AIT-2011-108-HC by wuyunqing

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									                              AIT-2011-108-HC
                   IN THE HIGH COURT OF JUDICATURE AT MADRAS

              WRIT PETITION NO.5534 of 2006and WPMP.No.5976 of 2008

                                  Kasturi & Sons Ltd.,
 "Kasturi Buildings" rep. By its Joint Managing Director Mr.N.Murali 859 & 860 Anna Salai
                                 Chennai 600 002. - Petitioner

                                           Versus

                                     1. Union of India
rep. By the Secretary, Ministry of Finance Government of India North Block, New Delhi 110
                                           001.

 2. The Central Board of Excise & Customs Ministry of Finance Government of
                                  India New Delhi 110 001.

            3. The Assistant Commissioner of Central Excise Division II
        M.H.U.Complex 692, Anna Salai Nandanam, Chennai 600 035. - Respondents

Writ Petition filed under Article 226 of the Constitution of India praying for issuance of a
Writ of Declaration as stated therein.

For petitioner: Mr.P.Aravind Datar,Sr.Counsel for Mr. Muizz Ali
For respondents: Mr.S.Yashwanth

Coram: Mr. Justice P.Jyothimani

Date of Order: 24.02.2011

AIT Head Note: Based on the impugned circular of the second respondent, the third
respondent is insisting for payment of service tax on maintenance charges payable to
the company in Denmark and therefore, the impugned circular is challenged on various
grounds including that the same is ultra vires section 83 of the Finance Act, 1994 and
section 37B of the Central Excise Act, 1944, that when the section itself takes away
the maintenance of software from the purview of service tax, the second respondent
cannot by virtue of such circular impose service tax, that it is ultra vires Article 265
of the Constitution of India, since it seeks to impose service tax through a circular
which is not permissible in law and therefore, it affect Articles 19(1)(g) and 14 of the
Constitution of India
the impugned circular is declared to have no application to the petitioner, as the same
is opposed to the provisions of the Finance Act insofar as it relates to imposing of




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service tax on software relating to maintenance, repairing and servicing under the
Finance Act, 1994 before the period of Finance Act, 2006. (Para 22)

                                        O R D E R

The writ petition is for declaration to declare the Circular dated 7.10.2005 issued by the
second respondent, the Central Board of Excise and Customs as ultra vires section 83 of
Finance Act, 1994 read with sections 37B and 65(19) of the Central Excise Act, 1944 and is
in violation of Articles 14, 19(1)(g) and 265 of the Constitution of India insofar it relates to
the petitioner.

2. The petitioner which is engaged in the business of publishing newspapers and periodicals
had entered into a contract on 31.10.2000 with CCI Europe A/S Denmark for the supply of
software for pagination system. That apart, an agreement for maintenance of software was
also entered, by which the petitioner paid DKK 2,209,690 equivalent to Indian Rupees 1.66
crores (approximately).
        (a) The second respondent issued a circular on 17.12.2003 to the effect that the
        software service would be outside the purview of service tax and it is also
        stipulated in section 65(19) of the Finance Act, 1994 that it does not include
        Information Technology Services and as per the explanation to that Section, the
        maintenance of computer software is included in information technology service.

       (b) After the judgment was rendered by the Supreme Court in Tata Consultancy
       Service v. State of Andhra Pradesh [(2005) 1 SCC 308], wherein it was held that
       canned software amounts to tangible property and when the same is sold it would be
       liable for sales tax, the second respondent issued the impugned circular dated
       7.10.2005 to the effect that software amounts to “goods” and therefore, the
       maintenance of software will attract maintenance charges liable for service tax.

       (c) Based on the impugned circular of the second respondent, the third respondent
       is insisting for payment of service tax on maintenance charges payable to the
       company in Denmark and therefore, the impugned circular is challenged on various
       grounds including that the same is ultra vires section 83 of the Finance Act, 1994
       and section 37B of the Central Excise Act, 1944, that when the section itself takes
       away the maintenance of software from the purview of service tax, the second
       respondent cannot by virtue of such circular impose service tax, that it is ultra vires
       Article 265 of the Constitution of India, since it seeks to impose service tax
       through a circular which is not permissible in law and therefore, it affect Articles
       19(1)(g) and 14 of the Constitution of India.

3. In the counter affidavit filed by the respondents, it is stated that the services done by
outsourcing agencies are to be treated as business auxiliary service as defined under
section 65(19) of the Finance Act, 1994 as substituted by the Finance (No.2) Act, 2004 and
the definition “information technology service” includes computer software, system
networking, data processing, etc., after the amendment effected in the Finance Act, 2006
and after 1.5.2006 only the services relating to designing or developing of computer



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software or system networking or computerised data processing or any other services
primarily in relation to operation of computer systems are excluded and therefore, it does
not mean that it is not taxable under maintenance or repair service. Therefore, according to
the respondents, the maintenance branch of information technology was brought into the
purview of service tax structure by the amendment made to section 65(19) by Explanation
(b) in Finance Act, 2004.

