Login
Email Or User Name
Password
Invalid Login details Forgot your password?


Contents

Software Development Services. 1

Taxability in case of services to foreign customers and BPO services: 1

Sub-contracting of software development services: 5

 

Software Development Services

Taxability in case of services to foreign customers and BPO services:

 

Maxim Software Ltd. is a company based out of Gujarat. It provides the services of Software development & BPO services for its foreign clients. It has asked for our advice on the leviablity of Services tax on its services. The facts of the case are given below:

 

 

A] Software Development

 

Facts in brief:

       Maxim is engaged in providing the services of Software development. They provide these services to their foreign based clients having no permanent establishment in India.

 

       They receive the Projects/Orders from them and raise the Invoice in foreign currency after completion of the project / work.

 

       Maxim develops the software according to the customer's needs. They may develop the software from start to end or customize the software for them as per the customer's requirements.

 

       They send the developed software through softcopy, mostly emails.

 

       Sometimes, the Maxim sub-contracts the activity to a third party viz. Carnival Software Solutions hereinafter referred to as the "CSS".

 

       CSS also sends the software developed by them to the Maxim through emails. The Maxim in turn forwards the same to its clients abroad.

 

Queries:

 

The specific queries raised based on the above facts are as follows:

 

i)    Whether this will be considered as export of services and exempt from Service Tax?

 

ii)   Whether the Services provided by CSS will attract the service tax being the ultimate services receiver is outside India?

 

iii)  Whether Services Tax Charged by CSS is payable by the Maxim?

 

iv)  If it is payable and the Maxim is not required to pay the Service Tax as it is treated as Export of Services then whether the Maxim can claim refund of Service Tax paid to CSS?

 

v)   Whether the Service Tax charged by CSS can be set off against Excise Duty payable by the Maxim?

 

Justification:

  Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software is a "Declared Service" under Section 66E(d) of Finance Act, 1994.

 

  The services provided in India are taxable. Section 66B of the Finance Act which is the Charging Section provides that service tax shall be levied on all services provided or agreed to be provided in taxable territory. Thus the taxability of service will be determined based on the "place of its provision".

 

  Section 66C of the Finance Act 1994, which empowers the Central Government to prescribe rules for determination of place of provision of service & accordingly Place of Provision of Service Rules, 2012 has been issued for this purpose w.e.f.01.07.2012.

 

  The rules are divided in to 14 rules. The general rule i.e. Rule 3 provides that the service shall be deemed to be provided at the place where the service receiver is located. This rule is a residuary rule. It will apply only when subsequent specific rule is not applicable. Therefore, a later specific rule will override earlier general rule.

 

  The "software development" being not fitting in to any of the rules from 4 to 14, by default it will fall under Rule 3 of Place of Provision of Service Rules, 2012. As provided under this rule, the place of provision of a service shall be the location of the recipient of service.

 

  Section 93A of the Finance Act, 1994 empowers Central Government to make provisions to grant rebate of service tax paid on input services which are used for manufacturing or processing of goods or for providing any taxable service.

Notification No.39/2012-ST dated 20.06.2012 w.e.f.01.07.2012 provides for rebate of excise duty paid on inputs and service tax paid on input services used in providing services exported in terms of Rule 6A of Service Tax Rules to any country other than Nepal & Bhutan.

Therefore, rebate is permissible only if service is "export" as per Rule 6A which is as follows:

1) The provision of any service provided or agreed to be provided shall be treated as export of service when,-

(a)  the provider of service is located in the taxable territory ,

(b) the recipient of service is located outside India,

(c) the service is not a service specified in the section 66D of the Act,

(d)  the place of provision of the service is outside India,

(e) the payment for such service has been received by the provider of service in convertible foreign exchange, and

(f) the provider of service and  recipient of service  are not merely establishments of a distinct person in accordance with  item (b) of Explanation 3 of clause (44) of section 65B of the Act.

 (2) Where any service is exported, the Central Government may, by notification, grant rebate of service tax or duty paid on input services or inputs, as the case may be, used in providing such service and the rebate shall be allowed subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification.

 

Conclusion:

Based on the facts explained above, our point-wise views/ opinion are given herein below:

i)    The services rendered by the Maxim are one of the declared services. In terms of Place of Provision of Service Rules, 2012, the software development services will fall under Rule 3 of the said rules. As provided under this rule, the place of provision of a service shall be the location of the recipient of service. In the issue under discussion, the recipient being outside India, the place of provision of service will be outside the taxable territory and therefore Maxim will not be liable to pay service tax for the services rendered.

 

ii)   As regards to taxable services provided by CSS, the same will again fall under Rule 3 of PPSR, 2012 and since both service receiver i.e. Maxim and the provider i.e. CSS are in taxable territory, CSS will be liable to pay service tax.

 

iii)  Since CSS will charge service tax in the Invoice issued to the Maxim, it is needless to mention that the same will be paid to CSS by the Maxim.

 

iv)  All the conditions mentioned under Rule 6A of Service Tax Rules, 1994 being satisfied by the client, they are rightly eligible to claim rebate of service tax paid by them to CSS since it is used to render their output service which is exported.

 

v)   If it can be established by the Maxim that, the services received from CSS are used by them in relation to manufacture of excisable goods on which excise duty is paid, then the service tax charged by CSS can be utilized for payment of excise duty.

 

B] BPO Services

Facts in brief:

  The Maxim is into services which include Back-office support and custom website and web and mobile application development which are being delivered in soft version.

 

  The customers for whom it is provided are all foreign clients from America, South Africa and UK.

 

  The services are provided in following manner:

 

Back-office support:

 

  Client email the Maxim instructions for the tasks to be performed or upload their instruction on FTP server.

 

  The Maxim then download the instructions and related documents, process them using respective software; Photoshop or their provided custom software license copy and upload final result back on FTP server.

 

Custom Software development:

 

  Software services include custom website, web application development, and mobile app development.

 

  Client sends Maxim their requirement online via email. They analyze it and develop custom applications based on their requirement and upload them on their server. They don't deliver any software or website or application in hard copy in CD   or DVD.

Justification:

  Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software is a "Declared Service" under Section 66E(d) of Finance Act, 1994.

 

  The term "Information Technology Software" is also defined under Section 65B (28) of the Finance Act, 1994 w.e.f.01.07.2012 which means, any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.

Conclusion:

  As observed from the facts given, it can be concluded that the BPO services are also in the nature of Software Development and therefore all the service tax provisions already explained above for "software development" can also be made equally applicable for BPO services also.

 

Sub-contracting of software development services:

XYZ Ltd. has procured an order from EA Games (P) ltd. of a specific software development from outside India. XYZ Ltd. has out-sourced the said order to Switches & associates outside India. Now Switches & associates will develop the specified software and bill it to the XYZ ltd. Then XYZ ltd. will supply the said software and bill it to Party No.1. In this event, kindly clarify the treatment of service tax.

 

Solution:

If Switches & Associates is supplying software within India and billing in India, then service tax should apply  However, if software is sold outright outside without bringing it in India (either physically or electronically), it should be simple trading in goods and then service tax will not apply.

If XYZ ltd. is supplying software to EA Games (P) ltd., it should be export of service and service tax should not apply as it would get covered under rule 3 of Place of provision of services Rules.