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This important sector has been subjected to service tax and with the inclusion of ITSS in 2008 fairly covered all the services provided by this sector. Some of them have been discussed below:


Information technology Software Service:


As per section 65(105)(zzzze), service provided or to be provided to any person, by any other person in relation to information technology software.

Prior to enactment of the Finance Bill 2010, the software for use in the course, or furtherance, of business or commerce was only taxable.


What does the taxable service specifically includes?

In addition to the general coverage as mentioned above the taxable service definition specifically covers the following—

·         Development of Information Technology Software,

·         Study, analysis, design and programming of information technology software,

·         Adaptation, upgradation, enhancement, implementation and other similar services related to information technology software,

·        Providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a database, advice on proprietary Information technology software,

·         Providing the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products,

·         Providing the right to use information technology software supplied electronically.

Issues & Intricacies:

Whether the canned or off the shelf software are taxable under Information Technology Software Service?

The taxable service covered is the service in relation to development of the software for other person. In the case of canned software the development is undertaken for oneself and after completion, the right to use is affected. In such case there should be no service, instead it is right to use goods and liable only under VAT. However the view of the revenue is different.


Whether customization of the canned software is covered?

The customization of the canned software includes the development of a patch for the existing canned software. Since the patch is considered as goods liable for VAT/CST therefore the same would not be covered under service tax. Again the view of the revenue is different.


Whether repairs and maintenance of software is covered?

The repairs and maintenance of software is specifically covered under the category of Management, Maintenance or Repair Service. Therefore the same is not taxable under ITSS. Challenge maybe of valuation under VAT and ST.


Whether the software licenses are covered?

The service does not cover the software license by itself it covers the services in relation to acquiring such software license, Further, it is interesting to note the decision of the division Bench of the Madras High Court in the case of Infotech Software Dealers Association (2010(20) STR 289(Mad) wherein an important decision in the context of taxation of software has been delivered. While holding that software (packaged or customized) is goods, the Court has also upheld the validity of levy of service tax on IT software services. The Court has however left open the much debated issue as to whether a transaction in software between the re-seller and end user is a sale or service.


Content Development & Supply Service:


As per section 65(105)(zzzzb), any service provided or to be provided to any person by any other person in relation to development and supply of content for use in any of the following:

  • Telecommunication services, Advertising agency services or On-line information and database access or retrieval services

What is telecommunication Service?

As per section 65(109a), ‘Telecommunication Service’ means service of any description provided by means of any

·         Transmission, Emission or reception of signs, Signals, Writing, Images and sounds or intelligence or information of any nature, By:

·         Wire, Radio, Optical, Visual or Other electro-magnetic means or systems,

·         Including the related transfer or assignment of the right by a person who has been granted a license under the first proviso to section 4(1) of the Indian Telegraph Act, 1885 to use capacity for such

·         Transmission, Emission or Reception

·         And also includes —

(i)      Voice mail, data services, audio tex services, video tex services, radio paging;

(ii)     Fixed telephone services including provision of access to and use of the public switched telephone network for the transmission and switching of voice, data and video, inbound and outbound telephone service to and from national and international destinations;

(iii)    Cellular mobile telephone services including provision of access to and use of switched or non-switched networks for the transmission of voice, data and video, inbound and outbound roaming service to and from national and international destinations;

(iv)         Carrier services including provision of wired or wireless facilities to originate, terminate or transit calls, charging for interconnection, settlement or termination of domestic or international calls, charging for jointly used facilities including pole attachments, charging for the exclusive use of circuits, a leased circuit or a dedicated link including a speech circuit, data circuit or a telegraph circuit

(v)     Provision of call management services for a fee including call waiting, call forwarding, caller identification, three-way calling, call display, call return, call screen, call blocking, automatic callback, call answer, voice mail, voice menus and video conferencing;

(vi)    Private network services including provision of wired or wireless telecommunication link between specified points for the exclusive use of the client;

(vii)   Data transmission services including provision of access to wired or wireless facilities and services specifically designed for efficient transmission of data; and

(viii)  Communication through facsimile, pager, telegraph and telex,

but excludes service provided by —

(a)  Any person in relation to on-line information and database access or retrieval or both referred to in sub-clause (zh) of clause (105);

(b)  A broadcasting agency or organisation in relation to broadcasting referred to in sub-clause (zk) of clause (105); and

(c)  Any person in relation to internet telephony referred to in sub-clause (zzzu) of clause (105);]

What is Advertising Service?

