PACKAGED SOFTWARES –ARE THEY COMPLETELY OUT OF SERVICE TAX?
After a lot of deliberations and conclusions the Service tax department finally issued a circular (No.17/2010 dt.27.2.2010) exempting the packaged or canned software from Service tax subject to the condition that the document providing the Right to use such software has been attached, appropriate customs/Excise duty has been paid and the corresponding exemptions granted under Customs (Notification No.31/2010) and Excise (Notification No.17/2010) have not been taken advantage of. Creditably, this exemption is intended to eliminate the possibility of double taxation, one as goods and other as a Service. But it is becoming habitual for any Notification to create further ambiguity.
Now on to the subject, taking a look at the basics of Customs valuation, the Rules governing the valuation of imported goods for the purpose of Custom duty assessment, require among various other things, the addition of Royalty, technical fee, knowhow fee, etc to the Invoice value to the extent they are not already included therein. This addition is a must if they are made conditional to the sale agreement.
Practically, the importer might pay these Royalties post the importation especially if this is an import from a related company. There have been instances where the department had issued Show cause notices to assessees regarding payment of customs duty on such conditional Royalty payments in the later stages, though not particularly in this situation. Presumably, in all these cases the importer would have already paid the Service tax with R&D Cess and obtained the certificate from a Chartered accountant. Subsequently this Royalty amount will be getting added to Invoice value whenever found by Customs. Hence it is felt that the concept of mutually exclusive taxation has not fully evolved. Isn’t the main purpose of the Notification getting defeated?
What will be the stand of Customs department in these cases? There are only two possibilities here, either refund back the service tax already paid in cash/credit against future payments or Decide at the threshold that there is no need for payment instead of dragging the assessee to the Tribunal and Courts. Summing up, it is better to issue a clarification soon on the following,
· Whether Service Tax is still payable on such Royalties which are conditional to the agreement which will suffer Customs Duty?
· Whether the Notification affects retroactively or only the fresh cases?
· What is the mechanism for the department to refund the Service tax paid prior to this Notification and where the concerned transaction is under the taxman lens?