Service Tax not Leviable on License Fee collected for Supply of Customised Software to BITS: CESTAT [Read Order]

Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Bangalore bench has set aside service tax demands raised on the appellants for reimbursements and customised software licence fees collected from BITS Pilani in connection with BITSAT online admission tests.

The Tribunal held that reimbursable expenses cannot be included in taxable value under Management Consultancy Services and that customised software supply was outside the scope of service tax before May 2008.

The dispute arose from an audit of Eduquity Career Technologies Pvt. Ltd, the appellant's records for the period 2004–2006, which revealed that the company had received payments from BITS Pilani for conducting computer‑based online admission tests (BITSAT).

The Department issued a show‑cause notice in June 2008 demanding service tax of ₹31.15 lakh along with interest and penalties, alleging liability under Management Consultancy Services. On adjudication, the demand was confirmed, though the Commissioner (Appeals) granted partial relief by setting aside a small portion of the demand and denying cenvat credit. Eduquity carried the matter further to the Tribunal.

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Appearing for the appellant, Mr Bhanu Murthy J.S. argued that the bulk of the amounts received, ₹2.97 crore, were reimbursements for expenses incurred in establishing and maintaining seven dedicated testing centres and additional third‑party centres.

These reimbursements covered real estate costs, computers, hubs, networking equipment, rentals, and travel expenses. He submitted that such reimbursable expenses could not be included in the taxable value, as Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 had been declared ultra vires by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. (2018).

On the issue of licence fees of ₹27.31 lakh collected for customised software supplied to BITS, counsel contended that information technology services were specifically excluded from Business Auxiliary Service and Management Consultancy Service during the relevant period. The supply of customised software amounted to the sale of goods rather than a service, and service tax on IT software services was introduced only from 16 May 2008. Therefore, any levy before that date was unsustainable.

Mr M. Sreekanth, Superintendent (AR), appearing for the Revenue, reiterated the findings of the Commissioner (Appeals). He maintained that reimbursements formed part of the gross amount charged and were taxable under Section 67 of the Finance Act, 1994, read with Rule 5(1). He also argued that licence fees for customised software were taxable under Management Consultancy Services.

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The two-member bench comprising D Bhagya Devi (Technical Member) and DM Misra (Judicial Member), after considering the submissions and perusing the records, held that the demand for reimbursements could not be sustained.

It noted that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, had been struck down by the Supreme Court, and therefore, the reimbursable expenses could not be artificially included in the taxable value.

On the issue of customised software, the Tribunal relied on its earlier decision in IBM India Pvt. Ltd. v. CCE [2010], which had been affirmed by the Supreme Court. That decision had categorically held that customised software supply was excluded from service tax under MCS/BAS before 16 May 2008. Since IT software services became taxable only thereafter, the demand for licence fees was also unsustainable.

In conclusion, the Tribunal set aside the impugned order to the extent of confirming service tax demands on reimbursements and customised software licence fees, and allowed the appeal in favour of Eduquity Career Technologies Pvt. Ltd.

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