TaxTMI 
TaxTMI 
TaxTMI 
2020 (1) TMI 430
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....s 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 place on payment of applicable VAT in the re....
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....n 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 same cannot be treated as deemed sale under Article 366....
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....oftware. 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 provided. The Adjudicating Authority observed that the first stage of the transacti....
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....s 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 leviable to Service Tax; iii. Service does not include any activity where "sale of goods" or "deemed sale" under article 366 (29A) of the Constitution takes place and in support of this ....
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....eloping 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 antivirus software. The Antivirus Software without this Key Number the software on our CD is just a free demonstration as it does not receive any of the updates required to run the software, i.e. it cannot function as an effective anti-virus software and hen....
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....ct 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 defines 'service' and the relevant portion is reproduced below:- "65B (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include- (a) an activity which constitutes merely,- (i) a transfer of title in goods or immovable property, by way of sale, gift or in any ....
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....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 through the implementation of social interfaces." B. McGraw-Hill Dictionary of Scientific and Technical Terms Fifth Edition interactive information system An information system in which the user communicates with the computing facility through a terminal and receives rapid responses which can be used to prepare the next input. C. Chambers Science and Technology Dictionary Interactive computin....
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....ecting 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 definition of 'information technology software' under section 65B(28) remained the same and so also service tax was not leviable. 31. The matter can be examined from another angle. Section 65B (51) defines a 'taxable service' to mean any service on which service tax is leviable under section 66B. Section 66B provides that there shall be levied service tax on the value of all services, other than those services specified in the negative list, provided or agreed to be provided ....
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.... 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 sold. It is an article of value. It is sold in various forms like - floppies, disks, CD-ROMs, punch cards, magnetic tapes, etc. Each one of the mediums in which the intellectual property is contained is a marketable commodity. They are visible to senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regard leviability of the tax under a fiscal statute, it may not make a difference. A programme containing instruction....
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....rability. 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 respectfully agree with the opinion of Variava, J. that the appellant herein is liable to pay sales tax on the softwares marketted by it and the appeals should be dismissed." (emphasis supplied) 35. It is clear from the aforesaid decision of the Supreme Court in Tata Consultancy Services that intellectual property, once it is put on the media and marketed could become 'goods' and that a software may be intellectual property and such intellectual property contained in a medium is purchased and sold in various forms including CDs. 36. Section 65....
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.... 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." Therefore, in case a pre-packaged or canned software or shrink wrapped software is sold then the transaction would be in the nature of sale of goods and no service tax would be leviable. * * The judgement of the Supreme Court in Tata Consultancy Service case ....
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.... 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 of transaction. If the software is put on the media like computer disks or even embedded on a computer before the sale the same would be treated as goods. If software or any programme contained is delivered online or is down loaded on the internet the same would not be treated as goods as software as the judgment of the Supreme Court in Tata Consultancy Service case is applicable only in case the pre-packaged software is put on a media before sale. * Delivery of content online would also not amount to a transaction in goods as the content has not been put on a media before sale. Delivery of content online for consideration would, therefore, amount to provision of service." 38. A perusal of the a....
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....ransfer 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 condition that the goods should be in existence for use; (iii) in the transaction for the transfer of the right to use goods, delivery of goods is not a condition precedent, but the delivery of goods may be one of the elements of the transaction; (iv) the effective or general control does not mean always physical control and, even if the manner, method, modalities and the time of the use of goods is decided by the lessee or the customer, it would be under the effective or general control over the goods; and (v) the approvals, concessions, licences and permits in relation to goods would also be available to the user of goods, even if such licences or permits are in the name of owner (transferor) of the goods, and (vi) during ....
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....dly 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 make it clear that even on the off days the crane can be called for operation by the ONGC at its sole discretion." 42. Thus, in spite of the fact that certain restrictions may have been placed in the contract, the Courts have held that there was a transfer of the 'right to use the goods' covered by the contract agreement. 43. It would now be pertinent to analyze the terms of the agreement to find out whether there was a transfer of the 'right to use goods'. 44. The relevant provisions of the "Quick Heal" Internet Security End-User License Agreement are as follows:- " 16. BY USING THIS SOFTWARE OR BY ACCEPTING OUR SOFTWARE USAGE AGREEMENT POLICY OR ATTEMPTING TO LOAD THE SOFTWARE IN ANY WAY, (SUCH ACTION WILL CONSTITUTE A SYMB....
