TaxTMI 
TaxTMI 
2020 (1) TMI 430
X X X X Extracts X X X X
X X X X Extracts X X X X
.... only to eliminate the existing viruses from the computer system, but also to ensure "virus free" environment for functioning of the computer system. Thus, all anti-virus developers have to keep continuous surveillance on Viruses, Malware and Spam, and this is achieved by providing continuous updates to virus definitions. This enables "Anti-Virus Software" to maintain the computer system "virus free". 3. According to the Appellant, during the disputed period from 1 March, 2011 to 31 March, 2014, the Antivirus Software was developed by M/s Softtalk Technologies Ltd., M/s Jupiter International Ltd. and M/s IP Softcom (India) Pvt. Ltd. for the Appellant in a ready to sell condition mentioning unique Key number (license key) and MRP. Being a Canned Software [Canned Software means that it is not specifically created for a particular customer], it was in the nature of 'goods' and was subject to Sales Tax/ VAT and so no service tax was to be paid. This Antivirus Software was, therefore, sold by the aforesaid manufactures to the Appellant on payment of VAT. They were thereafter transferred by the Appellant to various Sales Offices of the Appellants from where the ultimate sale took plac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of clause (zzzze) of sub-section (105) of Section 65 of the Finance Act, 1994 and w.e.f. 01.07.2012, on the services covered under the category of 'information technology software service' under Section 66E(d) of the Finance Act, 1994 for providing Quick Heal brand Antivirus software license key/code supplied along with CD/DVD replicated with Quick Heal brand Antivirus software through dealers/distributors to the end-customers in India. 17. Investigations conducted against M/s QHTPL has revealed that during the period 01.03.2011 to 31.03.2014, M/s QHTPL had supplied Quick Heal brand Antivirus software key/codes in retail packs to the end-user through dealers/distributors without discharging their Service Tax liability on such transactions. Packaged anti-virus software consists of license code which assists the end-user for receiving future updates of antivirus software electronically direct from the antivirus software owner for a certain period depending on the license to use the antivirus software. The end-user is provided with the temporary (non-exclusive) right to use the antivirus software as per conditions of end-user license agreement entered with M/s QHTPL and the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ellant had been paying sales tax/VAT on sale of such Quick Heal Antivirus Software. It was also pointed out that generation of license key/ code was neither a manufacturing activity nor service and that license key was neither software nor could it function or work as Antivirus Software. The updates/ upgrades were free and the activity was without consideration and, therefore, not a service. The Appellant also contended that the extended period of limitation under the proviso to section 73 of the Finance Act, 1994 [The Act] could not have been invoked. 6. The Adjudicating Authority, however, did not accept the contentions of the Appellant and confirmed the demand of service tax with interest and penalty. The Adjudicating Authority noticed that the whole transaction could be divided in two stages, namely (a) up to the replication of the Master CD by the replicators under the terms of agreement; and (b) Supply of Antivirus Software in CD to End-Users under a separate End User Licensing Agreement. It also noticed that the second part (i.e. b) consisted of two parts, namely (i) Supply of Antivirus Software in CD and (ii) Providing electronic updates to the software originally provid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or a specified period only. Therefore, it appears that the receiver of the software does not enjoy the same rights in the arrangement as a buyer of goods in general. As a result, the transaction is in the nature of a service and chargeable to service tax. ii) Subsequent supply as electronic updates It is not disputed that electronic updates are provided to the end customers under the license. Such electronic supply is an activity for a consideration. As such, it is clearly in the nature of supply of services. Hence, it is taxable. 9. The Adjudicating Authority also held that the extended period of limitation was correctly invoked and that the Appellant was also required to pay penalty and interest amount. 10. Shri M H Patil, learned Counsel for the Appellant submitted that:- i. "Quick Heal" Antivirus Software supplied in CD is not covered under "information technology software" service either prior to 1 July, 2012 under section 65(53a) of the Act or after 1 July, 2012 under section 65B (28) of the Act; ii. Even otherwise, Quick Heal Antivirus Software supplied in CD form is a Canned Software which would be "goods" and, therefore, not leviab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....software "Quick Heal". Antivirus Software Development is a continuous process, which goes for 24/7 a week. This involves R&D; rigorous testing and surveillance. We have a "Development Centre" in Pune where we develop our Software. After developing the software we have to continuously provide updates for the same. These updates contain solution for the new viruses. All these updates/ upgrades are provided as new version. These versions are given numbers for proper Identification. The developed software is offered to Customers in CD media, which cannot run or operate without a key password; These CDs are required in big quantity, a third party on job work basis; at his premises does this mass replication, currently from Moser Bear. The job worker dispatches these replicated CDs to all our branches as per the quantity intimated to them. To register our Software from this CD a special Key number is required. These unique Key Numbers are generated only in our Central Excise Registered premises right from beginning i.e. 1st March 2006; which creates verve in software and allows downloading of latest updates from website enabling the software to function as effective ant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ology software and right to use software components for the creation of and inclusion in other information technology software products, (vi) providing the right to use information technology software supplied electronically;" After 1 July 2012 18. 