Karnataka High Court

The Principal Commissioner vs M/S. Ibm India Pvt. Limited on 4 February, 2021

Author: Alok Aradhe Rangaswamy

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  IN THE HIGH COURT OF KARNATAKA AT BENGALURU

       DATED THIS THE 4TH DAY OF FEBRUARY 2021

                          PRESENT

        THE HON'BLE MR. JUSTICE ALOK ARADHE

                            AND

  THE HON'BLE MR. JUSTICE NATARAJ RANGASWAMY

                    C.E.A. NO.8 OF 2016
BETWEEN:

THE PRINCIPAL COMMISSIONER
OF SERVICE TAX, SERVICE TAX-II
COMMISSIONERATE
TTMC/BMTC BUILDING, DOMLUR
BANGALORE-560071.
                                            ... APPELLANT
(BY SRI. JEEVAN J. NEERALGI, ADV.,)

AND:

M/S. IBM INDIA PVT. LIMITED
PLOT NO.12, SUBRAMANYA ARCADE
BANNERGHATTA MAIN ROAD
BANGALORE-560029.
                                          ... RESPONDENT
(BY SRI. HARISH BINDUMADHAVAN, ADV.)
                            ---
      THIS C.E..A. IS FILED UNDER SEC.35G OF THE CENTRAL
EXCISE ACT, ARISING OUT OF ORDER DATED 22.07.2015 PASSED
IN FINAL ORDER NO.21671/2015 BY THE CESTAT, BENGALURU IN
THE INTEREST OF JUSTICE AND EQUITY, PRAYING TO
      (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW
FRAMED ABOVE.
      (ii) DECIDE THE SUBSTANTIAL QUESTIONS OF LAW IN
FAVOUR OF THE APPELLANT BY ALLOWING THE APPEAL IN THE
INTEREST OF JUSTICE AND EQUITY.
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     (iii) SET  ASIDE   THE    IMPUGNED    FINAL ORDER
NO.21671/2015 DATED 22.07.2015 PASSED BY THE CESTAT,
BENGALURU IN THE INTEREST OF JUSTICE AND EQUITY.

     THIS C.E.A. COMING ON FOR HEARING,            THIS   DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:

                       JUDGMENT

This appeal under Section 35G of the Central

Excise Act, 1944 (hereinafter referred to as the Act for

short) has been filed by the appellant against the

judgment dated 23.07.2015 passed by the Customs,

Excise and Service Tax Appellate Tribunal (hereinafter

referred to as 'the tribunal' for short). The subject

matter of the appeal pertains to the period from

09.07.2004 till 06.10.2005. The appeal was admitted by

a bench of this Court vide order dated 22.04.2020 on

the following substantial questions of law:

              "(i)    Whether, in the given facts
        and    circumstances    of   the   case,    the

Tribunal is correct overlooking the facts and then overruling the statutory provisions enacted by Parliament?"

"(ii) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the demand is raised beyond the normal period of limitation, resulting in undue gains to the Respondent?".

2. Facts leading to filing of this appeal briefly

stated are that the respondent is engaged in providing

services with regard to maintenance and repair of

computer software. Vide Notification dated 21.08.2003,

the maintenance services related to computers,

computer systems or computer peripherals were exempt

from payment of service tax. The Central Board of

Direct Taxes (CBDT) issued a circular dated 17.12.2003

by which it was clarified that the maintenance of repair

of computer software would not be liable to service tax

inasmuch as the same does not amount to maintenance

or repair of tangible goods. The Notification dated

21.8.2003 was withdrawn by a Notification dated

09.07.2004 and thereafter, the liability to pay service

tax to services relatable to maintenance and repair of

computer software were made effective from

01.06.2007. Thereafter, a show cause notice dated

22.09.2009 was issued to the respondent by which

service tax to the tune of Rs.3,41,63,132/- for a period

from 09.07.2004 to 06.10.2005 was demanded. The

respondent submitted a reply to the aforesaid notice.

However, vide order dated 25.08.2009, the adjudicating

authority held the respondent liable payment of service

tax to the tune of Rs.3,41,63,132/- for a period from

09.07.2004 to 06.10.2005 along with interest and

penalty to the extent of 100% in terms of Section 78 of

the Finance Act. The respondent challenged the validity

of the aforesaid order in an appeal before the tribunal.

The tribunal vide order dated 23.07.2015 by placing

reliance on decision of the Madras High Court held that

software maintenance is exigible for levy of service tax

only with effect from 01.06.2007 whereas, the period in

question is from 09.07.2004 to 06.10.2005. It was

further held that the demand is barred by limitation as it

has been raised beyond the period of limitation and it

was also held that no allegation of any suppression or

misstatement can be cast upon the respondent as there

was a doubt with regard to levy of the tax in question.

In the result, the appeal preferred by the respondent

was allowed. In the aforesaid factual background, this

appeal has been filed.

3. Learned counsel for the appellant submitted

that the exemption was withdrawn with effect from

09.07.2004 therefore, the respondent was liable to pay

service tax for the period from 09.07.2004 to

06.10.2005. It is further submitted that during the

course of audit of the records of the assessee it was

found that they were providing software maintenance

services and they haven to paid the service tax. It was

further contended that the assessee have failed to apy

the service tax in respect of services which were

taxable under Section 68 and 70 of the Act. Therefore,

the extended period of limitation would apply.

