In this article we shall take a close look at the taxability of maintenance and repair services under service tax as well as specified exclusions from the same apart from recent developments. The aspects of Cenvat credit and remote service have been addressed. The relevant case laws along with comments and practical issues one comes across in the normal course are discussed with possible solutions.
The immovable and movable properties one acquires It is quite common to find assessees who provide services in relation to maintenance and repair of goods on a one off basis or under a contract for a year or more. High value capital goods could come with a long warranty which is serviced by third parties. The assessees who do so may either be manufacturers who are registered under the Central Excise Act or pure service providers who may also be providing a wide variety of services. Though this category of service was introduced with effect from 01.07.2003, it is not uncommon to come across cases where assessees happen to provide services classifiable under this category but are ignorant of their liability under service tax with regard to their earnings from the same. In quite a few cases, the assessees have also been found to be under the mistaken notion that their service is classifiable under the category of Business Auxilliary Service while in reality the same was classifiable under the category of maintenance, management or repair services. This has resulted in such assessees wrongly claiming the benefit of exemption notification 8/2005 ST and ending up with a demand from the department. The category has not remained the same since its introduction and has undergone modifications and additions in scope over the years.
What does "management, maintenance or repair" cover?
As per Section 65(64) of Chapter V of Finance Act 1994 as amended from time to time,
"management, maintenance or repair" means any service provided by -
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any person under a contract or an agreement; or
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a manufacturer or any person authorised by him, in relation to, -
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management of properties, whether immovable or not;
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maintenance or repair of properties, whether immovable or not; or
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maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle;
For the purpose of clause (c) above, "goods" includes computer software. The word "properties" is defined to include information technology software.
"Goods" has the meaning assigned to it in Section 2(7) of Sale of Goods Act 1930 as per section 65(50).
The terms "management", "reconditioning" and "restoration" have not been defined under service tax and we would have to refer a Standard English Dictionary for their meaning. The term "management" has been defined in the Webster's Unabridged Dictionary as the act or manner of managing, handling, direction or control. The term "restoration" has been defined to mean - a return of something to a former, original, normal, or unimpaired condition. "Reconditioning" means to restore to a good or satisfactory condition. The term "maintenance" has been defined in the Webster's Unabridged Dictionary as - means of upkeep, support or subsistence.
It would also be interesting to see the meaning of the term "agreement" as an arrangement that is accepted by all parties to a transaction. "Contract" means an agreement that is enforceable by law.
What would the taxable service be?
As per Section 65(105)(zzg), taxable service means any service provided or to be provided to any person by any person in relation to management, maintenance or repair.
What is sought to be taxed under this category is the maintenance or repair service in relation to movable or immovable property. Maintenance or repair activities are generally carried out under a contract or an agreement and these would be covered. The contract or agreement may or may not be in written form as the definition is silent in this regard. They can also be carried out by manufacturers of goods by way of after sales service and even this would be covered. In case of after sales service though, the question of taxing the same would arise if the service is a paid service and not free service. Where service is free, for instance, during warranty period, the same in our view cannot be taxed as there would be no consideration for the same.
The assessee would however have to be careful to watch the processes undertaken on goods. This is because where the process amounts to manufacture as defined under Central Excise Act 1944, the liability would be under Central Excise. This can happen when the repair process involves substantial reconditioning or reconstruction of the damaged goods such as to bring about a change in the name, character and usage of the items put into process.
Is maintenance or service or repair of software taxable?
Yes. The definition of "goods" has also been clarified to include software for the purposes of this category and hence maintenance or service of software would be covered under this category. This has also been clarified by the departmental Master Circular on technical issues 96/7/2007 ST dated 23.08.07.
Liability for the earlier period
There has been some confusion in the past regarding taxability of the maintenance of software under service tax. The Supreme Court in Tata Consultancy Services Vs State of Andhra Pradesh (2008 -TMI - 4143 - Supreme Court)had held that software sold in canned form was goods. But the department had earlier issued a Circular 70/19/2003 ST dated 17.12.2003 which had exempted maintenance or repair of software from service tax which was withdrawn only on 10.05.07 through Circular 93/4/2007 ST. In the meantime, as a fallout of the Supreme Court judgement in Tata Consultancy Services case, the department had issued another Circular 81/02/2005 ST dated 07.10.05 which had held maintenance or servicing or repair of software as liable to service tax. The assessees who have followed this Circular would be on the safer side of the law.
Is sub-contractor to principal/prime contractor who provides the service liable to service tax?
Yes. In view of the clarification by Master Circular 96/7/2007 ST dated 23.08.07, even subcontractors who provide the taxable service under this category to a principal contractor who falls under this category, would be liable to service tax. The principal contractor would however be eligible to input service credits on the service tax paid on such service from the sub-contractor. As far as taxability in the prior period is concerned, where sub contractors provided service to prime contractor, the taxability was only in the hands of the prime contractor and not the sub contractor which was also reiterated in M/s BBR (India) Ltd Vs CCE Bangalore III [2006 (9) TMI 9 - CESTAT, BANGALORE].
Whether the sub-contractor and prime contractor relationship existed at all was something to be determined on the facts and circumstances of each case. In M/s Indfos Industries Ltd Vs CCE Noida, the contractor appointed by a development and procurement agency was held not to be a sub-contractor to a principal contractor as the transaction was one on principal to principal