Information Technology Software Services

Prior to 1-7-2012, taxable service in relation to information technology service was defined in erstwhile section 65(105)(zzzze). The definition of taxable service included practically all the services which are provided in connection with information technology software. The word information technology software was defined in erstwhile section 65B(28).

With effect from 1-7-2012, clause (d) of section 66E specifies major services relating to information technology software as taxable service. The definition of ‘service’ as given in section 65B(44) is very wide and it covers all the services provided in relation to information technology service even if they have not been specified in clause (d) of section 66E.

  • Important Definition

Section 65B(28): “Information Technology Software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment”.

The key ingredients of the definition are as under:

  • There is representation of instruction, data, sound or image, including source code and object code.
  • These are recorded in a machine readable form.
  • These are capable of being manipulated or providing interactivity to a user;

by means of a computer or an automatic data processing machine or any other device or equipment.

Such services are in relation to

  • Development,
  • Design,
  • Programming,
  • Customization,
  • Adaption,
  • Up-gradation,
  • Enhancement,
  • Implementation of information technology.

Software is a term for a set of instructions, which makes a computer to perform a task. The set of instructions are commonly known as a program, without which computers cannot do any operations. A software is classified broadly into two groups, application software, which includes normal utility applications like Microsoft word, power point, etc., that interacts and performs user specific tasks and systems software, such as operating systems, which interacts directly with hardware to make the system work and also provides a platform for other applications to work.

  • Accounting Codes

Such codes are no longer statutory but used for statistical purpose for the purpose of registration and for payment of tax as specified vide Circular No.165/16/2012 –ST dated 20.11.2012:

 

Tax Collection of Service Interest and penalties on such service
00440452 00440450

  • Provision relating to Negative List

Information technology software services are not included in the Negative list as specified under section 66D of the Finance Act, 1994.

  • Provisions relating to exemptions

  1. General Exemption
  • Small Service Provider

Vide Notification No 33/2012-ST, dated 20.06.2012 – Exemption to Small service providers having taxable turnover of less than 10 Lakhs and providing services other than by way of under a brand name.

  • Import of Technology

Vide Notification No. 14/ 2012-ST, dated March 17, 2012 – Exemption in respect of Taxable service involving import of technology, from so much of service tax, as is equivalent to the extent of amount of R&D Cess payable on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986. 

  • To Foreign Diplomatic missions and their personnel

Vide Notification No 27/2012-ST, dated 20.06.2012 – Exemption for all the taxable services provided by any person, for the official use of a foreign diplomatic mission or consular post in India, or for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein.

  • Services by TBI or STEP

Vide Notification No 32/2012-ST, dated 20.06.2012 – All taxable services provided by TBI or STEP have been exempted

  • Services provided to SEZ

Vide Notification No 40/2012-ST, dated 20.06.2012, all taxable services received by a Unit located in a Special Economic Zone (SEZ) or Developer of SEZ for the authorized operations, has been exempted from the levy of whole of the service tax.

  1. Specific Exemptions

Notification No. 25/2012-ST dated 20-6-2012 grants exemption to various services specified therein. None of the item in the said notification relates to information technology software services.

  • Provisions relating to Valuation and Abatement

Section 67 read along with Service Tax (Determination of Value) Rules, 2006 provides the manner of determining the value of taxable services on which service tax should be levied.

In respect of Information Technology software services, no specific provision for determination of taxable value has been provided. However it has been clarified that the value of taxable services is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration are indicated separately in the invoice. Thus, the value of taxable Information Technology software services is to be determined in terms of provision of Section 67 read with the prescribed rules.

No abatement has been granted to any person liable to pay service tax under the section.

  • Provisions relating to Cenvat Credit

The Credit is available to the service provider of the duty or tax paid on ‘capital goods’, ‘inputs’ and ‘input services’. Since all the services relating to information technology software are taxable, the provider of service will get the credit of excise duty paid on capital goods, input and service tax paid on input services as defined in Cenvat Credit Rules, 2004.

  • Provisions relating to point of taxation

As per Rule 3 of Point of Taxation Rules, 2011, the point of taxation shall be-

  1. Time when the invoice for the service provided or to be provided is issued. As per Rule 4A of Service Tax Rules, invoice shall be issued within 30 days from the date of completion of service. In case invoice is not issued within 30 days from the completion of service, the point of taxation shall be the date of completion of service.
  2. In case where the person providing the service receives payment before the time specified above, the date of receipt of payment shall be the point of taxation.

  • Provisions relating to Place of Provision of Service Rules, 2012

The Place of Provision of Service Rules, 2012 contains different rules for different nature of services. Since no specific Rule applied to such services, the place of provision shall fall under Rule 3 which provides that location of service recipient shall determine place of provision of such services.  Thus, if the recipient is within taxable territory, place of provision shall be within taxable territory and taxable, else, non taxable.

  • Provisions relating to reverse charge

Information Technology software services is not included under the mechanism of Reverse Charge. Hence, the person providing the service shall be the person liable to pay service tax.

  • FAQs from Education Guide issued from Department relating to IT sector

  • Would sale of pre-packaged or canned software be included in this entry?

No, it is a settled position of law that pre-packaged or canned software which is put on a media is in the nature of goods [Supreme Court judgment in case of Tata Consultancy Services Vs State of Andhra Pradesh [2002(178) E.L.T. 22(SC) refers]. Sale of pre-packaged or canned software is, therefore, in the nature of sale of goods and is not covered in this entry.

  • Is on site development of software covered in this entry?

Yes. On site development of software is covered under the category of development of information technology software.

