Custom, Excise & Service Tax Tribunal
M/S Infosys Technologies Ltd vs Commissioner Of Central Excise, Pune-I on 12 November, 2014
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. I Appeal No. ST/126/08 (Arising out of Order-in-Appeal No. PI/BBP/126/08 dated 7.4.2008 passed by the Commissioner of Central Excise & Service Tax (Appeals), Pune-I). For approval and signature: Honble Shri Anil Choudhary, Member (Judicial) Honble Shri P.S. Pruthi, Member (Technical) ======================================================
1. Whether Press Reporters may be allowed to see : No
the Order for publication as per Rule 27 of the
CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the : Yes CESTAT (Procedure) Rules, 1982 for publication
in any authoritative report or not?
3. Whether their Lordships wish to see the fair copy : Seen
of the order?
4. Whether order is to be circulated to the Departmental : Yes
authorities?
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M/s Infosys Technologies Ltd.
Appellant
Vs.
Commissioner of Central Excise, Pune-I
Respondent
Appearance:
Shri A. Anand, Advocate
for Appellant
Shri D. Nagvenkar, Addl. Commissioner (AR)
for Respondent
CORAM:
SHRI ANIL CHOUDHARY, MEMBER (JUDICIAL)
SHRI P.S. PRUTHI, MEMBER (TECHNICAL)
Date of Hearing: 12.11.2014
Date of Decision: .2014
ORDER NO.
Per: P.S. Pruthi
The appellant is in appeal against the impugned order of Commissioner (Appeals), who had upheld the order of the adjudicating authority in rejecting the refund claims submitted by the appellant under Rule 5 of the Cenvat Credit Rules, 2004.
2. The brief facts of the case are that 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. Due to export of such services, the CENVAT Credit of Service Tax paid on input services gets accumulated. Therefore, the appellants filed two refund claims for refund of input service tax credit under Rule 5 of the Cenvat Credit Rules for the period July, 2005 to Sept, 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 the refund claims on the ground that all the output services are exempted from Service Tax. He came to this conclusion holding that the services provided by the appellant are classifiable under Business Auxiliary Services and Consulting Engineers Service. And, both these services as defined in Sections 65(19) and 65(105)(g) respectively of the Finance Act, 1994 categorically excluded software development and Computer software engineering from their coverage during the period in dispute. Hence, being non-taxable, CENVAT Credit is not available on the input services as per Rule 3 which allows credit only to provider of taxable services and as per Rule 6(1) of Cenvat Credit Rules, which bars availment of CENVAT Credit used in the exempted services. The Commissioner (Appeals) agreed with the order of the adjudicating authority holding that the service provided/exported does not fall in the category of maintenance or repair service but under Consulting Engineer Service but for the exclusion clause which excludes computer software engineering and therefore, it is non-taxable.
3. Heard both sides.
4. The learned Counsel for the appellant explained that at the initial stage itself they had deleted the amount of refund attributable to CENVAT Credit on input services used in the export of the exempted services, namely, software development and software consultancy. According to him, the appellant had actually provided and exported the Maintenance and Repair Services under Section 65(105)(zzg) and Management Consultancy Services in relation to ERP implementation under Section 65(105)(r) of the Finance Act, 1994, both taxable services. He drew attention to a series of notifications and the Boards Circular on the issue of Maintenance and Repair of software. Initially the maintenance and repair of computers, computer systems or computer peripherals was exempted under Notification No. 20/2003-ST dated 21.8.2003. This notification was rescinded vide Notification No. 7/2004-ST dated 9.7.2004. Further, in the light of the Hon'ble Supreme Courts judgment in the case of TCS Vs. State of Andhra Pradesh 2004 (175) ELT 22 (SC) , Board clarified vide Circular No. 81/2/2005-ST dated 7.10.2005 that branded/un-branded/canned/customized software incorporated in a media for use is to be treated as goods. In this view of the matter, it was also clarified by Board that software, being goods, any service in relation to maintenance or repair or servicing of software is leviable to Service Tax under Section 65(105)(zzg). The learned Counsel also stated that ERP software system provided by a management consultant in connection with the management of any organization is exempted under Notification No. 16/04-ST dated 10.9.2004 and therefore is clearly a taxable service. Therefore, refund of input credit accumulated due to export of Maintenance and Repair Service, ERP Consultancy Service is admissible. Having explained the relevant provisions of law, the learned Counsel referred to the decision of the Tribunal in the case of KPIT Cummins Infosystem Ltd. 2013 (32) STR 356 (Tri-Mum), wherein under the same set of facts, it was held that 100% EOU-STP unit were entitled to refund of unutilized credit. He also relied on the Hon'ble Karnataka High Courts decision in the case of mPortal India Wireless Solutions Pvt. Ltd. Vs. Commissioner of Service Tax 2012 (27) STR 134 (Kar), wherein it was held that on export of software service, assessees were entitled to refund even when the service exported is not taxable.
4. The learned Addl. Commissioner (AR) reiterates the findings of the Commissioner (Appeals).
5. We have carefully considered the submissions made by both sides.
5.1 The appellants contend that the software exported by them is classifiable under the Maintenance or Repair Service covered under Section 65(105)(zzg), whereas the Commissioner classified the service provided as Consulting Engineers Service falling under Section 65(105)(g) as it, stood during the period in dispute i.e. July December, 2005. These two services are defined as under:-
(g) to a client, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering including the discipline of computer hardware engineering but excluding the discipline of computer software engineering.
(zzg) [to any person], by any person in relation to management, maintenance or repair. Revenues contention is that because the Consulting Engineers Service specifically excluded Software Engineering from its scope during the relevant period, therefore, the same is non-taxable. By holding the output services to be non-taxable, it was concluded that CENVAT Credit on input services is not admissible under Rule 3 and Rule 6 and, therefore, refund of accumulated CENVAT Credit under Rule 5 of Cenvat Credit Rules, 2004 is consequently not admissible.
