Pre-developed software supplied through encryption keys classified as goods under Chapter Heading 8523, eligible for 5% concessional GST rate

AAR Karnataka ruled that pre-developed software supplied through encryption keys constitutes supply of goods under Chapter Heading 8523, not services. The software qualifies as computer software requiring computer loading and activation for use. Since supply was made to a public funded research institution under DRDO with required certification, the applicant was entitled to concessional CGST/IGST rate of 5% under Notifications 45/2017 and 47/2017 dated 14.11.2017. The ruling distinguished between licensing services and packaged software with limited end-user licenses.

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Issues Involved:
1. Classification of software licenses supplied by the applicant.
2. Applicability of concessional GST rates as per specific notifications.

Issue-Wise Detailed Analysis:

1. Classification of Software Licenses:
The applicant, a reseller of scientific and technical equipment and software licenses, sought clarification on whether the software licenses they supply qualify as "Computer Software" and thus be classified under Chapter Heading 8523 80 20, which pertains to goods.

The applicant argued that their software licenses should be treated as goods based on several grounds:
- The software is pre-developed, pre-designed, and supplied through encryption keys.
- The software cannot be used without a computer and needs to be activated post-installation.
- The software is not tailor-made but is a packaged software sold to multiple clients without customization.
- The applicant referenced the Supreme Court's decision in Tata Consultancy Services Vs. State of Andhra Pradesh, which held that software, whether customized or non-customized, qualifies as goods if it has utility, can be bought and sold, and can be transmitted, transferred, delivered, stored, and possessed.

The Authority for Advance Rulings (AAR) agreed with the applicant's interpretation, stating that the software supplied meets the criteria of goods and should be classified under tariff heading 8523.

2. Applicability of Concessional GST Rates:
The applicant also sought clarity on whether the software licenses supplied to Public Funded Research Institutions (PFRIs) are eligible for the concessional GST rate of 5% as per Notifications No. 45/2017-Central Tax (Rate) and No. 47/2017-IGST (Rate), both dated 14.11.2017.

The applicant contended that:
- The software licenses supplied to PFRIs should benefit from the concessional GST rate.
- They provided certificates from the institutions confirming that the software is used for research purposes, meeting the conditions stipulated in the notifications.

The AAR examined the conditions laid out in the notifications, which require that the goods (including computer software) supplied to specified institutions must be certified as necessary for research purposes by a competent authority.

The AAR found that the applicant's supply of software licenses to PFRIs met all the conditions specified in the notifications. The institutions provided the necessary certificates, and the software was indeed used for research purposes.

Ruling:
a) The software supplied by the applicant qualifies to be treated as Computer Software resulting in the supply of goods and is therefore classified under Chapter Heading 8523 80 20.

b) The benefits of Notifications No. 45/2017-Central Tax (Rate), Notification (45/2017), No. FD48 CSL 2017, Bengaluru, and Notification No. 47/2017-IGST (Rate), all dated 14.11.2017, are applicable to the computer software supplied by the applicant to the institutions specified in the notifications, subject to the fulfillment of the conditions of the notifications in each case.

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