2022 (10) TMI 1293 - AT - Service Tax

Shrink-wrapped software sold on CD/DVD is sale of goods, not taxable service; possession and control decisive

M/s. Quick Heal Technologies Ltd. Versus Commissioner of Service Tax-I, Pune

CESTAT Mumbai (AT) allowed the appeal, holding that shrink-wrapped packaged software sold on CD/DVD constitutes a sale of goods and not a taxable service. ... Levy of service tax - Shrink Wrapped Packaged Software sold on CD/DVD - HELD THAT:- In the appellant’s own case [2022 (8) TMI 283 - SUPREME COURT,] the issue has been decided where it was held that 'It is, in substance, one transaction of sale of software and once it is accepted that the software put in the CD is 'goods', then there cannot be any separate service element in the transaction. We are saying so because even otherwise the user is put in possession and full control of the software. It amounts to 'deemed sale' which would not attract service tax.' Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether service tax is payable on shrink-wrapped/packaged software sold on CD/DVD where a lumpsum consideration is charged and sales tax (or tax as applicable on goods) is paid on the sale of the physical medium and software. 2. Whether a composite transaction involving sale of packaged software and ancillary updates/maintenance can be artificially segregated into sale and service for the purpose of levying service tax. 3. Whether, in view of higher judicial pronouncement on the legal character of such transactions, demands of service tax, interest and penalties confirmed by the Commissioner are sustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Chargeability of service tax on shrink-wrapped/packaged software sold on CD/DVD Legal framework: The relevant legal question arises under the service tax regime where levy depends on whether the transaction is a supply of 'service' or of 'goods' (sale). The determination hinges on the substance of the transaction and the characterisation of software on CD/DVD as 'goods' leading to a deemed sale. Precedent treatment: The Court follows the authoritative treatment in the higher court's recent ruling which held that where software on a CD is sold for a lumpsum amount and the user is put in possession and control, the transaction amounts to sale (deemed sale) and does not attract service tax; earlier reasoning in the line of BSNL jurisprudence that disallows vivisection of a composite transaction into sale plus service is applied. Interpretation and reasoning: The Court reasons that once software embedded in a physical medium is accepted to be 'goods' and a lumpsum consideration is charged for the packaged product, the user obtains possession and full control. Artificial segregation of the same transaction into sale and subsequent service components (such as updates) is not tenable. The substantive nature of the transaction - sale of software as goods - precludes imposing service tax on the entire sale consideration. Ratio vs. Obiter: The holding that transaction constituted sale (deemed sale) and therefore not amenable to service tax is ratio of the decision as applied by the Court. Observations about possession, control and rejection of vivisection are integral to the ratio. Any remarks about ancillary scenarios are obiter if they extend beyond packaged software on physical medium sold for a lumpsum. Conclusion: Service tax is not payable on shrink-wrapped/packaged software sold on CD/DVD where the transaction is, in substance, a sale (deemed sale) and a lumpsum consideration has been charged and taxed as sale. Issue 2 - Permissibility of vivisection (artificial segregation) of a composite transaction into sale and service Legal framework: The assessment principle requires substance over form and prohibits splitting a single composite transaction into artificial components to levy multiple taxes; the contract cannot be vivisected where the bundled consideration covers the packaged software as goods. Precedent treatment: The Court adopts the higher court's conclusion that vivisection is impermissible where the composite transaction is, in substance, a single sale of software in physical form. The earlier BSNL-line reasoning is applied to reject artificial segregation. Interpretation and reasoning: The Tribunal applies the test of substance: where the user gains possession and control and the consideration is a lumpsum for the packaged product, subsequent characterization of updates or support as separate services cannot be used to re-tax the same consideration. The Court stresses that acceptance of the software as goods negates a separate service element in the same transfer. Ratio vs. Obiter: The prohibition on vivisection in these factual circumstances is ratio. Any discussion of when segmentation might be permissible (e.g., truly separate recurring service contracts distinct in consideration and time) would be obiter unless grounded in the facts before the Court. Conclusion: Artificial segregation of a lumpsum sale of packaged software into sale plus service for levy of service tax is not legally tenable; the entire transaction, being one of sale, cannot be subjected again to service tax. Issue 3 - Sustenance of departmental demand of service tax, interest and penalties in light of higher court precedent Legal framework: Revenue can confirm demands under relevant sections for tax, interest and penalties if the original classification as service is legally tenable. However, where binding higher court precedent establishes non-liability, demand must fall. Precedent treatment: The Court respectfully follows the binding ratio of the higher court which held that similar demands lacked legal foundation where software sold on CD was a sale; thus confirmatory orders sustaining service tax cannot survive. Interpretation and reasoning: Applying the higher court's ratio to the facts, the Court finds the impugned demand and penalties (including interest and penal consequences) relate to a classification error addressed by the higher court. Where the central legal issue is identical and resolved against levy of service tax, the demands confirmed by the Commissioner cannot be sustained. Ratio vs. Obiter: The direction that appeals on the same issue be allowed and demands set aside is ratio as applied to the present appeals. Any procedural or ancillary observations about future actions under other laws are not determinative of the instant appeals and are obiter if beyond setting aside the tax demand. Conclusion: The appeals are allowed in favour of the appellant; the confirmed demands of service tax, interest and penalties relating to the sale of packaged software on CD/DVD are not maintainable in view of the higher court authority and are set aside accordingly. Cross-references and consequential points 1. The resolution of Issue 1 and Issue 2 is interdependent: the finding that the packaged software sale is a deemed sale (Issue 1) follows from the prohibition on vivisection of a lumpsum composite transaction (Issue 2); the conclusions on both issues directly inform the outcome on Issue 3. 2. The judgment applies the higher court's articulated principles (possession/control test, substance over form, prohibition on artificial segregation) as binding precedent and not as distinguishable or overruled law, thereby making those principles determinative for appeals raising the same question.