By TIOL News Service

MUMBAI, JUNE 19, 2015: THE appellant is a 100% EOU-STP unit engaged in exporting services, namely, Software Consultancy, Development of software, Maintenance or Repair of Software (MRS) and Management Consultant in relation to ERP software implementation service.

They filed claims for refund of input service tax credit under Rule 5 of the CCR for the period July, 2005 to September, 2005 and for the period October, 2005 to December, 2005. Later, the appellants revised the amount of refund claim and reduced the claims to Rs. 2,47,27,422/- and Rs. 32,34,635/- respectively as they realized that the refund of CENVAT Credit attributable to inputs used in the non-taxable output services namely, software development and software consultancy is not admissible.

The adjudicating authority rejected both the refund claims on the ground that all the output services are exempted from Service Tax inasmuch as the services provided by the appellant are classifiable under Business Auxiliary Services and Consulting Engineer Service and both these services categorically excluded software development and Computer software engineering from their coverage during the period in dispute.

The Commissioner (Appeals) agreed with the order of the adjudicating authority and so the appellant is before the CESTAT.

After considering the submissions, the Member (Technical) observed -

+ For determining the classification of the output services in question and their taxability, we note that the classification of ERP Software system under Section 65(105)(r) cannot be doubted because Notification No. 16/2004 which exempted such software itself classified the services as provided by Management Consultant in connection with the management of any organization. Therefore, such service is taxable. It is a different matter that the service is exempted.

+ As regards the remaining software service, which appellant have termed as 'management, maintenance or repair of software service, we find merit in appellant's contention that no satisfactory reasoning has been given by the adjudicating authority or the Commissioner (Appeals) as to why the services should not be considered as maintenance or repair service. We also note that the appellant was registered with Service Tax Department under the category of 'Maintenance and Repair Service' which was never questioned or annulled.

+ From the technical literature, it can be inferred that maintenance or repair of software will also involve some development or designing. The maintenance and repair service ought not to be equated with maintenance or repair of goods. Merely because the maintenance or repair leads to some modified software does not necessarily imply that there is no 'maintenance or repair' of the software. Thus, it appears that the software in question could be categorized under the Maintenance or Repair service. The software relating to software development and software consultancy was, in any case, deleted from the refund claim by the appellant.

+ It is clear from the Rules (CCR) that credit on input services was allowed only to provider of taxable service. Further, the refund under Rule 5 was allowed to manufacturers only. For service provider, there was a system of rebate of duty paid on excisable inputs or input services under Notification No. 12/2005-ST dated 19.4.2005. It was only in 2006, vide Notification No. 4/2006 dated 14.3.2006 that Rule 5 was amended to allow refund to providers of output services. Therefore, during the period of dispute i.e. April, 05 to Dec., 05, refund was permissible only to manufacturers and service providers could take the route of Notification No. 12/2005, which provided for rebate.

+ The point to be considered here is whether the input service credit itself was admissible before the refund can be considered. As shown above, Rule 3 permitted input service credit only if used for providing taxable service. Thus, it would be important to consider whether the services exported were taxable services.

+ We note that the appellant submitted detailed literature in support of their claim that the service provided is to be categorized under Management, Maintenance or Repair service. The Commissioner (Appeals) has not examined why the software maintenance which includes corrective maintenance, adoptive maintenance and perfective maintenance, or enhancement and preventive maintenance or re-engineering cannot be categorized under software maintenance and repair service. He has not distinguished between the software development service in respect of which no refund has been claimed and the services under which refund has been claimed and the services under which refund has been claimed.

+ The matter is remanded back to the Commissioner (Appeals).

The Member (J) did not fully agree with the order recorded by Member (T).

He observed -

+ Supreme Court in the case of TCS Vs. State of Andhra Pradesh - 2004-TIOL-87-SC-CT-LB, judgment dated 5.11.2004 have held that software is goods. There is no doubt that the management, maintenance and repair of goods was taxable during the period in dispute for which the appellant is claiming refund. Thus, the software is required to be treated as goods through out for the purpose of levy of tax w.e.f. 05.11.2004, when the law was so declared by the Supreme Court. Accordingly, there is no element of doubt as to taxable nature of the services in question particularly with respect to management, maintenance and repair of software is concerned.

+ Further, Karnataka High Court in the case of mPortal India Wireless Solutions Pvt. Ltd. - 2011-TIOL-928-HC-KAR-ST has held that in the case of export of software, the non-taxable item, Service Tax paid on input service which remains unutilized, the exporter is entitled to refund of such unutilized credit on furnishing of the particulars of tax paid by them. Such refund cannot even be denied on the ground of limitation under Section 11B of the Central Excise Act. It was also held that the registration with the Service Tax Department is not a pre-requisite for claiming the credit and resultant refund. I hold that the assessee has rightly classified the service in question under 'management, maintenance or repair service' under Section 65(105)(zzg) and the Commissioner has erred in classifying the services under 'Consulting Engineers Service'.

+ The amendment under the definition of 'Management, maintenance or repair service' under Section 65(64) of the Finance Act, 1994 w.e.f. 16.5.2008 is clarificatory and/or explanatory in nature, in view of the ruling of the Apex Court in the TCS case (supra). Thus, the amendment being clarificatory in nature, will be applicable with retrospective effect i.e. from the date when the Section was brought on statute.

+ I hold that the appellant have rightly taken CENVAT Credit and is entitled to refund. Thus, the appeal is allowed with consequential benefit in accordance with law.

In view of the difference in opinion, the matter is placed before the President for reference to the Third Member for a Majority decision.  

(See 2015-TIOL-1185-CESTAT-MUM)