Customized software sold on CD with DCS constitutes sale of excisable goods, not service provision under Chapter 85238090

CESTAT Bangalore ruled that customized software sold on CD along with DCS constitutes sale of excisable goods, not service provision. The tribunal found that despite introduction of service tax on Information Technology Software Services from 16/05/2008, the transaction remained a sale where software ownership transferred to customers without appellant retaining title. Purchase orders demonstrated parties' intention was sale of goods rather than service provision. The customized software classified under Chapter sub-heading 85238090 of CETA 1985, eligible for exemption notifications. Revenue's contention that transaction constituted taxable ITSS service was rejected. Appeal allowed, impugned orders set aside.

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Issues Involved:
1. Classification of customized software as 'goods' or 'service'
2. Applicability of excise duty and/or service tax on customized software
3. Interpretation of legislative provisions and relevant case laws

Summary:

Issue 1: Classification of customized software as 'goods' or 'service'
The core issue is whether the customized software sold/cleared by the Appellant along with Distributed Control Systems (DCS) should be classified as 'excisable goods' under Chapter sub-heading 85238090 of CETA, 1985, or as a 'service' leviable to service tax under the category of 'Information Technology Software Services' (ITSS) introduced w.e.f. 16/05/2008. The Tribunal noted that the software was customized and sold in a recorded media (CD) along with DCS, and the intention of the parties was to treat it as 'goods' rather than 'service'. The Tribunal emphasized that the true nature of the transaction, as evidenced by purchase orders and invoices, indicated a sale of goods rather than a provision of service.

Issue 2: Applicability of excise duty and/or service tax on customized software
The Tribunal examined whether the same activity could attract both excise duty and service tax simultaneously. It was found that the customized software, when sold in a recorded media, should be treated as 'excisable goods' and not subject to service tax under ITSS. The Tribunal referred to various case laws, including Bharat Sanchar Nigam Ltd. and Infotech Software Dealers Association, which supported the view that the nature of the transaction should determine the applicable tax. The Tribunal concluded that the sale of customized software in recorded media is subject to excise duty and not service tax, provided the conditions of the relevant exemption notifications are met.

Issue 3: Interpretation of legislative provisions and relevant case laws
The Tribunal analyzed the relevant entries under the Central Excise Tariff Act, 1985, and the Finance Act, 1994, along with various judicial precedents. It was noted that the legislative intent was to continue the levy of excise duty on the manufacture and sale of Information Technology software and to levy service tax on ITSS. The Tribunal distinguished the present case from the Suzlon Energy Ltd. case, emphasizing that the intention of the parties and the nature of the transaction should determine the tax liability. The Tribunal concluded that the customized software sold along with DCS should be classified as 'excisable goods' and not as 'service'.

Conclusion:
The impugned orders were set aside, and the appeals were allowed with consequential relief, if any, as per law. The Tribunal held that the customized software sold in recorded media along with DCS should be treated as 'excisable goods' and not subject to service tax under ITSS.

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