2022 (8) TMI 283 - SC - Service Tax

Quick Heal Antivirus Software License Key Sale: Not Subject to Service Tax

The Supreme Court upheld the Tribunal's decision that the sale of Quick Heal Antivirus Software, including the license key/code, constitutes a deemed ... Deemed sale by transfer of right to use goods - classification of prepackaged/canned software as goods - interactivity test for information technology software - contractual construction of license agreements - vivisection of composite transaction - sale versus service - application of TATA Consultancy Services precedent to software on mediaInteractivity test for information technology software - information technology software - Antivirus software supplied in retail packs does not satisfy the interactivity requirement of 'information technology software' and hence is not taxable as an Information Technology Software Service. - HELD THAT: - The Tribunal's finding that the antivirus software is non-interactive is upheld. The software, once installed and the system booted, operates autonomously to detect and remove viruses; there is no continuous exchange of information or requirement of user commands characteristic of interactive programs such as ERP, MS Word or Excel. On this basis, the product does not fall within the statutory definitions of 'information technology software' for service-tax levy both prior to 01.07.2012 and after (sectional definitions remaining materially similar). [Paras 29, 30, 31]Antivirus software is non-interactive and not taxable as an Information Technology Software Service.Classification of prepackaged/canned software as goods - application of TATA Consultancy Services precedent to software on media - deemed sale by transfer of right to use goods - The transaction of supplying packaged antivirus software with license key in retail packs amounts to a transfer resulting in the right to use goods and, viewed with the agreement, constitutes a 'deemed sale' rather than a service. - HELD THAT: - Applying this Court's exposition in TATA Consultancy Services and related authorities, intellectual property embodied on a medium and marketed (CDs) can be 'goods'. The Tribunal correctly construed the End User License Agreement: the licensee enjoys the right to use the software for the license period, is entitled to updates and technical support, and the conditions do not curtail free enjoyment so as to negate transfer of right to use. The settled tests for a deemed sale under Article 366(29A)(d) and authorities cited require existence of goods and a transfer of right; the contract here vests the licensee with the right to use during the license period, amounting to deemed sale. Consequently, the transaction falls within the state taxation domain and is not exigible to service tax. [Paras 35, 36, 51, 55, 56]Supply of packaged antivirus software with license key in the facts found amounts to a deemed sale (transfer of right to use goods) and is not taxable as service.Vivisection of composite transaction - sale versus service - contractual construction of license agreements - The provision of updates and technical support as part of the packaged software sale cannot be artificially severed and treated as a separate taxable service when no separate consideration is charged. - HELD THAT: - The Court endorses the principle that a composite transaction cannot be vivisected to recharacterise components already constituting sale. Where the boxed/prepackaged software sale includes updates and the user pays a lump sum (with VAT/sales tax discharged), the updates are part and parcel of that sale; absent separate consideration, they do not constitute a distinct service exigible to service tax. Contract must be read as a whole; artificial segregation into sale of CD and separate service for updates is impermissible. [Paras 55]Updates and support included in the sale without separate consideration form part of the sale and are not separately taxable as services.Final Conclusion: The Supreme Court dismissed the revenue appeal and upheld the Tribunal's conclusion that the supply of boxed/replicated Quick Heal antivirus software with license key to end customers (for the period and regimes in question) is a deemed sale of goods and not exigible to service tax; related Madras High Court orders were set aside in the appellant's subsequent appeals accordingly. Issues Involved:1. Whether the transaction results in the right to use the software and would amount to deemed sale.2. Liability of the Antivirus Software license key/code to Service Tax.3. Classification of the service provided under Information Technology Service.4. Whether the transfer of goods by way of licensing or any such manner without transfer of right to use such goods is a declared service under Section 66E of the Finance Act, 1994.Detailed Analysis:1. Whether the transaction results in the right to use the software and would amount to deemed sale:The Tribunal held that the transaction involving the sale of Quick Heal Antivirus Software, which includes the supply of a license key/code, results in the right to use the software, thus amounting to a deemed sale. The Tribunal emphasized that the software, once put on a medium like a CD and sold, should be treated as goods, as per the Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh. The Tribunal also noted that the software did not have an element of interactivity, which further supports the classification of the transaction as a sale of goods rather than a service.2. Liability of the Antivirus Software license key/code to Service Tax:The Tribunal concluded that the antivirus software, when sold in a prepackaged form, should not be liable to service tax. The Tribunal relied on the Central Board of Excise & Customs (CBEC) guidelines, which clarified that prepackaged/canned software is considered goods and not services. The Tribunal also noted that the software's nature as goods could not be altered by the fact that updates and technical support were provided as part of the sale.3. Classification of the service provided under Information Technology Service:The Tribunal found that the antivirus software did not fall under the category of 'Information Technology Software Service' as defined under Section 65(105)(zzzze) of the Finance Act, 1994, prior to 01.07.2012, and under Section 66E(f) of the Finance Act, 1994, w.e.f. 01.07.2012. The Tribunal observed that the software did not involve any interactivity or manipulation by the user, which is a requirement for classification under Information Technology Software Service.4. Whether the transfer of goods by way of licensing or any such manner without transfer of right to use such goods is a declared service under Section 66E of the Finance Act, 1994:The Tribunal held that the transaction involving the sale of antivirus software, including the license key/code, did not fall under the declared services category under Section 66E of the Finance Act, 1994. The Tribunal emphasized that the transaction should be viewed as a whole and not artificially split into separate components of goods and services. The Tribunal concluded that the right to use the software was transferred to the end user, making it a deemed sale and not a service.Conclusion:The Supreme Court upheld the Tribunal's decision, affirming that the transaction involving the sale of Quick Heal Antivirus Software, including the supply of a license key/code, results in the right to use the software and amounts to a deemed sale. Consequently, the transaction is not liable to service tax. The Court emphasized that the entire transaction should be viewed as a sale of goods, and any attempt to artificially segregate the transaction into separate components of goods and services is not tenable in law. The appeals filed by the revenue were dismissed, and the Tribunal's order was upheld.