.2004. Hence such services became taxable since then; further, vide circular No. 81/2/2005-ST dated 7.10.2005, Board based on Supreme Curt's decision, also clarified that computer software is leviable to service tax. Accordingly, Board decided that the Chief Commissioners should be directed to recover the service tax payable on the above said services after 9.7.2004, the date when the exemption was withdrawn.”
But how on earth are they going to recover it?
The DGST, the Chief Commissioner, Hyderabad and unfortunately the worthy Board have all forgotten an elementary fact. This amount cannot be recovered. The undeniable fact is that Board circular 70/2003 clearly mentioned that “it is to clarify that maintenance of Software is not chargeable to Service Tax” . This circular was over ruled only 7.10.2005. So whatever the Board wants to do, can be done only after 7.10.2005. But the most important fact is that as of today, the entire period prior to March 2005 is barred by limitation. How are they going to recover it? Will the CAG raise an audit objection that due to late issue of clarification by the Board, substantial revenue has been lost?. Will Show Cause Notices allege suppression of fact that the assessee in 2004 willingly with intent to evade payment of tax suppressed the fact that the CBEC is going to come out with a circular in October 2005?
And how much does the Board hope to collect from this protracted litigation? Is the Board under some moral obligation to keep the consultants busy and well off?
Tail spark: This service does not fall under maintenance or repair but would fall under Business Auxiliary Service and is excluded from taxability. The TCS judgement on which so much reliance is placed is not applicable.
See F.No. , Dated : 7th March, 2006