Urgent - Applicability of Service Tax

This query is : Resolved

Shikha Sharma (Querist)
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20 August 2009 Dear Sir/Madam,
If there is a comprehensive contract, to develop a product, develop software for the same, testing, training the personnel of the buyer with the to using the buyer,installing the same and maintenance of the same. Can you please suggest the category under which these services shall be taxable??
Another query that, how is taxable value of ITSS derieved..

Madhukar N Hiregange

Madhukar N Hiregange (Expert)
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20 August 2009 Since thew contract is comprehensive it would only be liable for VAT. However disputes possible from Service tax since services are also involved.

It is advisable to bifurcate the same and get the same confirmed by the buyer/ client and pay VAT on the software transferred and charge ST for the training, AMC etc.

Shikha Sharma

Shikha Sharma (Querist)
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24 August 2009 Thanks a lot sir..If it not possible to bifurcate the costs, what can be done..

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Here’s a quick guide on your urgent query about **Service Tax applicability on a comprehensive software development contract** that includes development, testing, training, installation, and maintenance:

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### 1. **Nature of Contract: Comprehensive or Composite**

* When the contract covers **multiple services bundled together** (software development, testing, training, installation, maintenance), it is called a **composite contract**.
* Generally, **if software is transferred as goods (like packaged software), VAT applies on sale of goods**.
* If the contract mainly involves **services** (custom software development, installation, training, maintenance), **Service Tax is applicable**.

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### 2. **Taxability of Each Component**

| Service Component | Likely Tax Treatment |
| ------------------------ | -------------------------------------------------------------------------------------- |
| Software development | Taxable under **“Software Development Services”** (Service Tax) if customized software |
| Software sale (packaged) | Subject to **VAT** as sale of goods |
| Testing | Considered part of service; **Service Tax applicable** |
| Training | Taxable under **“Training and Coaching Services”** |
| Installation | Taxable under **“Installation Services”** |
| Maintenance (AMC) | Taxable under **“Maintenance and Repair Services”** |

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### 3. **If Bifurcation is Possible:**

* **Separate invoices** for goods (software) and services.
* VAT on software sale portion.
* Service Tax on services like training, installation, AMC.

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### 4. **If Bifurcation NOT Possible:**

* The contract is treated as a **composite service**.
* **Service Tax will generally apply on the entire contract value**, as Service Tax covers composite services.
* There may be risk of VAT demand later on software portion, but that depends on tax authorities’ interpretation.
* In such cases, get **written confirmation/agreement from the buyer** about tax treatment to avoid disputes.

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### 5. **Taxable Value of IT Enabled Services (ITSS):**

* The **taxable value** is the **gross amount charged for the service**.
* Deduct only taxes levied under the Act (like Service Tax itself).
* No deduction for cost of materials unless provided by the client.

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### Summary:

* Try to **bifurcate if possible** to reduce disputes.
* If not, treat it as a **composite service liable to Service Tax on entire value**.
* Keep clear agreements with buyer.
* Consult a tax professional for complex contracts to ensure compliance.

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If you want, I can help draft a sample bifurcation or contract clause for clarity between buyer and seller. Would that help?

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