The revenue department has said maintenance or repair of software would now be subjected to service tax.
The clarification was issued following a Supreme Court decision that classified the sale of software as "sale of goods". This issue was being contested by Tata Consultancy Services and the Andhra Pradesh government.
The Supreme Court reached the decision on the basis that all criteria required to satisfy the definition of goods are applicable in the case of software.
In case of branded software (canned software) sold in stores, too, the software is transferred in a medium (say, a compact disc) and is sold as a package of retail material, and the Supreme Court decided that such cases fell within the definition of goods.
Similarly, in the case of unbranded or customised software, the supplier develops the programs and generally transfers them in a media (say, any portable storage device) and thereafter it is loaded in the customer's system. In this case too the software is incorporated in a medium for use.
"In either case, the taxable service of maintenance or repair or servicing of software is in relation to software in a medium, which is covered under the definition of goods as per the ruling of the Supreme Court. It is therefore clarified that maintenance or repair or servicing of all computer software is taxable," the revenue department said in a draft circular.
In December 2003, the department had issued a clarification that software was not taxable. This was after an issue had been raised whether organisations engaged in design and development who enter into annual maintenance contracts for their software are exempt from service tax.
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