2024 (3) TMI 691 - AT - Service Tax

Thin Client manufacturer's purchase of software authentication stickers ruled as sale not service

CESTAT Bangalore held that purchase/import of Certificate of Authenticity stickers/labels on high sea sale basis for affixation on manufactured Thin ... Nature of activity - sale or service - Classification of services - purchase/import of Certificate of Authenticity(COA)/ stickers/labels on high sea sale basis from M/s Priya Ltd., later affixed on the manufactured ‘Thin Clients’ already installed with MS software embedded system procured from local Microsoft authorized distributors - Information Technology Software Services or not - demand issued on 23.06.2011 for the period from 01.04.2008 to 31.03.2010 - invocation of extended period of limitation. Whether the purchase/import of COAs/stickers / labels will result in sale or service? HELD THAT:- On a cumulative reading of the definitions and the ‘Licence Grants and Limitations’ in the present context, it is found that the appellant are engaged in the manufacture of ‘Thin Clients’, which required a software to make it functional/operational and they are not distributors/resellers of the installed/ embedded software. For the said purpose, to acquire the necessary software to be embedded with the system, they entered into an agreement with MS, whereby they were authorized to procure off-shelf MS OS software, which also provided them the right to replicate into individual hard discs installed later into the Thin Clients. The software would be operational or functional only with affixation of the stickers i.e. COAs procured separately for each of the Thin Clients from the authorized MS distributors. Clause ‘m’ of the ‘Licence Grants and Limitations’ makes it clear that the appellant shall not advertise, provide a separate price for, or otherwise market or distribute the Licensed products or any images as a separate item from the Embedded system. Merely by affixing the stickers / labels providing authenticity to software loaded to each of the Thin Clients cannot be construed as a ‘service’ received by the appellant under the category of ITSS as held by the Commissioner in the impugned order - in the absence of a transfer of copyright of the software but only on mere right to use the software as clarified in the aforesaid circulars in explaining the scope of the levy as ‘service' under ITSS, distinguishing the same from levy of excise duty and applicable customs duty being Information Technology software falling under Chapter 85 of Central Excise Tariff Act, 1985 or CTA,1985 as the case may be, the import of stickers/labels, later affixed to the Thin clients cannot considered as a ‘service’ and attract levy under ITSS. There are merit in the contention of the learned senior advocate for the appellant that the whole transaction/activity including the installation of the software and later affixing stickers / labels to the Thin Clients procured / purchased on HSS basis from M/s. Priya Limited are in the nature of ‘sale’ and not service. Consequently, demand of service tax on reverse charge basis on the Appellant cannot be sustained. Time Limitation - suppression of facts or not - HELD THAT:- The stickers / labels have been imported by the appellant by filing relevant Bills of Entry from time to time and the said stickers/labels are assessed as ‘goods’ by the Customs department, which are later warehoused as per the procedure under the Customs Act and the Rules made thereunder. In these circumstances, allegation of suppression of facts cannot be sustained. The appeal succeeds both on merit as well as on limitation. Issues Involved:1. Whether the purchase/import of Certificate of Authenticity (COA)/stickers/labels on high sea sale basis from M/s Priya Ltd., later affixed on the manufactured 'Thin Clients' already installed with MS software embedded system procured from local Microsoft authorized distributors, is a 'sale' or 'service' classifiable under taxable category of Information Technology Software Service (ITSS) received from M/s. Microsoft Licensing GP and accordingly chargeable to service tax under Section 66A of the Finance Act, 1994 read with Rule 2(l)(d)(iv) of the Service Tax Rules, 1994.2. Whether the demand issued on 23.06.2011 for the period from 01.04.2008 to 31.03.2010 is barred by limitation.Summary:Issue 1: Classification of COA/Sticker Import as 'Sale' or 'Service'The appellant entered into a 'Microsoft OEM Customer License Agreement for Embedded Systems' with Microsoft Corporation, allowing them to use and replicate Microsoft software on their manufactured Thin Clients. They procured Certificates of Authenticity (COA) from M/s Priya Limited, which were essential for the sale of Thin Clients with embedded Microsoft software. The Revenue argued that the COAs, which certify the authenticity of the software, should be classified as a service under the Information Technology Software Service (ITSS) category and thus subject to service tax.The appellant contended that the COAs are merely stickers/labels that do not constitute a service but are goods necessary for the sale of Thin Clients. They argued that these COAs were assessed by the Customs Department under Chapter 4907 00 30 as 'documents of title conveying the right to use Information Technology Software' and not as a service.The Tribunal found that the COAs/stickers are indeed goods and not services. The agreement and the nature of the transaction did not involve the transfer of copyright but only the right to use the software, which does not fall under the taxable category of ITSS. The Tribunal concluded that the import of COAs/stickers, later affixed to the Thin Clients, cannot be considered a service and thus, the demand for service tax on this basis is not sustainable.Issue 2: Limitation of DemandThe appellant argued that the demand issued on 23.06.2011 for the period from 01.04.2008 to 31.03.2010 is barred by limitation. They asserted that the import of stickers/labels was done following due procedure, with all relevant Bills of Entry filed and assessed by Customs authorities. Therefore, there was no suppression or misdeclaration of facts.The Tribunal agreed with the appellant, noting that the stickers/labels were imported and assessed as goods by the Customs Department and warehoused as per the procedure. Hence, the allegation of suppression of facts could not be sustained.Conclusion:The appeal was allowed both on merit and on the ground of limitation. The Tribunal held that the import of COAs/stickers does not constitute a service under ITSS and that the demand for service tax is not sustainable. Additionally, the demand was found to be barred by limitation due to the proper declaration and assessment of the imported goods.