5.2 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 classifies 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.
5.3 As regards the service, namely, Software Development and Software Consultancy, the appellant is not claiming refund on the input service credit in respect of these output services, which are non-taxable as they are excluded from the definition of Consulting Engineers Service, as discussed above.
5.4 As regards the remaining software service, which appellant have termed as management, maintenance or repair of software service, we find merit in appellants 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. In fact, the appellant submitted technical literature to the appellate authority as admitted in the impugned order in para 7. The appellant also pleaded that there are hundred of contracts involved and the contracts need to be examined properly instead of stating that the contracts were highly technical. 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. The appellant also explained to the lower authorities the meaning of software maintenance which, according to the technical literature submitted by them is described hereunder: -
Software maintenance may be defined by describing four activities that are undertaken after a program is released for use viz., corrective maintenance, adoptive maintenance, perfective maintenance or enhancement and preventive maintenance or re-engineering. Corrective maintenance has to do with the removal of residual errors that are present in the product when it is delivered, as well as errors introduced into the software during its maintenance. Adoptive maintenance, involves adjusting the application to changes in the environment (e.g., a new release of the hardware or the operating system or a new database system). Finally, perfective maintenance, involves changing the software to improve some of its qualities. Hence, changes are due to the need to modify the functions offered by the application, add new functions, improve the performance of the application, make it easier to use, etc. The requests to perform perfective maintenance may come directly from the software engineer, in order to improve the status of the product on the market, or they may come from the customer, to meet some new requirements. From this 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.
5.5 Before analyzing the issue further, we may refer to the relevant provisions of law as they stood during the material time. The period of dispute in this case is July 05 to Dec. 05, CENVAT Credit is allowed under Rule 3 of the Cenvat Credit Rules, 2004. During the material time, Rule 3 stated that -
A manufacturer or producer of final products or a provider of taxable service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of . paid on .
i)
ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004. Rule 2(l) defined input service as As per Rule 2(l) of Cenvat Credit Rules, 2004 input service means any service;
i). used by a provider of taxable service for providing an output service;
or
ii). The appellant sought refund under Rule 5 of Cenvat Credit Rules, 2004. Rule 5 as it stood during the material time stated that -
Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,
(i) duty of excise on any final product cleared for home consumption or for export on payment of duty; or
(ii) service tax on output service, and where for any reason such adjustment is not possible, the manufacturer shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification: It is clear from the above Rules 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 case of KPIT Cummins Info System (supra) does not support the appellant because this judgment related to the period April, 2007 to March, 2008 after the amendment under Rule 5. The Commissioner (Appeals) in his order has examined the issue from the classification angle. He has not examined whether the refund was admissible to service provider under Rule 5, as it stood during the period in question.
5.6 Another issue to be examined is whether taxable services were provided by the appellant. This is an important point because Rule 3 permitted credit on input services only to provider of taxable services. In case, the output services which are exported are determined to be non-taxable, the question of taking input service credit on input service does not arise. To this extent, the judgment of the Hon'ble Karnataka High Court in the case of mPortal India Wireless Solutions Pvt. Ltd. (supra) does not support appellants case because the Hon'ble High Court did not have the occasion to consider the definition of Rule 3 during the material time. The Hon'ble Karnataka High Court only held that refund of input service credit may be allowed, even though the export of software is not a taxable service. With due respect to the Hon'ble High Court, 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.
5.7 We note that the Maintenance or Repair Service under Section 65(64), under which the appellant classified their output service to avail CENVAT Credit, includes both Computer Software and Information Technology Software, with effect from 16.5.2008 as below: management, maintenance or repair means any service provided by
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorized by him, in relation to,
(a) management of properties, whether immovable or not;
(b) maintenance or repair of properties, whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle;] [Explanation. For the removal of doubts, it is hereby declared that for the purposes of this clause,
(a) goods includes computer software;
(b) properties includes information technology software;] However, during the relevant time in 2005, the definition of Maintenance or Repair service did not specifically refer to goods including computer software or properties including Information Technology software. The Explanation in the above definition did not exist in 2005. The Information Technology Software service itself was introduced under Section 65(105)(zzzze) only with effect from 16.5.2008. Therefore, prior to the above amendment in the definition of Management, Maintenance or Repair Service and introduction of Information Technology Software service, we have to respect the law and circulars prevalent during the material time. Boards Circular No. 81/2/2005-ST (supra) clarified that Software incorporated in a Media for use is to be treated as goods. It did not distinguish between Computer Software and Information Technology Software. In view of the Boards Circular, it would be justifiable to consider the software in question in this case as Computer Software.
5.8 Having said so, the next question which arises is whether the software in question was taxable or not. To decide this, the issue to be determined is whether the software exported by the appellant would fall under the category of Maintenance or Repair service or would be covered under the exclusion clause of Consulting Engineers Service falling under Section 65(105)(g). 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 made only passing reference to the literature and has only referred to some clauses of some of the contracts under which services were exported and came to the conclusion that the services are covered under exclusion clause of Section 65(105)(r). He 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. Even if the analysis needs to be done in respect of a very large number of contracts involved, the same must be done for each contract in the interest of justice.
6. In view of our observations and findings in foregoing paragraphs, the mater is remanded back to the Commissioner (Appeals), who should re-examine the nature of service provided keeping in view the evidence presented by the appellant. He should also consider the provisions of Service Tax law as they stood during the material time to arrive at an appropriate decision. The impugned order is set aside and appeal is allowed by way of remand.
(Pronounced in Court on )
(Anil Choudhary) (P.S. Pruthi)
Member (Judicial) Member (Technical)
Sinha
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