Advertising service is not defined in the statue. It can be understood as service in relation to advertisement. Advertisement includes any of following:

  • Notice, Circular, Label, Wrapper, Document, hoarding

o   Audio or visual representation made by means of: Light, Sound, Smoke or Gas

What is online information and database access/retrieval service?

On-line information and database access or retrieval means providing of retrievable or non-retrievable data/information in electronic form through a computer network to a customer.

What contents are included in development and supply of content?

It includes development and supply of any of the following:

  • Mobile value added services, Music, Movie, Clips, Ring tones, Wall paper, Mobile games, Aggregated and non-aggregated data, Information, News or Animation films


Issues & Intricacies:

Whether pure supply of content is covered?

In case the service provider buys the content and sells the same to other he is not involved in development of content. The taxable service requires development and supply of content. Hence pure supply of content may not be taxable. However the person who provides such content is liable.


Whether development of content for visiting card is taxable?

The definition of the content development and supply should be for the purpose of telecommunication, advertisement and online information access. The visiting card is the card that gives the information of the person or an organization, where no advertisement is involved. Therefore such service is not taxable.


Whether contract for development of content for web-site is taxable?

The development of banner for hosting in the web-site is a service of development of content for online information and database access and retrieval service. Therefore preparation of banner for web-site is taxable.


Whether preparation of e-module (study material) for the Website, which in turn allows the students to pay and retrieve is taxable?

Yes, since the service is provided for online database access and retrieval service, content developed for such purpose shall also be covered under the tax net.     


Would the licensing of developed content to be used in a software product liable under this category?

The content is developed and supplied through a license to resell the same as a part of the software sold by recipient. Development and supply of contents  includes development and supply of mobile value added services, music, movie clips, ring tones, wall paper, mobile games, data whether or not aggregated, information, news and animation films.

It can be inferred that in order to attract liability under this category the content would have to be developed and supplied by service provider for use in telecommunication services, advertising services or in online information and data base access or retrieval services. As the content would not be used in relation to any of the foregoing services and hence, it would not be liable under this or any other category of service.

Online Information Access and Data Base Retrieval Service:


As per section 65(105)(zh), any service provided or to be provided to any person in any manner by any person in relation to on-line information and database access or retrieval or both in electronic form through computer network.

What is online information and database access or retrieval service?

As per section 65(75), ‘On-line information and database access or retrieval’ means providing data or information, retrievable or otherwise to a customer in electronic form through a computer network.


Issues & Intricacies:

Whether broadband charges paid for downloading contents from the website is covered?

The taxable definition is for providing online information access or retrieval service through computer network is covered. Broadband charges paid for accessing internet is not covered here. Only charges for accessing website are covered under this entry. Hence the broadband charges is not covered here.


Whether the down loading of software from the net on payment of the cost of the same is liable for the service tax?

This is an e- commerce service. It is transaction of buying and selling and therefore not a service of access and retrieval. Therefore may not be liable as on date.


       Whether providing of mailing list in covered in this entry?

The taxable service definition here is access of database electronically or otherwise. If the mailing list is provided by way of access in the internet or through other computer network, then the same is taxable under this entry. On the other hand selling the mailing list to a customer in the CD or other electronic form is not covered here but under mailing list service.


       Whether provision of space in the website is taxable here?

The taxable service definition is to cover access of the database or online information and hence proving of space in the website may not be covered under this entry. However the same may be covered under sale of space for advertisement.


Management, Maintenance or Repair Services:


As per section 65(105)(zzg) any service provided or to be provided to any person by any person in relation to management, maintenance or repair would be a taxable service.


What is the concept of management, maintenance or repair?

As per Section 65(64) of Chapter V of Finance Act 1994 as amended from time to time, ‘Management, Maintenance or Repair’ means any service provided by any person under a contract or an agreement; or a manufacturer or any person authorized by him, in relation to –

I.    management of properties whether immovable or not, or

II.    maintenance or repair of properties whether immovable or not; or

III.    maintenance or repair including reconditioning or restoration, or servicing of any goods or equipment, excluding a motor vehicle.


As per the explanation to the said Section, for the purposes of this clause, the term “goods” includes computer software and the term “properties” includes information technology software.


Issues & Intricacies:

Would the comprehensive maintenance of existing billing software used in telephone company for consumer billing, collection and allied services including software implementation, maintenance, server maintenance, Version control and training be treated as AMC contract?

Since server hardware as well as software resources are maintained under contract, the ITSS category cannot be attracted. The Rules of classification provides that in case of composite services being provided specific category has to be preferred to general category. The services provided are for upkeep of property, equipment in respect of billing software. Service rendered in relation to maintenance or repair is specifically covered under the service tax category of Management, maintenance or repair service.


