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					                                “IT” is no more soft.

         (S. Jaikumar & G. Natarajan, Advocates, swamy associates)


The levy of service tax on various software related services, with effect from
10.05.2008, has thrown out many issues as to the applicability of this levy, vis-à-vis
the levy of duty of excise and customs. In this article an attempt has been made to
reap a holistic understanding of the issue.

Excise Duty.

Chapter heading 8523 of the first schedule to the Central Excise Tariff Act, 2005
reads as

Discs, tapes, solid-state non-volatile storage devices, “smart cards” and
other media for the recording of sound or of other phenomena, whether or
not recorded, including matrices and masters production of discs, but
excluding products of chapter 37.

A cruise through the bewildering single/double/triple dashes under the tariff entry
would reveal that the above chapter heading has been broadly sub-divided into, (a)
Magnetic media, (b) Optical media, (c) Semi-conductor media.          Under semi
conductor media, chapter heading 8523 80 20 reads as “information technology
software”. The term “information technology software” is also explained in the
Supplementary Note as

               For the purposes of heading 8523, “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 an automatic data processing machine”.


It may be observed that, software by itself is an intangible property and it cannot be
considered as “goods”. But, when software is stored in a medium, it acquires the
characteristics of “goods” and also find a place in the Central Excise Tariff. It has also
been held so by the Hon‟ble Apex Court in Tata Consultancy Services Vs State of
A.P. 2004 (178) ELT 22 SC.

As per the Central Excise Tariff, such software attracts a duty of excise @ 12 %. But
customized software is exempted from payment of duty of excise, vide S.No. 27 of
Notification 6/2006 Dated 01.03.2006, which reads as below:
  (1)       (2)                     (3)               (4)       (5)
 “27.      8523      (a)     Any customized           Nil        -
                     software (that is to say, any
                     custom designed software,
                     developed for a specific user
                     or client), other than
                     packaged software or canned
                     software
                     (b)     Packaged Software       12%        -”;

                     Explanation. – The
                     expression “packaged
                     software or canned software”
                     means a software developed
                     to meet the needs of variety
                     of users, and which is
                     intended for sale or capable
                     of being sold, off the shelf.



As per Chapter note 10 of Chapter 85, for the purposes of heading 8523 “recording”
of sound or other phenomena shall amount to manufacture. As such, copying of
software from one storage medium to another storage medium or multiplication
thereof into number of storage mediums, would amount to manufacture and if the
same is done in relation to any “packaged software” duty of excise has to be paid.

In this connection, it may be noted that it is a common commercial practice to trade
in software through online. In other words, if a person wants do purchase a
software, he may do so, by visiting the web site, where such software is offered for
sale and purchase the same. Upon such purchase, the said software would be loaded
into the system. This process of downloading the software through electronic mode
and storing the same, can be considered as “manufacture”, thereby strictly attracting
the duty of excise. But, in the absence of “removal” of such software, i.e. removal
the medium in which such software is stored, or due to the availability of the
exemption notification 67/95 (wherever the said download of software has been
done in or in relation to manufacture of dutiable excisable goods), or may be due to
the SSI exemption availability, there would not be any duty liability in case of such
online downloading of software.
Service Tax.

In the budget 2008, various software related activities have been brought within the
ambit of levy of service tax. While doing so, the Hon‟ble Finance Minister has
observed in para 156 of his Budget speech,


               55 per cent of the GDP is contributed by the services 156. sector,
               which is a growing sector that must contribute its legitimate share to
               the exchequer. I propose to bring under the service tax net four
               services. They are:-

               (i)    asset management service provided under ULIP, to bring it on
               par with asset management service provided under mutual funds;

               (ii)  services provided by stock/commodity exchanges and clearing
               houses;

               (iii)    right to use goods, in cases where VAT is not payable; and

               (iv)  customised software, to bring it on par with packaged
               software and other IT services.

It is also relevant to refer to the clarifications contained in the CBEC‟s letter D.O.F.
No. 334/1/2008 TRU Dated 29.02.2008


               4.1     Information Technology Software Service :

               4.1.1    Information Technology (IT) software service includes, -

           •   Development (study, analysis, design and programming) of software.

           •   Adaptation, up-gradation, enhancement, implementation and other
               similar services in relation to IT software.

           •   Provision of advice and assistance on matters related to IT software,
               including :

              Conducting feasibility studies on the implementation of a system,
              Providing specifications for a database design,
              Providing guidance and assistance during the start-up phase of a new
               system,
              Providing specifications to secure a database, o Providing advice on
               proprietary IT software.

