Service tax on Software

This query is : Resolved

Mehul (Querist)
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24 March 2009 we are rendering services to our client in software development.

we develop a software as per client's specification and requirement. The development varies client to client. A software developed for one client may not be used for development of another software for another client. The software is developed as per intructions receive from the client. The rights to use the software remains with the client and there is no right of us thereafter on that software. we are not developing our own software and selling in the market. The developed software (as per client's specification) has independent idendity and salable in the market.

Please advise, Service tax applicable or VAt applicable. One consultant has given opinion that VAT will be applicable quoting Madras HC decision of Infosys.

Please advise.

Regards,

Mehul.

Dayal

Dayal (Expert)
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24 March 2009 No service tax on sale or purchase of ‘goods’

Service tax is imposed under entry 97 of List I which is a residual entry. Thus, if a transaction is covered in list II i.e. State List or in any other entry in List I, it cannot get covered in entry 97 of List I.

Entry No. 92A of List I (Union List) - Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.
Entry No. 54 of List II (State List) - Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.
In Imagic Creative Pvt. Ltd v. CCT (2008) 12 STT 392 = 12 VST 371 (SC), it has been held that service tax and Vat (sales tax) are mutually exclusive.
Service tax is not leviable on a transaction treated as sale of goods and subjected to levy of sales tax / VAT – Ref Code 036.03/23.8.07 of CBE&C Circular No. 96/7/2007-ST dated 23-8-2007. Though the clarification is in respect of services of authorized service station, the principle should apply to all transactions

Thus, where transaction is subjected to Vat or sales tax, service tax cannot be imposed.

In short, service tax is on ‘software service’ and not ‘software supply’.

However in your case you are providing customised softwared and Service in relation to development of information technology software’ is a taxable service.

For the purpose of the above Packaged software sold off the shelf, being treated as goods, is leviable to excise duty @ 8%. In this budget, it has been increased from 8% to 12% vide notification No. 12/2008-CE dated 01.03.2008.

But since in your case it is customised and not usable by any other client, will render it as customised services falling under software services.

The above clarification is NOT provided as a legal opinion. Individual organizations are encouraged to seek professional consultancy from their respective lawyers.