4. On the other hand, learned counsel for the

respondent has referred to decision of the High Court of

Madras in 'KASTURI AND SONS VS. UNION OF

INDIA', (2011) 22 STR 129 (Mad.) and submitted

that the issue involved in this appeal is no longer res

integra and in any case, the demand raised by the

appellant was barred by limitation.

5. We have considered the submissions made

by learned counsel for the parties and have perused the

record. For the facility of reference, paragraphs 6, 7 and

8 of the decision rendered by High Court of Madras in

KASTURI AND SONS is reproduced for the facility of

reference:

6. Admittedly, it is under the Finance at, 2007, with effect from 1.06.2007, the term 'goods' has been expressly made to include computer software. But earlier in the Finance Act, 2003 in which the terms, 'business auxiliary

service' and 'maintenance or service' were introduced for the first time. There was specific exclusion of information technology service including maintenance of computer software from the purview of business auxiliary service.

The term 'business auxiliary service' as introduced in the Finance Act, 2003 with explanation contained therein is as follows:

65(19) "business auxiliary service" means any service in relation to-

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) promotion or marketing of service provided by the client;

      (iii) any        customer         care       service
             provided on behalf of the client;
             or

(iv) any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public relation services.

And includes services as a

commission agent, but does not include any information technology service.

Explanation - For the removal of doubts, it is hereby declared that for the purposes of this clause "information technology service", means any service in relation to designing, developing or maintaining of computer software, or computerized data processing or system networking, or any other service primarily in relation to operation of computer systems.

7. That was also followed in the Finance Act, 2004 with effect from 10.09.2004 and that status has been followed till the Finance At, 2007, as stated above. Therefore, the liability for payment of service charge from 2007 which has been imposed by way of statutory incorporation is not in dispute. But the question for consideration is, till passing of the Finance Act, 2007 in the light of specific exemption of information technology from the purview of "business auxiliary service" under the respective Finance Acts. Whether the impugned circular issued by the second respondent can have the effect of imposing the

liability of service tax or otherwise and whether the circular issued by the second respondent can be read in super cession of the statutory provisions of the Finance Act in the respective financial years.

8.Therefore, on fact, it is clear that ill the advent of the Finance Act, 2007, the information technology which included maintenance of computer software, had been outside the purview of 'business auxiliary service', especially under Section 65 and the term, 'goods' in the Finance Act, 2007 has included 'computer software' under Section 65(105)(zzg). However, under the impugned circular the second respondent placed reliance on the judgment of the Supreme Court in Tata Consultancy Service vs. State of Andhra Pradesh [2005) 1 SCC 308] to conclude that software being goods, any service relating to maintenance, repairing and servicing of the same is also liable for service tax. The Supreme Court in that case decided about the term 'goods' in the light of Andhra Pradesh General Sales Tax Act and farmed the question as follows:

The appellants provided consultancy services including computer consultancy services. As part of their business they prepared and laded on customers' computers custom- made software ("uncanned software") and also sold computer software packages off the shelf ("canned software"). The canned software packages were of the ownership of companies / persons who had developed those software. The appellants were licensees with permission to sub-license those packages to others. The canned software programs were programs like Oracle, Lotus, Master Key, N-Export, Unigraphics, etc.

The question raised in this appeal was whether the canned software sold by the appellants could be termed as "goods" and as such was assessable to sales tax under the Andhra Pradesh General Sales Tax Act, 1947.

And ultimately answered as follows:

"There is no error in the High Court holding that branded software is goods. In cases of both branded and unbranded software

the software is capable of being abstracted, consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed etc. Thus even unbranded software, when it is marketed / sold, may be goods. However, this aspect is not eng dealt with here and no opinion ins expressed thereon because in case of unbranded software other questions like situs of contract of sale and / or whether the contract is service contract may arise."

6. Learned counsel for the appellant was unable

to point out that the aforesaid decision was challenged

before the Supreme Court by the appellant. It is also

pertinent to mention here that in para 17 of the

aforesaid judgment, the stand of the appellant has been

recorded, which reads as under:

17. While it is admitted by the respondents in the counter affidavit that there has been exemption in respect of maintenance of computer software prior to 2006, it is not even their case thst in 2007, when the amendment was brought in the Finance At, it

was given retrospective effect and even the altered definition of the term 'goods' in the amendment of 2007 in the Finance Act, 1994 under Section 65(105)(zzg) also was not given retrospective effect and hence, it cannot be said tsht the impugned circular attempts togive effect o the provisions or explains the changes proposed in the Finance Act, 2005.

7. Thus, admittedly as per the stand taken by

the respondent themselves before the High Court of

Madras, it is evident that activity of maintenance of

computer software was exempt from the provisions of

the Act prior to 2006. We are in agreement with the

view taken by the High court of Madras. It is pertinent to

mention here, that in the show cause notice itself no

allegations of fraud collusion, misstatement or

suppression of facts have been stated against the

respondent, therefore, the demand is barred by

limitation under Section 73 of the Finance Act, 1994 as

well. For the aforementioned reasons, the substantial