       (a) After the amendment, in respect of import of service, section 66A(1) provides
       that any service specified in section 65(105) is taxable service provided that the
       person has established a business or has a fixed establishment from which the
       service is provided or has his permanent address or usual place of residence in a
       country other than in India and that the same is received by a person who has his
       place of business or usual place of residence in India.

       (b) To attract service tax, the contracted agreement need not necessarily be
       maintenance contract or agreement. By the circular it is only the scope of
       explanation to the amendment to the Finance Act which has been indicated and that
       is well within the statutory powers and therefore, the contention of the petitioner
       that it is ultra vires is erroneous.

       (c) The present circular which supersedes all other earlier circulars and
       communications other than the orders issued under section 37B of the Central
       Excise Act, 1944 was due to the decision of the Government to give a comprehensive
       review of all clarifications issued since the introduction of service tax in the year
       1994 and the circular only reflects the interpretation of law and the current
       practice followed in the department and it does not override the legal provisions.

       (d) As per the circular, the petitioner is liable to pay service tax on the maintenance
       contract for the service received by it from the foreign service provider and
       therefore, the contention that the circular is ultra vires the provisions of the
       Finance Act or the Central excise Act, 1944 and also the Constitution of India is
       unfounded.

       (e) It is stated that the impugned circular does not impose any tax liability but only
       explains the scope of changes made by virtue of the amendments in the Finance Act,
       2004 and therefore, the question that it is violative of Article 265 of the
       Constitution of India does not arise. It is also stated that alternative remedy is
       available to the petitioner and without availing the same, the present writ petition
       has been filed and therefore, on the said ground also, the writ petition is liable to
       be dismissed.

4. Under the impugned circular issued, the second respondent relied upon the judgment of
the Supreme Court in M/s.Tata Consultancy Services v. State of Andhra Pradesh [(2004)
178 ELT 22 (SC) = (2005) 1 SCC 308] and observed that software being “goods”, any
service in relation to maintenance or repairing or servicing of software is liable for service




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tax under section 65(105)(zzg) read with section 65(19) of the Finance Act, 1994 and
hence, the circular is in supercession of earlier circulars.

5. Under the contract entered on 31.10.2000 with a foreign dealer for supply of software,
the petitioner entered a maintenance contract paying annual maintenance charges to the
foreign dealer and by virtue of the impugned circular issued by the second respondent the
petitioner would be bound to pay service tax in respect of maintenance of software.

6. Admittedly, it is under the Finance Act, 2007, with effect from 1.6.2007, 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; or

       (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
       computerised data processing or system networking, or any other service primarily
       in relation to operation of co9mputer systems."

7. That was also followed in the Finance Act, 2004, with effect from 10.9.2004 and that
status has been followed till the Finance Act, 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



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respondent can be read in supercession of the statutory provisions of the Finance Acts in
the respective financial years.

8. Therefore, on fact, it is clear that till 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 v. 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 framed the question as follows:

       "The appellants provided consultancy services including computer consultancy
       services. As part of their business they prepared and loaded 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,1957."

       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 being dealt
       with here and no opinion is expressed thereon because in case of unbranded
       software other questions like situs of contract of sale and/or whether the contract
       is a service contract may arise."

9. While deciding the same, there was no occasion to consider the implications of the
Finance Act 2003 to 2006 in respect of the terms “information technology” and
“maintenance of software” and the decision rendered in Tata Consultancy Service v. State
of Andhra Pradesh [(2005) 1 SCC 308] in the context of the said Act under Entry 54, List-
II of VII Schedule to the Constitution cannot be cited for a clarification in respect of the
Finance Act, 1994 which is a Parliamentary enactment.




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10. The Supreme Court held in Kerala Finance Corporation v. Commissioner of Income-tax
[(1994) 4 SCC 375] in the context of section 119 of the Income-tax Act that the circulars
issued cannot override the provisions of the Act and the relevant portion of the judgment is
as follows:

       "14. The fact that the circular to which Shri Salve has referred is one which had
       been issued in exercise of powers conferred by Section 119 of the Act has no
       significance insofar as the point under consideration, namely, whether the circular
       can override or detract from the provisions of the Act, is concerned, inasmuch as
       what Section 119 has empowered is to issue orders, instructions or directions for
       the “proper administration” of the Act or for such other purposes specified in sub-
       section (2) of the section. Such an order, instruction or direction cannot override
       the provisions of the Act; that would be destructive of all the known principles of
       law as the same would really amount to giving power to a delegated authority to even
       amend the provision of law enacted by Parliament. Such a contention cannot
       seriously be even raised."

       15. The impugned circular has been issued by virtue of the powers conferred under
       section 37B of the Central Excise Act, 1944 which is as follows:

               "37-B.Instructions to Central Excise Officers.- The Central Board of Excise
               and Customs constituted under the Central Boards of Revenue Act,1963 (54
               of 1963), may, if it considers it necessary or expedient so to do for the
               purpose of uniformity in the classification of excisable goods or with
               respect to levy of duties of excise on such goods, issue such orders,
               instructions and directions to the Central Excise Officers as it may deem
               fit, and such officers and all other persons employed in the execution of this
               Act shall observe and follow such orders, instructions and directions of the
               said Board:

               Provided that no such orders, instructions or directions shall be issued-

               (a) so as to require any Central Excise Officer to make a particular
               assessment or to dispose of a particular case in a particular manner; or

               (b) so as to interfere with the discretion of the [Commissioner of Central
               Excise (Appeals)] in the exercise of his appellate functions."

