Double taxation on software licence fee rejected where VAT had already been paid on transfer of right to use software.

Licence fee paid for customised software, where VAT had already been discharged treating the transaction as a sale, could not be included again in the taxable value of information technology software services. The agreement and invoice structure showed transfer of the right to use the software, with control and possession passing to the customer; delivery through a CD or other medium did not change the character of the transaction. As VAT and service tax operated in mutually exclusive fields on these facts, the service tax demand on the licence fee was unsustainable. The bona fide sale treatment also removed the basis for penalty, so the demand, interest and penalties failed.

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Issues: Whether the licence fee collected for software, on which VAT was paid treating the transaction as a sale, could again be included in the taxable value of information technology software services and subjected to service tax, and whether the related penalties could be sustained.

Analysis: The agreement and invoice structure showed that the appellant supplied a software solution to meet the customer's business requirements and that the customer received control and possession of the customised software with a right to use it. The fact that the software was delivered through a CD or other medium did not alter the character of the transaction where the licence fee represented consideration for the transfer of the right to use software and had already suffered sales tax. On these facts, the same value could not be taxed again as service value. Since VAT and service tax operate on mutually exclusive fields in such a transaction, the demand on the licence fee was unsustainable. The bona fide treatment of the transaction as sale also negatived the foundation for penalty.

Conclusion: The licence fee could not be subjected again to service tax, and the demand with interest and penalties was not sustainable. The issue is answered in favour of the assessee.

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