           •   Acquiring the right to use,-

               IT software for commercial exploitation including right to reproduce,
           distribute and sell,
    Software components for the creation of and inclusion in other IT
software products,

    IT software supplied electronically.

    4.1.2 Software consists of carrier medium such as CD, Floppy and
    coded data. Softwares are categorized as “normal software” and
    “specific software”. Normalised software is mass market product
    generally available in packaged form off the shelf in retail outlets.
    Specific software is tailored to the specific requirement of the customer
    and is known as customized software.

    4.1.3 Packaged software sold off the shelf, being treated as goods, is
    leviable to excise duty @ 8%. In this budget, it has been increased
    from 8% to 12% vide notification No. 12/2008-C.E., dated 1-3-2008.
    Number of IT services and IT enabled services (ITeS) are already
    leviable to service tax under various taxable services:

•   Consulting engineer‟s service - advice, consultancy or technical
    assistance in the discipline of hardware engineering [Section
    65(105)(g)].

•   Management or business consultant‟s service - procurement and
    management of information technology resources [Section 65(65)].

•   Management, maintenance or repair service - maintenance of
    software, both packaged and customized and hardware [Section
    65(64)].

•   Banking and other financial services - „provision and transfer of
    information and data processing‟ [Section 65(12)].

•   Business support service - various outsourced IT and IT enabled
    services [Section 65(105)(zzzq)].

•   Business auxiliary service - services provided on behalf of the client
    such as call centres [Section 65(19)].

    4.1.4 IT software services provided for use in business or commerce
    are covered under the scope of the proposed service. Said services
    provided for use, other than in business or commerce, such as services
    provided to individuals for personal use, continue to be outside the
    scope of service tax levy. Service tax paid shall be available as input
    credit under Cenvat credit Scheme.

    4.1.5 Software and upgrades of software are                 also supplied
    electronically, known as digital delivery. Taxation is to   be neutral and
    should not depend on forms of delivery. Such supply         of IT software
    electronically shall be covered within the scope of          the proposed
    service.
              4.1.6 With the proposed levy on IT software services, information
              technology related services will get covered comprehensively.

              4.1.7 Following consequential amendments in other taxable services
              are also being made:

          •   At present, „Information technology service‟ is specifically excluded
              from the scope of Business auxiliary service [Section 65(105)(zzb)].
              Consequent on the proposed IT software service, information
              technology services get covered comprehensively for the purpose of
              levy of service tax and, therefore, specific exclusion of „Information
              technology service‟ under Business auxiliary service is being deleted.

          •   To include „testing and analysis of IT software‟ services under
              Technical testing and analysis service [Section 65(105)(zzh)].

          •   To include „Certification of IT software‟ services under Technical
              inspection and certification service [Section 65(105)(zzi)].

          •   To clarify as removal of doubts that „Management, maintenance or
              repair of properties‟ includes Management, maintenance or repair of IT
              software [Section 65(105)(zzg)]. Maintenance of packaged software
              (being goods) is also leviable to service tax under the said service.

          •   Services provided in relation to advice, consultancy and assistance on
              matters related to IT software shall be leviable to service tax under the
              IT software service. Consulting engineer‟s service [Section 65(105)(g)]
              in the discipline of computer hardware engineering is leviable to
              service tax whereas consulting engineer‟s service in the discipline of
              computer software engineering is not leviable to service tax by way of
              specific exclusion. Specific exclusion of „consultancy in the discipline of
              computer software engineering‟ from the scope of „consulting
              engineer‟s service‟ is not necessary and, therefore, being deleted.

          •   To clarify that a consultancy service, covering both hardware and
              software consultancy, shall be classifiable under „Consulting engineer‟s
              service‟.

From the above, it may be observed that the intention of the Government is to levy
service tax only in respect of “customized software”. It may be noted that
customization of software is a service activity. Once such customized software is
copied into a medium, it becomes goods and thanks to Notification 6/2008, supra,
the excise duty payable thereon is exempted. Even though, the service rendered
would ultimately result in the emergence of “goods”, the service part of it would
attract the levy of service tax.

Now, let us turn our attention to the relevant definitions under the Finance Act,
1994.

Section 65 (53a) ibid defines “information technology software” as
              „information technology software‟ to mean 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 taxable service has been defined under clause (zzzze) of Section 65(105) as any
service rendered to any person, by any other person in relation to information
technology software for use in the course, or furtherance, of business or commerce,
including:-




Development (study, analysis, design and programming) of software.