       16. The scope of such power came to be decided by this Court in Lakshmi Machine
       Work Ltd., vs. Union of India [(1992) 57 ELT 211 (Mad)] to the effect that the
       Circular cannot interfere with the powers of the quasi-judicial authority in applying
       the statutory provisions. J.Kanakaraj,J. (as He then was) observed in this regard as
       follows:

               "19. The last point which has to be decided is whether the first and third
               respondents have jurisdiction to issue such circulars which bind the quasi-



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             judicial authorities without leaving any room for exercising their quasi-
             judicial powers. The respondents can take umbrage, only under Section
             37(B) of the Act. Sri K.Parasaran argues that Section 37(B) should be to
             the classification of excisable goods or with reference to levy of duties of
             excise on such goods. In other words, it is argued that the words "all such
             goods" are relatable only to the classification of excisable goods. If the
             argument of the revenue with regard to the scope of Section 37(B) is
             accepted, it will only mean that the second respondent can give any direction
             to any of the statutory authorities and direct them to impose duty in a
             particular manner. I am clearly of the opinion that could not have been the
             intention of the legislature. The quasi-judicial authorities are certainly
             supposed to apply the charging provisions to the facts of a case and find out
             whether the goods are assesssable and if so what would be the assessable
             value. Certainly Section 37(B) does not enable the second respondent to
             give a direction that in respect of advances/deposits, notional interest is
             definitely chargeable and includible in the assessable value in all cases,
             notwithstanding the fact whether the same had an effect on the price,
             directly or indirectly or did not have such an effect. ....."

      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 that in 2007, when the amendment was brought in the Finance
      Act, 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
      that the impugned circular attempts to give effect to the provisions or explains the
      changes proposed in the Finance Act,2005.

      18. The judgment in Collector of Central Excise, Vadodra vs. Dhiren Chemical
      Industries [(2002) 2 SCC 127] on which reliance was placed by the learned counsel
      for the respondents, wherein it was held that the circular issued by the Central
      Board of Excise and Customs giving different interpretation for some of the words,
      would bind the revenue has no application to the facts of the present case. Here, it
      is not a case of different interpretation of the circular, but it is a case where the
      circular sought to explain the statutory provisions.

      19. Again, in State of Kerala v. Kurian Braham (P) Ltd., and another [(2008) 3 SCC
      582], the Supreme Court, in the light of the Central Excise Act, 1944 and the Kerala
      General Sales Tax Act, 1963 and the Central Sales-tax Act, 1956, considered the
      nature of commodity taxed regarding the turnover of field latex in the hands of the
      asessee and the assessment was made on the ground that centrifuge latex obtained
      by processing field latex is a different commodity based on a circular issued by the
      Board in order to sustain the impugned notification and found on fact as follows:

             "22. We find no merit in the above contentions. At the outset, it may be
             stated that in the case of field latex there is 60% water and 40% is the



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             rubber content. On the other hand, centrifuged latex produced from field
             latex reverses the ratio whereby the rubber content is increased to 60%
             and the water content is reduced to 40%. Basically, field latex is raw rubber
             whereas centrifuged latex is a product. This is the rationale behind giving or
             setting-off/deduction under Notification dated 13-11-2007."

      20. Again, the judgment relied upon by the learned counsel for the respondents in
      Union of India vs. Azadi Bacho Andolan (2004) 10 SCC 1] was in the context of the
      circular issued in violation of section 119 of the Income-tax Act relating to the
      residence nature of a Company which was sought to be assessed and it was held that
      the powers of Central Board of Direct Taxes in issuing directions in the form of
      circular under section 119 of the Income-tax Act to set things on course by
      eliminating avoidable wastage of time, talent and energy of the assessing officers
      discharging the onerous public duty of collecting revenue and that is not the case on
      hand.

      21. Further, the judgment of this Court in W.P.No.9835 of 2010, etc. batch dated
      14.9.2010 on which reliance was placed by the learned counsel for the respondents is
      of no help to the case of the respondents. They were all cases where individual
      show-cause notices and summons were issued to individual assessees based on the
      circular. In such circumstances, finding that individual assessees can file their
      objections and against the decision the appeal remedy is available, the writ petitions
      came to be dismissed. But, here it is a challenge to the circular which cannot be
      compared to the circumstances that existed in the above said batch of writ
      petitions.

      22. In such view of the matter, the impugned circular is declared to have no
      application to the petitioner, as the same is opposed to the provisions of the Finance
      Act insofar as it relates to imposing of service tax on software relating to
      maintenance, repairing and servicing under the Finance Act, 1994 before the period
      of Finance Act, 2006. No costs. Connected miscellaneous petition is closed.




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