The new Section 66 E of the Finance Act specifies certain services as Declared services on which service tax is to be levied, one of them being
(f) "development , design, programming, customization, adaptation, up gradation, enhancement , implementation of Information Technology Software.
The Educational guide issued by the department under para 6.4.4 clarifies the scope of the above mentioned entry (f) of Section 66E (Declared Services). The relevant extracts are as under:
++ Transfer of right to use goods' is deemed to be a sale under Article 366(29A) of the Constitution of India and transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods is a declared service under clause (f) of section 66E.
++ A license to use software which does not involve the transfer of �right to use' would neither be a transfer of title in goods nor a deemed sale of goods. Such an activity would fall in the ambit of definition of �service' and also in the declared service category specified in clause (f) of section 66E.
++ Whether the license to use software is in the paper form or in electronic form makes no material difference to the transaction.
++ However, the manner in which software is transferred makes material difference to the nature of transaction. If the software is put on the media like computer disks or even embedded on a computer before the sale the same would be treated as goods.
++ If software or any programme contained is delivered online or is down loaded on the internet the same would not be treated as goods as software as the judgment of the Supreme Court in Tata Consultancy Service case is applicable only in case the pre-packaged software is put on a media before sale.
++ Delivery of content online would also not amount to a transaction in goods as the content has not been put on a media before sale. Delivery of content online for consideration would, therefore, amount to provision of service.
That having discussed Section 66 E and clarifications on the same, it is understood that the Service tax department is clear about the fate of the license to use software as a SERVICE only.
As per the present practice among the software companies they charge both service tax and VAT on License to use Software as well as on composite value of the AMC by treating the AMC contract as a works contract where both elements of service and sale of goods are involved. Because the VAT department have been charging and collecting VAT on software license provided electronically or on paper, providing the license to use upgrades of software during AMC is also being considered as sale of goods, thereby VAT is charged on the value of contract under WCT i.e 12.5 % reduced by 20 % as deemed labour cost resulting in 10 % WCT on the AMC contract value.
That along with the above VAT treatment as WCT because of the fact that the value of services and value of goods involved in contract is inseparable, the Software companies have been charging service tax on the contract value again treating the contract as Works Contract Service valued and taxed as per notification no 24/2012 ST providing New Rule 2A where service tax is calculated on 70 % of the contract value, resulting in effective rate of 8.65% of the value.
Example : Company XYZ raises an Invoice for providing software license as well as AMC service as under:
|
Sl No
|
Particulars
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Amount
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Taxes Extra
|
|
1
|
License � SafeSoft
|
10,00,000/-
|
ST (12.36%) + VAT (5%)
|
|
2
|
AMC (SafeSoft) � 3years
|
8,00,000/-
|
ST( 8.65%) + VAT (10%)
|
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