          Adaptation, up-gradation, enhancement, implementation and other similar
           services in relation to IT software.
          Provision of advice and assistance on matters related to IT software,
           including:
               o Conducting feasibility studies on the implementation of a system,
               o Providing specifications for a database design,
               o Providing guidance and assistance during the start-up phase of
                   anew system,
               o Providing specifications to secure a database,
               o Providing advice on proprietary IT software.

          Acquiring the right to use,-
              o IT software for commercial exploitation including right to
                  reproduce, distribute and sell,
              o Software components for the creation of and inclusion in other IT
                  software products,
              o IT software supplied electronically.

From the above, it may be observed that the definition is an “inclusive one” and any
service in relation to information technology software for use in the course, or
furtherance, of business or commerce, would be a taxable service. It may be in the
form of grant of licence to use the software, development of a new software,
upgradation and the like, providing advices and services in relation to acquiring the
right to use (may be assisting in sourcing the licence).

In case of packaged software sold off the shelf, there is an excise duty liability. It
may be observed that by purchase of such packaged software, the purchaser only
gets the licence to use the said software, with attendant restrictions on copying,
multiplication, etc. So, the purchase of packaged software also involves, acquiring
the right to use the software. As the main part of the definition of taxable service
reads as any service rendered to any person, by any other person in relation to
information technology software for use in the course, or furtherance, of business or
commerce, the developer / seller of the packaged software, can be said to be
rendering the service of granting the right to use the software and service tax would
also attract on such activity, apart from the excise duty liability on such packaged
software. Unlike the levies of sales tax and service tax, which are mutually exclusive,
there is nothing to preclude the levy of excise duty in lieu of levy of service tax or
vice-versa. So, there is a possibility that purchase of packaged software may attract
both excise duty and service tax. But, under the VAT legislation, such packaged
software is treated as goods and sales tax demanded on the entire value. Hence, by
virtue of Notification 12/2003 ST, the entire value can be ascribed to the sale and
there is no need to pay any service tax, in case of sale / purchase of packaged
software!


Customs.

No basic customs duty is leviable on import of software. If the packaged software is
imported in the form of any storage media, CVD would be payable @ 12 % plus
Education Cess. If any customized software is imported in the form of any storage
media, there would be no customs duties at all. If any software is imported through
online, in the absence of any medium, the same cannot be considered as import of
goods and hence no customs duties would be payable.


The above views can also be tabulated as below, in respect of various activities:

S.No.     Activity                                           Liability to Excise duty
                                                             / Service Tax
1         Development and sale of packaged software          ED @ 12 % plus Education
          (Eg. Sale of Excus CDs by M/s Centax               Cess. No Service Tax.
          Publications)
2         Development of a new software for a specific       ED : Nil. Service Tax
          client, according to his requirements.             under          Information
                                                             Technology Service @ 12
                                                             % plus Education CESS.
3         Grant of License to use software.                  ED : Nil. Service Tax
                                                             under          Information
                                                             Technology Service @ 12
                                                             % plus Education CESS.
4         Upgradation, Implementation,        Adaptation,    ED : Nil. Service Tax
          etc. of software                                   under          Information
                                                             Technology Service @ 12
                                                             % plus Education CESS.
5         Maintenance of software                            Service     tax      under
                                                             Maintenance     &   Repair
                                                             service @ 12 % plus
                                                             Education Cess.
6         Facilitating the acquisition of right to use any   ED : Nil. Service Tax
          software                                           under          Information
                                                             Technology Service @ 12
                                                             % plus Education CESS.
7         After   getting   a   customized  software,        ED @ 12 % plus Education
          multiplying it in CDs and sale as packaged         Cess on subsequent sale
          sogftware.                                         of such software.       No
                                                             Service Tax. But, service
                                                             tax would be charged by
                                                             the software developer
                                                     who       develops       the
                                                     customized         software,
                                                     which can be availed as
                                                     Cenvat credit.
8     Import of packaged software in CD.             BCD : Nil. CVD 12 % Plus
                                                     Education CESS. Service
                                                     Tax : NIL. Addl Customs
                                                     duty is also exempted vide
                                                     S.No. 60 of Notification
                                                     20/2006 Cus, unless the
                                                     software is imported in
                                                     floppy discs or cartridge
                                                     tapes.
9     Import of customized software in CD.           No customs duties at all.
                                                     Service      Tax       under
                                                     Information     Technology
                                                     Service @ 12 % plus
                                                     Education CESS on reverse
                                                     charge basis.
10    Import of packaged software through online     No customs duties at all.
                                                     Service Tax : Nil.
11.   Import of customized software through online   No Customs duties at all.
                                                     Service      Tax       under
                                                     Information     Technology
                                                     Service @ 12 % plus
                                                     Education CESS on reverse
                                                     charge basis.

				
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