The Ahmedabad bench Customs, Excise and Service Tax Appellate Tribunal (CESTAT) have held that service tax demand under “Management or Business Consultant Service” for the period before 16.05.2008 is not valid.
Basf India Ltd, the appellant to redesign and replace its existing system with a single ERP system had entered into an agreement dated 07.011.2005 with M/s. CIBA Switzerland whereby it was agreed to share the costs incurred towards the development of enterprise resource planning (ERP) software and reporting and replace the existing system used by the appellant. As per the agreement the appellant was to receive the services of software maintenance, hardware maintenance and IT operations implemented in the appellant’s company. This agreement was also cost-sharing.
Since the expenditure incurred after the development of the ERP system qualifies as capital expenditure the appellant accounted the same as capital expenditure and showed the same expenditure under capital heads in their financial reports of the year 2006-2007, 2007 -2008 and 2008 -2009.
On audit, it was pointed out that the appellant has received ERP-related services from two service providers situated outside India and accordingly, the appellant was liable to pay service tax under Section 66A.
It was alleged that the appellant had paid a total amount of Rs. 2,21,73,200/- to M/s. CIBA Switzerland and BASF, South East Asia Singapore during the period from June 2006 to March 2008 towards ERP system-related services which should have been taxed under the category of Management or Business Consultant Service” and further paid the amount of Rs. 2,90,65,606/- during the period from June 2006 to April 2010 towards ERP system related service should be taxable under the category of “Information Technology Software Service”.
The appellant paid service tax of 23,81,235/- under the category of “Information Technology Software Service” along with interest of Rs 1,44,179/- on 22.10.2010 on a total value of Rs 2,47,35,691/- which was paid by the appellant towards ERP related services during the period 2009- 2010. The appellant further paid service tax of 10,13,121/- along with interest of Rs. 3,00,600/- after the audit and during the investigation carried out by the department.
The appellant was issued with show cause notice dated 04.10.2011 demanding an amount of Rs. 58,54,029/- under reverse charge mechanism in terms of Section 66 A read with Rule 2 (1) (d) (iv) of Service Tax Rules, 1994 along with interest and penalty under Section 76,78,77(1) and 77 (2) of the Finance Act for the period 2006-07 to 2009-10. The department alleged that the ERP-related services received by the appellant were taxable under Management Consultant Services for the period up to 15.05.2008 and thereafter from 16.05.2008 under “Information Technology Software Service” on the introduction of said service.
Shri Jigar Shah, Counsel along with Shri Amber Kumrawat, submitted that the issue regarding taxability of ERP implementation-related service under the category of “management or business consultant service” for the period before 16.05..2008 is no more res- integra given the decision of CESTAT Bangalore in the case of IBM India Pvt. Ltd.
The two-member bench comprising Mr Ramesh Nair, Judicial Member and Mr C L Mahar, Technical Member observed that implementation of the ERP services is specifically covered under the information technology service, which was effective only from 16-5-2008. Under these circumstances, it cannot be liable to Service Tax for a period before that. It was evident that the entire period in the present case is before 16-5-2008.
The CESTAT bench held that “the appellant has made out a strong case for waiver of penalties invoking Section 80 of the Finance Act, 1994. Accordingly, we set aside the penalties imposed in the impugned order.”
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