2025 (3) TMI 1248 - AT - Service Tax

License fees for customized software solutions constitute sale of goods, not service provision, making service tax demand unsustainable.

CESTAT Chennai held that license fees collected by appellant for customized software solutions constituted sale of goods rather than service provision. ... Levy of service tax - licence fee collected from the appellants’ customers, on which the appellant has paid value added tax treating it as sale, can once again be included in the taxable value of service rendered under the category of Information Technology Software Services or not - HELD THAT:- It can be seen from a perusal of the agreement as a whole that the solution which the appellant provides is a software solution. The solution is to meet the specified business requirements of the client. The solution is to be made available in the customer/client’s system as per the deliverables indicated in the delivery schedule. Such customisation required to integrate with the existing legacy/ERP system, includes all activities such as installation, training and enhancements to the standard product by change of source code. Thus, it is evident from the agreement that the solution that the appellant provides is in the form of the appellant’s product, i.e., the software which it customises as per the client’s requirements, including making changes in the source code as required. It is also clear from the agreement that while the intellectual property rights of all the products of the appellant that is implemented/used for developing and providing the solution to the client belongs to the appellant, nevertheless, the client is put in full control and possession of the appellant’s product, i.e. the customised software, so delivered with its exclusive right to use. The transaction between the appellant and its customer in terms of this agreement has resulted in sale of the appellants’ software along with the right to use such software and the licence fee for the same has therefore been rightly made exigible to sales tax by the appellant and cannot therefore be yet again subjected to levy of service tax. Payment of service tax as well as VAT are mutually exclusive. Reliance placed in the decision of this Tribunal in Quick Heal Technologies v. CST, Delhi [2020 (1) TMI 430 - CESTAT NEW DELHI]. In the said case the facts were that the appellant therein had supplied “Quick Heal” brand Anti- virus Software key/codes to the end users through dealers/distributors without discharging the service tax liability on such transactions. It was further stated that the end user was provided with a temporary/non- exclusive right to use the Anti-virus Software as per the conditions contained in the End User License Agreement (EULA) and would, therefore, not be treated as deemed sale under Article 366(29A) of the Constitution. Thus, on the view that the supply of packed Anti-virus Software to the end user by charging license fee would amount to a provision of service and not sale, the Department had demanded service tax on the appellant. The impugned order in appeal upholding the demand along with applicable interest as well as imposing penalties, cannot sustain and is liable to be set aside. The appellant having displayed its bonafides by not only indicating the levy of sales tax on the invoice but also remitting the same and reflecting it in its sales tax returns, no malafide can be attributed to them. The imposition of penalties is unsustainable on this count too. Conclusion - The appellant's transaction with its customers constituted a sale of goods, and the license fee was rightly subjected to VAT. Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Tribunal was whether the license fee collected by the appellant from its customers, on which it had paid value-added tax (VAT) treating it as a sale, could also be included in the taxable value of services rendered under the category of Information Technology Software Services and subjected to service tax.2. ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents:The legal framework involved the interpretation of the Finance Act concerning the levy of service tax on Information Technology Software Services and the application of VAT on sales transactions. The Tribunal referred to several precedents, including the Supreme Court's decision in Imagic Creative Pvt Ltd v. CCT, which clarified the mutual exclusivity of VAT and service tax. The Tribunal also considered the Supreme Court's judgment in Tata Consultancy Services, which established that software, whether canned or customized, qualifies as 'goods' if it satisfies certain attributes.Court's interpretation and reasoning:The Tribunal interpreted that the transaction between the appellant and its customers, involving the provision of customized software solutions, constituted a sale of goods. The Tribunal reasoned that the license fee represented a one-time fee for the software product, which was delivered in tangible form (CD) and involved a transfer of the right to use the software. The Tribunal emphasized that payment of VAT on the license fee indicated the transaction's nature as a sale, thereby precluding the imposition of service tax on the same transaction.Key evidence and findings:The Tribunal found that the appellant's agreement with its clients involved delivering a software solution tailored to meet specific business requirements. The agreement included provisions for customization, installation, and training, with the intellectual property rights remaining with the appellant. The Tribunal noted that the appellant's methodology involved delivering the software via CD, which provided a permanent license to the customer.Application of law to facts:The Tribunal applied the legal principles established in previous judgments to the facts of the case, concluding that the appellant's transaction constituted a sale of goods. The Tribunal highlighted that the software, once delivered and customized, was in the customer's control and possession, satisfying the attributes of 'goods' as defined by the Supreme Court.Treatment of competing arguments:The Tribunal addressed the respondent's argument that the transaction should be subject to service tax by emphasizing the mutually exclusive nature of VAT and service tax. The Tribunal relied on legal precedents to support its view that the transaction was a sale of goods, not a provision of services.Conclusions:The Tribunal concluded that the license fee collected by the appellant was rightly subjected to VAT and could not be included in the taxable value for service tax purposes. The Tribunal found the imposition of penalties unsustainable, given the appellant's bona fide belief and compliance with VAT obligations.3. SIGNIFICANT HOLDINGSThe Tribunal held that the impugned order in appeal, which upheld the demand for service tax along with applicable interest and imposed penalties, could not be sustained and was liable to be set aside. The Tribunal emphasized the principle that payment of service tax and VAT are mutually exclusive, citing the Supreme Court's judgment in Imagic Creative Pvt Ltd v. CCT.Verbatim quotes of crucial legal reasoning:'Payment of service tax as well as VAT are mutually exclusive. The Judgement in Imagic Creative Pvt Ltd v. CCT, 2008 (9) STR 337 (SC) refers.'Core principles established:The Tribunal reinforced the principle that software, whether customized or non-customized, qualifies as 'goods' if it satisfies certain attributes, including utility, capability of being bought and sold, and capability of being transmitted, transferred, delivered, stored, and possessed.Final determinations on each issue:The Tribunal determined that the appellant's transaction with its customers constituted a sale of goods, and the license fee was rightly subjected to VAT. The Tribunal set aside the impugned order in appeal, allowing the appeal with consequential relief as per law.