Can the software upgrades provided in course of maintenance be liable under this category?

The explanation to section 65(64) which defines management, maintenance or repair services says that goods include software. M.F. (D.R) D. O. F. No. 334/1/2007-TRU, dated 28.02.2007 clarifies the difference of software maintenance and software development and non-taxability of software development. Circular no. 96/7/2007-ST, dated 23.08.2007-Ref Code 053.01/23.08.2007 clarifies maintenance of software is taxable as the explanation to section 65(64) provide clarification of software being goods.

This circular also does not go into the root of the matter as much of software maintenance is software development (continued upgrades being made available).

Here a practical solution might be to take a deduction for the value of software upgrade. Where upgrade patches are also provided, the same could be regarded as goods going by the principles enumerated in the BSNL case( discussed above where taxability of SIM cards was involved. This would mean that the best option is to take the benefit of notification 12/2003 ST which would provide deduction for the value of goods sold and only the balance if any would be subject to service tax.


Business Support Services:


As per section 65(105) (zzzq), any service provided or to be provided to any person by any other person in relation to support services of business or commerce, in any manner


What is support service of business or commerce?

As per section 65(104c), ‘Support Services of Business or Commerce’ means services provided in relation to business or commerce and includes:

v  Evaluation of prospective customers,

v Telemarketing,

v  Processing of purchase orders and fulfillment services,

v  Information and tracking of delivery schedules,

v  Managing distribution and logistics,

v Customer relationship management services,

v Accounting and processing of transactions,

v Operational assistance for marketing,

v Formulation of customer service and

v  Pricing policies,

v Infrastructural support services,

v  Other transaction processing

Note: The definition has two parts a descriptive part and inclusive part. The descriptive part is wide enough to cover the each and every service that is provided in relation to business or commerce. On examination of the intention of ministry in introducing such service it can be concluded that this entry is applicable for outsourcing activity. Emphasis laid on Letter No. 334/4/2006-TRU, dated 28-2-2006.

It is also interesting to note that some of the entries in this category are already covered in the business auxiliary service category.


Issues & Intricacies:


Would spot billing services using hand held computers provided to the Electricity Distribution Companies be covered under Business Auxiliary Services?

The services here are directly rendered to Electricity Distribution Company. The service providers are not the agents of the electricity Distribution Company. They are not doing any service on behalf of the recipient. Therefore the services rendered namely outsourcing of spot billing work, would come within the ambit of business support  service.

Here it could be examined if such service providers could be exempt from service tax vide Notification No.32/2010-ST dated 22.6.2010. this notificaiton exempts all the taxable services provided  by distribution licensees, franchisees or other persons, in course of distribution of electricity. Such exemption would be applicable to all services  provided in relation to distribution of electricity.


Can the building of software modules to be integrated with the proprietary software which are delivered to the client be treated as support services of business?

When such services are provided to the independent software vendor which creates, develops and sells such e-learning products, the services are outsourced. The rules of classification in Section 65A(2)(a) says classification has to be made under the category, which is more specific rather than a general category of service. The category of ITSS is more specific, which covers the services provided in relation to software, it may be applicable.

The vendor can take a stance that there is no service element involved and what has taken place is development of software and transfer of rights to use thereon, which can be treated as deemed sale of goods in light of discussion on BSNL’s case and Infosys Technologies Ltd Vs CCT Chennai (2009 (233) ELT 56 (Madras)), There could be chance of litigation.

However, it should be noted that in the Commissioner v. Idea Mobile Communication Ltd(2010(19)STR 18(Ker) held that plea by other service providers that SIM cards not sold but supplied as part of service, acceptable. The value of SIM card supplied by respondent includible in taxable value for Service tax.

The safer option would be to pay service tax thereon under Information Technology Software service.


Business Auxiliary Service:


Section 65(105)(zzb) defines the taxable service in this regard as any service provided or to be provided to a client, by any person in relation to Business Auxiliary Service.


What is Business Auxiliary Service?