  • Would providing advice, consultancy and assistance on matters relating to information technology software be chargeable to service tax?

These services may not be covered under the declared list entry relating to information technology software. However, such activities when carried out by a person for another for consideration would fall within the definition of service and, hence, chargeable to service tax if other requirements of taxability are satisfied.

  • Would providing a license to use pre-packaged software be a taxable service?

The following position of law needs to be appreciated to determine whether a license to use pre-packaged software would be goods-

  • As held by the Hon’ble Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh [2002(178) ELT22(SC)] ] pre-packaged software or canned software or shrink wrapped software put on a media like is goods. Relevant portion of para 24 of the judgment is reproduced below-

“A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become “goods”. We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of “goods” within the meaning of the term as defined in the said Act. The term “all materials, articles and commodities” includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.”

Therefore, in case a pre-packaged or canned software or shrink wrapped software is sold then the transaction would be in the nature of sale of goods and no service tax would be leviable.

  • The judgement of the Supreme Court in Tata Consultancy Service case is applicable in case the pre-packaged software is put on a media before sale. In such a case the transaction will go out of the ambit of definition of service as it would be an activity involving only a transfer of title in goods.
  • As per the definition of ‘service’ as contained in clause (44) of section 65(B) only those transactions are outside the ambit of service which constitute only a transfer of title in goods or such transfers which are deemed to be a sale within the meaning of Clause 29(A) of article 366 of the Constitution. The relevant category of deemed sale is transfer of right to use goods contained in sub-clause (d) of clause (29A) of the Constitution.
  • ‘Transfer of right to use goods’ is deemed to be a sale under Article 366(29A) of the Constitution of India and transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods is a declared service under clause (f) of section 66E.
  • Transfer of right to use goods is a well-recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods.
  • A license to use software which does not involve the transfer of ‘right to use’ would neither be a transfer of title in goods nor a deemed sale of goods. Such an activity would fall in the ambit of definition of ‘service’ and also in the declared service category specified in clause (f) of section 66E.
  • Therefore, if a pre-packaged or canned software is not sold but is transferred under a license to use such software, the terms and conditions of the license to use such software would have to be seen to come to the conclusion as to whether the license to use packaged software involves transfer of ‘right to use’ such software in the sense the phrase has been used in sub-clause (d) of article 366(29A) of the Constitution.
  • In case a license to use pre-packaged software imposes restrictions on the usage of such licenses, which interfere with the free enjoyment of the software, then such license would not result in transfer of right to use the software within the meaning of Clause 29(A) of Article 366 of the Constitution. Every condition imposed in this regard will not make it liable to service tax. The condition should be such as restraints the right to free enjoyment on the same lines as a person who has otherwise purchased goods is able to have. Any restriction of this kind on transfer of software so licensed would tantamount to such a restraint.
  • Whether the license to use software is in the paper form or in electronic form makes no material difference to the transaction.
  • However, the manner in which software is transferred makes material difference to the nature of transaction. If the software is put on the media like computer disks or even embedded on a computer before the sale the same would be treated as goods. If software or any programme contained is delivered online or is down loaded on the internet the same would not be treated as goods as software as the judgment of the Supreme Court in Tata Consultancy Service case is applicable only in case the pre-packaged software is put on a media before sale.
  • Delivery of content online would also not amount to a transaction in goods as the content has not been put on a media before sale. Delivery of content online for consideration would, therefore, amount to provision of service.
  • In case contract is given for customized development of software and the customized software so developed is delivered to the client on media like a CD then would the transaction fall in this declared entry or would it be covered by the TCS Judgment?

In such a case although the software is finally delivered in the form of goods, since the contract is essentially for design and development of software it would fall in the declared list entry. Such a transaction would be in the nature of composite transaction involving an element of provision of service, in as much as the contract is for design and development of software and also an element of transfer of title in goods, in as much as the property in CD containing the developed software is transferred to the client. However, the CD remains only a media to transmit or deliver the outcome of which is essentially and pre-dominantly a contract of service. Therefore, such a transaction would not be excluded from the ambit of the definition of ‘service’ as the transaction does not involve ‘only’ transfer of title in goods and dominant nature of the transaction is that of provision of service.

  • In the case of Integra Micro Software Services (P.) Ltd. Commissioner of Service Tax, Bangalore [2012] (Bang. – CESTAT), it was held that Development of software through modification and upgradation of same based on shortcomings pointed out by clients, would prima facie, be covered under ‘Information Technology software service’.

  • Important cases / reference

Activity Whether falls within the scope of present service Reference
Charges paid for the maintenance of software Yes SAP India Pvt. Ltd.  v CCE, Bangalore-III [2011 (21) S.T.R. 303 (Tri. – Bang.)]
CD ROM is a software No LML Ltd. v CC (2010) 10 SCC 503
Maintenance of Software, whether customized or non-customized, provided it satisfies the attributes of goods. Yes Bharat Sanchar Nigam Ltd. & Anr. V UOI & Ors [AIR 2006 SC 1383]
If software downloaded from internet from abroad Yes Letter F.No. 334/1/2008-TRU, dated 29.02.2008
Development of Software Yes Sasken Communication Technologies Ltd V Joint Commissioner of Commercial Taxes, Bangalore 2011-TIOL-707-HC-KAR-ST
Packaged IT software, pre packaged in retail packages for single use subject to specified conditions No DOF Letter No. 334/1/2010 dated 26-2-2010

 

 

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By | 2017-04-06T10:49:00+00:00 September 19th, 2016|Service Wise Implications|

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