Classification of software licenses as goods under tariff heading 8523 for reduced tax rate eligibility

The Authority for Advance Rulings (AAR) classified the supply of software licenses by the applicant as a supply of goods under tariff heading 8523. The supply of software licenses to public funded research institutions, like the National Institute of Science Education and Research, Bhubaneswar, was deemed eligible for the reduced tax rate under Notification No. 45/2017-Central Tax (Rate) and Notification No. 47/2017-Integrated Tax (Rate), subject to meeting the specified conditions in the notifications.

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Issues Involved:
1. Classification of supply of software licenses as goods or services.
2. Applicability of Notification No. 47/2017-Integrated Tax (Rate) dated 14th November 2017.
3. Applicability of Notification No. 45/2017-Central Tax (Rate) dated 14th November 2017.

Detailed Analysis:

1. Classification of Supply of Software Licenses as Goods or Services:

The applicant, a reseller of IBM SPSS software, sought clarification on whether the supply of software licenses should be classified as goods or services. The software is pre-developed and provided to customers via internet download links and physical backup CDs. The applicant contended that software licenses should be considered a supply of services under HSN code 997331, as per entry 5(c) of Schedule II of the CGST Act, 2017, which includes the temporary transfer or permitting the use of intellectual property rights.

The Authority for Advance Rulings (AAR) examined the nature of the software provided and noted that it is pre-developed, pre-designed, and made available through encryption keys, which aligns with the definition of "goods." The software requires activation on a computer, making it "Computer Software" and more specifically "Application Software." The Explanatory Notes to the Scheme of Classification of Services exclude limited end-user licenses as part of packaged software from SAC 997331. Therefore, the supply of software licenses by the applicant is classified as a supply of goods under tariff heading 8523.

2. Applicability of Notification No. 47/2017-Integrated Tax (Rate) dated 14th November 2017:

The applicant sought to determine if the supply of software licenses falls within the ambit of Notification No. 47/2017-Integrated Tax (Rate), which provides a reduced rate of tax for certain supplies to public funded research institutions. The notification exempts specified goods, including computer software, when supplied to institutions like public funded research institutions, universities, IITs, and IISc, subject to specific conditions.

The AAR confirmed that the software supplied by the applicant qualifies as "computer software" under the notification. The applicant provided evidence of supplying software to the National Institute of Science Education and Research, Bhubaneswar, a public funded research institution under the Department of Atomic Energy (DAE), Government of India. The institution produced the required certificate from an officer not below the rank of Deputy Secretary, fulfilling the conditions of the notification. Thus, the supply of software licenses to such institutions is eligible for the reduced rate of tax under Notification No. 47/2017-Integrated Tax (Rate).

3. Applicability of Notification No. 45/2017-Central Tax (Rate) dated 14th November 2017:

Similar to the previous issue, the applicant sought clarity on the applicability of Notification No. 45/2017-Central Tax (Rate) for the supply of software licenses. This notification also provides a reduced rate of CGST for specified goods supplied to public funded research institutions, subject to conditions.

The AAR reiterated that the supply of software licenses by the applicant qualifies as "computer software" under the notification. The applicant's supply to the National Institute of Science Education and Research, Bhubaneswar, meets the conditions specified in the notification, including the provision of a certificate from the Deputy Secretary. Therefore, the supply of software licenses to such institutions is eligible for the reduced rate of tax under Notification No. 45/2017-Central Tax (Rate).

Ruling:

The AAR ruled that the supply of software licenses by the applicant is classified as a supply of goods under tariff heading 8523. The supply of software licenses to public funded research institutions, such as the National Institute of Science Education and Research, Bhubaneswar, qualifies for the reduced rate of tax under Notification No. 45/2017-Central Tax (Rate) and Notification No. 47/2017-Integrated Tax (Rate), provided the conditions specified in the notifications are met.

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