Section 65(19) defines ‘Business Auxiliary Service’ means any service in relation to

v Promotion or marketing or sale of goods produced provided by or belonging to the client

v Promotion or marketing of service provided by the client(including promoting and marketing game of chance whether conducted online or not)

v Any customer care service provided on behalf of the client; or

v Procurement of goods or services, which are inputs for the client or

v Production or processing of goods for or on behalf the client; or

v  Provision of service on behalf of the client; or

v  A service incidental or auxiliary to any activity specified in the above clauses such as billing, Issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision. This has also been reiterated by the Tribunal in Federal Bank Ltd vs. CCE, Calicut case(2008(01)LCX138)

Further definition moves to an inclusive mode to specifically include Commission Agent. Commission Agent is defined by way of a explanation, as a person who acts on behalf of another person and causes sale or purchase of goods or provision or receipt of services for a consideration and includes any person who while acting on behalf of another deals with goods or services or documents of title to goods and services or guarantees for collection or payment for such goods or services or undertakes activities relating to the sale or purchase of goods or services. The services of commission agents are exempt in relation to sale or purchase of agricultural produce.


Issues & Intricacies:

Whether services provided by use of computer can be information technology service?

The service provided by use of computer system does not mean that the service is an information technology service. The designing or developing of software, or system networking or services in relation to operation of a computer system would be IT services.


Whether the Software and hardware support for operating counters to pay taxes, bills, apply for licences, book train and bus tickets is liable under this category?

The support is to operate e-Seva counters under contract with Government, wherein the citizens can pay their taxes, utility bills, apply for licences, book cinema, train and bus tickets. The software and hardware is provided for putting through the transactions. The activity cannot be considered as Business Auxiliary services. This is not an obligation of the client, namely Government , which is discharged to the third parties namely, citizens. This was also held in United Telecom Limited vs Commr. of CCE 2009 (16) STR 493 Tri.-Bang


Can there be a liability on the activity of procuring orders to the foreign suppliers of software located outside India?

In the instant case, the question is whether the service of procuring orders offered by agent in India, is liable under the category of Business Auxiliary Service. In order to hold the service as having been exported, the consideration for the same would have to be in convertible foreign exchange apart from the service recipient having to be outside India.

The export of services has been structured by breaking up the services into three groups/sectors i.e. based on the situation of immovable property, based on the performance of service and on the situation of the recipient of service. There was confusion as to determination of export of services under the recipient based services group when the services are performed in India and the service recipient was situated outside India and benefit accrued to such service recipient outside India. The objection was that since the services are performed in India, the services are not used outside India; instead it is used within India.

The Bangalore Bench of Tribunal in case of Blue Star Ltd. [2008 (11) STR 23 Tri] and ABS India Ltd. [2009 (13) STR 65 Tri] held that procuring of orders in India for the foreign manufacturer/suppliers is export of services. However Delhi CESTAT in the case of Microsoft Corporation [2009 (15) STR 680] had a different view. Further CBEC vide Circular No. 111/5/2009-S.T., dated 24-2-2009 clarified that it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrues outside India. Now with the omission of that condition as to provision and usage of services outside India, it would be easier to satisfy the conditions as to export of service.

Further this matter has been examined recently in M/s IBM India(P) Ltd vs. Commissioner of Central Excise, Bangalore(2010-TIOL-154-CESTAT-Bang) in relation to service tax on commission agent in India for foreign client where held that when services are provided to a foreign enterprise by Indian agents, it cannot be held that export of services is not involved.


Under which category would liability be attracted where the composite services of procuring order of software to the foreign supplier and  procuring license to use the same, from abroad is done by commission agent in India?

Where the agreement with supplier is one for procuring the license to software with procurement of orders being incidental to such an agreement, the classification would have to be done using the principles of classification under the category which gives a more specific description of the service involved and that could be Information technology software service. This is because any service in relation to information technology software can be brought under taxable service. But where the main object is procurement of orders and if the procurement of license is incidental to procurement of orders, the classification of the composite service could change to that of business auxiliary service.


Would there be import of services when the Indian entrepreneurs engage foreign agent to canvass orders for sale of computer systems and peripherals?

In M/s IBM India(P) Ltd vs. Commissioner of Central Excise, Bangalore(2010-TIOL-154-CESTAT-Bang)it was also observed that when Indian entrepreneurs engage the foreign agents to canvas orders for products exported, such services are taxed when imported.

There would be a liability under the reverse charge mechanism for such services provided.

However, it should be noted that there is an exemption to the foreign commission agent service provided vide Notification No.18/2009-ST from payment of service tax to the exporter of goods who is liable to pay service tax on the consideration paid to agent aboard who causes sale of goods exported by the exporter. However exemption is given to service tax to the extent of 1% of FOB value of export subject to the conditions set out in the notification.


The article provides a few aspects / issues in each of the possible services which maybe offered by the IT & ITES sector.

Madhukar N.Hiregange FCA

Published by

Madhukar N Hiregange
(Chartered Accountant)
Category Service Tax   Report

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