Tribunal upholds Revenue's service tax demand on software activation charges. Appellant's distributor claim rejected.

The Tribunal found in favor of the Revenue, confirming the demand for service tax on software activation charges collected by the appellant. The appellant's argument that they were not providing a separate service for software activation but acting as a dealer or distributor was rejected. The Tribunal noted that the appellant's balance sheet showed separate income from software activation charges, indicating the provision of a service falling under business auxiliary service. The appellants were directed to deposit Rs. 50 lakhs as an interim measure pending further examination of the services rendered and corresponding liability.

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Issues:
Demand of service tax on software activation charge - Whether service activation is business auxiliary service.

Analysis:
The judgment in this case revolves around the imposition of a demand for service tax on software activation charges collected by the appellant. The demand, totaling Rs. 2,08,89,202/- including Education Cess, interest, and penalties under various sections, was confirmed by the Revenue on the grounds that the appellant did not pay service tax on the said charges, considering them as business auxiliary service. The appellant, through their Advocate, argued that they are not providing a separate service for software activation but are merely acting as a dealer or distributor of equipment supplied by their overseas principal. They contended that the software activation is done by the foreign vendor, and their role is limited to receiving payments from local purchasers and remitting them to the vendor, with their profit being the difference. They maintained that service tax is not applicable in this scenario.

Upon hearing both sides, the Tribunal found that the Department's case relied on the appellant's balance sheet, which indicated a separate income from software activation charges. It was observed that when a purchaser of equipment requires additional software, activation charges are levied, indicating that the appellants are indeed providing a service falling under the category of business auxiliary service from 10-9-2004 onwards. The Tribunal noted that the appellants failed to establish a prima facie case and did not cite any financial difficulties. The nature of services rendered and the corresponding liability would be further examined during the final hearing. As an interim measure, the appellants were directed to deposit Rs. 50 lakhs within ten weeks and report compliance by 24-11-2008. The Tribunal also stayed the recoveries of the balance amount of duty and penalties pending the appeal, subject to the aforementioned deposit.

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