'Declared service' has been defined under section 65B (22) of the Act to mean any activity carried out by any person for another person for consideration and declared as such under section 66E. In terms of section 66E (d) of the Act, the following shall constitute declared service. "66E (d) development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software;" 19. Section 65B (28) of the Act defines 'information technology software' as follows:- " 65B(28) "information technology software" means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment;" 20. Section 65B (44) of the Act def....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vity or requirement of giving any commands to the software to perform the function of detecting and removing virus from the computer system. The Appellant further contends that the software developed by it is quite distinct from software like ERP, EXCEL, MS Word, where there is a constant to and fro interaction between the user and the computer system containing the said software. These softwares perform their function only after receipt of input from the user, which is not the case in the Antivirus Software developed by the Appellant. 26. The Appellant has also referred to the meaning of "interactive software" and the same is as follows:- A. "In computer science: 'Interactive software' refers to software which accepts and responds to input from people - for example, data or commands. Interactive software includes most popular programs, such as word processors or spreadsheet applications. By comparison, non-interactive programs operate without human contact: examples of these include compilers and batch processing applications. If the response is complex enough it is said that the system is conducting social interaction and some systems try to achieve this thro....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Appellant is complete in itself to prevent virus in the computer system. Once the computer system is booted, the Antivirus Software begins the function of detecting the virus, which continues till the time the computer system remains booted. The computer system only displays a message that viruses existed and that they have been detected and removed. No interactivity takes place nor there is any requirement of giving any command to the software to perform its function of detecting and removing virus from the computer system. It is also seen from the meaning assigned to 'interactive' that a program should involve the user in the exchange of information. There has to be action and communication between the two. A user should communicate with the computer facility and receive rapid responses, which can be used to prepare the next inputs. In contract, in other softwares like ERP, EXCEL, MS Word, there is continuos interaction between the user and the computer system and these softwares perform only after receipt of input from the user. 30. Such being the position, no service tax was leviable under section 65(105)(zzzze) of the Act prior to 1 July, 2012. Even after 1 July, 2012 the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes." (emphasis supplied) 34. Justice S.B. Sinha in the concurring judgment also observed as follows:- " 71. A software may be intellectual property but such personal intellectual property contained in a medium is bought and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction between tangible property and intangible property. A 'goods' may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customized satisfies these attributes, the same would be goods. Unlike the American Courts, Supreme Court of India have also not gone into the question of severability. 75. Recently, in Commnr. Of Central Excise, Pondicherry v. M/s. Acer India Ltd. [2004 (8) SCALE 169] this Court has held that operational software loaded in the hard disk does not lose its character as tangible goods. 76. If a canned software otherwise is 'goods', the Court cannot say it is not because it is an intellectual property which would tantamount to rewriting the judgment. In Madan Lal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Ltd. [(1962) Suppl. 3 SCR 973], this Court held that the court cannot rewrite the provisions of law which clearly is the function of the Legislature which interprets them. 77. I respectful....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of "goods" within the meanin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... license to use such software would have to be seen to come to the conclusion as to whether the license to use packaged software involves transfer of 'right to use' such software in the sense the phrase has been used in sub-clause (d) of article 366(29A) of the Constitution. (See point no 5.6.1). • In case a license to use pre-packaged software imposes restrictions on the usage of such licenses, which interfere with the free enjoyment of the software, then such license would not result in transfer of right to use the software within the meaning of Clause 29(A) of Article 366 of the Constitution. Every condition imposed in this regard will not make it liable to service tax. The condition should be such as restraints the right to free enjoyment on the same lines as a person who has otherwise purchased goods is able to have. Any restriction of this kind on transfer of software so licensed would tantamount to such a restraint. • Whether the license to use software is in the paper form or in electronic form makes no material difference to the transaction. • However, the manner in which software is transferred makes material difference to the nature....