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....ose 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 the said number of systems as mentioned on the packaging. C. install the software on a network, provided you have a licensed copy of the software for each computer that can access the software over that network. D. avail Quick Heal RDM service to manage your device (a maximum of 10 devices in one account.) You cannot: A. emulate, or adapt any portion of the software. B. sublicense, rent or lease any portion of the software. C. try making an attempt to reveal/discover the source code of the software. D. debug, decompile, disassemble, modify, translate, reverse engineer the software. E. create derivative works based on the software or any portion thereof with sole exception of a non-waivable right granted to You by any applicable legislation. F. remove or alter any copyright notices or other propriet....
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....ated 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 Quick Heal. Any and all updates/ upgrades you receive from Quick Heal shall be governed by this Agreement, or as amended from time to time by Quick Heal. C. You agree, accept and acknowledge: I. that You are solely responsible for the configuration of the software/ RDM services settings and the result, actions, inactions initiated due to the same and Quick Heal assumes no liability/ responsibility in any case and the Clause of Indemnification shall be applicable. II. that Quick Heal assumes no liability/responsibility for any date deletion, including but not limited to any deletion/ loss of personal, and/or confidential date; and/or uninstallation of third-party apps; and/or change in settings; specifically authorized by You or occurs due to the actions, inactions (whether intentional or not) by You or any third party whom You have authorized to use, handle you Device due to features or software/RDM services. III. that to avail/use certain features of the software/RDM serv....
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.... and Quick Heal RDM service whether made by Quick Heal or any third party. You understand and acknowledge that you are provided with a license to use this software and Quick Heal RDM services subject to the terms and conditions of this Agreement. " 45. The agreement provides that the licensee shall have right to use software subject to terms and the conditions mentioned in the agreement. The licensee is entitled to use the software/RDM services from the date of license activation until the expiry date of the license. The licensee is also entitled for the updates and technical support. The conditions set out in the agreement do not interfere with the free enjoyment of the software by the licensee. Merely because "Quick Heal" retains title and ownership of the software does not mean that it interferes with the right of the licensee to use the software. 46. In this connection, it would be useful to refer to a decision of the Bombay High Court in Mahyco Monsanto Biotech (India) Pvt. Ltd. v/s Union of India [2016 (44) STR 161 (Bombay)]. In the Writ Petition filed by the Monsanto India, the petitioner supplied a certain type of hybrid cotton seed to third parties which generated a larg....
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.... service. In his formulation, the 'medium' (CD, pen drive, etc) is irrelevant. Surely this cannot be correct. Software may be downloaded too, without any 'physical medium' intervening - the medium is as intangible as the goods. It is impossible, we think, and does not stand to reason to suggest that unless, say, Microsoft or Adobe wholly cede all control over their software products there is no sale, and when they allow a user to download and use their software they are only providing a service. Indeed, this is demonstrably incorrect. Microsoft and Adobe both have alternative distributions models. One may 'purchase' a license to Microsoft Office or Adobe Photoshop. This may be a one-off, standalone product, delivered either by download or on physical media. That is for the user to keep and do with it what he wishes (except, of course, attempting to decompile it). He does not have to use it all; he can destroy the media and all personal copies of it. The same software is also available nowadays for a subscription -- for an annual or monthly fee, the software can be downloaded and used; if the subscription ends, at the very least updates end and very possibly ....
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....ers Association v/s Union of India [2010 (20) STR 289 (Madras)], has also been relied upon by the learned Authorized Representative of the Department. The issue was whether the Parliament had the legislative competence to insert provisions of section 65(105) (zzzze) in the Act in 2019 by virtue of powers under Entry 97 of List II of Schedule VII of the Constitution. The Madras High Court observed as follows:- "32. The above discussion as to the canned/packaged software or customised software is in respect of the transactions that are prevalent among the software re-sellers and their customers and the discussion is not with reference to any specific transaction. The challenge to the amended provision is only on the ground that the software is goods and all transaction would amount to sales. The said challenge is opposed on the ground that though the software is goods, the transaction may not amount to a sale in all cases and it may vary depending upon the End User Licence Agreement. As already pointed out, the Parliament has the legislative competency to bring in enactments to include certain services provided or to be provided in terms of information technology software for use ....