X X X X Extracts X X X X
X X X X Extracts X X X X
....adesh [2012-TIOL-49-HC-AP-CT] and the Guwahati High Court in Dipak Nath v/s Oil and Natural Gas Corporation Ltd. and others [2009 SSC ONLINE GUA 420]. 40. The Andhra Pradesh High Court in M/s G.S. Lambha indicated the settled essential request of a transaction for transfer of the right to use the goods. It observed that it is not on the delivery of the goods used but on the transfer of the 'right to use goods' and that the determination as to whether there has been transfer of the 'right to use goods' is to be answered on a consideration of the terms of the contract between the parties. The observations are as follows:- "30. From the judicial decisions, the settled essential requirement of a transaction for transfer of the right to use goods are: (i) it is not the transfer of the property in goods, but it is the right to use property in goods; (ii) Article 366(29-A)(d) read with the latter part of the Clause (29-A) which uses the words, "and such transfer, delivery or supply ..." would show that the tax is not on the delivery of the goods used, but on the transfer of the right to use goods regardless of when or whether the goods are delivered for use subject to the cond....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny period beyond the normally contemplated 10 hours. The deployment of the crane in oil field operations as well as other hazardous situations is at the sole discretion of the ONGC. Though the cranes are operated by the crew provided by the contract such crew while operating a crane is under the effective control of the ONGC and its authorities. Therefore, under the contract though the normal operational time is 10 hours a day, the ONGC is entitled to deploy the cranes, if required, to the entire period of 24 hours to perform duties the kind of which and the locations whereof is to be decided by the ONGC. The mere fact that after the operation of the crane is over on any given day the crane may come back to the owner/operator will hardly be material to decide as to who has dominion over the crane inasmuch as the crane can be recalled for duty by the ONGC at any time. Under the contract the crane is to be operated for 26 days in a month and the remaining four days are to be treated as maintenance off days. Though the crane is not operational on the maintenance off days, yet, 50% of the operational charges is paid by the ONGC for the maintenance off days and the terms of the contract....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sly granted, and retains the title and ownership of the software, including all subsequent copies in any media, This software and the accompanying written materials are the property of Quick Heal and are copyrighted. 1. DEFINITIONS -------------- B. "License period" means the period as more particularly described in this Agreement. ---------- G. Updates" means collections of any or all among virus definition files including detections and solutions for new viruses along with the corrections, improvements or modifications to the software. ------------ 2. DO's & DON'TS You can: A. make copy of the software for backup purpose or for the purpose of sharing through various means (and such backup copy must be estroyed when you lose the right to use the Software or is terminated for any other reason according to the legislation in force in the country of your principal residence or in the country where You are using the software) and replace lost, destroyed, or becomes unusable. B. use one copy of the software on a single computer. In case of multiuser pack, use of the software only on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....action by Quick Heal and/ Or its agents against you including but not limited to right to block the key file/ License key/ product key and without any refund to You and without any prior intimation/ notice to you in this regard. E. If you have acquired the specific language localization of the softwar/ RDM service, you will not be able to activate the software by applying the activation code of other language localization. F. Quick Heal does not guarantee the protection from the threats more particularly described in the user manual after the License to use the software/RDM service is terminated for any reason. 6. FEATURES OF SOFTWARE A. During the license period of the software/RDM services, You have the right to use features of software/RDM service. B. During the license Period of the Software/RDM, You have the right to receive free updates of the software and Quick Heal RDM service via Internet as and when Quick Heal publishes the updated virus- database and free version upgrade as and when Quick Heal releases new version upgrade. You agree, understand and accept that You will be required to regularly download the updates published by....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... will be sent to the Internet Centre includes the Quick Heal protection health status like, which monitoring service is in what state in the system. The information collected does not contain any files or personal date. The information will be used to provide quick and better technical support for legitimate customers. All the registered user/subscribers will get the updates free of cost from the date of license activation until the expiry date of the license. 13. Intellectual Property The software, source code, activation code, license keys, documentation, systems, ideas, information, content, design, and other matters related to the software, Quick Heal RDM services, trademarks are the sole proprietary and intellectual property rights of Quick Heal protected under the Intellectual Property Laws and belongs to Quick Heal. Nothing contained in this Agreement grant You any rights, title, interest to intellectual property, including without limitation any error corrections, enhancements, updates, or modifications to the software and Quick Heal RDM service whether made by Quick Heal or any third party. You understand and acknowledge that you are provided wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....trol over the machinery, despite the fact that he was using it, since he could not make such use of it as he liked. He could not use the machinery for any project other than that of the transferor's, nor could he move it out during the period of the project. We do not see how we can draw a parallel from that case to the one at hand. The effective control over the seeds, and, therefore that portion of the technology that is embedded in the seeds, is entirely with the sub-licensee. That sub-licensee is not bound to use the seeds (and the embedded technology) in accordance with Monsanto India's wishes.----------" 47. The Court further in paragraph 47 of the judgment examined the nature of intangible goods and it is reproduced below:- "47. We pause here momentarily to consider the nature of these intangible goods. We believe this is necessary, because this is perhaps a case where the law is yet evolving to keep abreast of technology. If what Mr. Venkatraman suggests is correct, then every sale of software as we currently know it is never a sale but only a service. In his formulation, the 'medium' (CD, pen drive, etc) is irrelevant. Surely this cannot be corr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y rights, but of the right to use an identified and identifiable version of that software." (emphasis supplied) 48. Learned Authorized Representative of the Department has placed reliance on the judgment of the Supreme Court in Bharat Sanchar Nigam Ltd. V/s Union of India [2006 (2) STR 161 (S.C.)]. The issue was whether VAT was payable on SIM cards used for providing telecommunication services and about the nature of the transaction by which mobile phone connections were enjoyed. The Supreme Court held that the issue would ultimately depend upon the intention of the parties. If the parties intended that the SIM card would be a separate object of sale, it would be open to the Sales Tax Authority to levy sales tax thereon, but if the sale of the same was merely incidental to a service being provided and it only facilitated the identification of subscribers, it would not be assessable to Sales Tax. This decision, therefore, does not help the Revenue so far as the controversy in this Appeal is concerned. 49. The decision of the Madras High Court in Infotech Software Dealers Association v/s Union of India [2010 (20) STR 289 (Madras)], has also been relied upon by the learned Au....