AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (8) TMI 283
X X X X Extracts X X X X
X X X X Extracts X X X X
....s common judgment. Civil Appeal (Diary No. 24399 of 2020) 2. Delay condoned. 3. This appeal under Section 35L(b) of the Central Excise Act, 1944 (for short, 'the Act 1944'), as made applicable to the service tax by Section 83 of Chapter V of the Finance Act, 1994 (for short, 'the Act 1994'), is at the instance of the revenue and is directed against the order No. 50022/2020 dated 09.01.2020 passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (for short, 'the Tribunal') in the Service Tax Appeal No. 51175 of 2016 by which the Tribunal allowed the appeal filed by the respondent herein (assessee) thereby set aside the Order in Original dated 28.01.2016 passed by the Additional Director General (Adjudication) DGCEI, Delhi. FACTUAL MATRIX 4. For the sake of convenience, the appellant herein shall be referred to as the "revenue" and the respondent herein shall be referred to as the "assessee". 5. The assessee is registered with the Service Tax Commissioner, PuneIII for providing taxable services, inter alia, under the category of "Information Technology Software Service". The assessee is engaged in the development of Quick Heal brand Antivirus Sof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion with interest and penalty. 9. The show cause notice referred to above was adjudicated by the Additional Director General (Adjudication), DGCEI, Delhi, who, in turn, confirmed the demand of service tax amount to Rs. 56,07,05,595/( Rupees Fifty Six Crore Seven Lakh Five Thousand Five Hundred Ninety Five Only) alleged to have been not paid by the assessee on the service of Information Technology Software Service vide its Order in Original dated 28.01.2016. 10. The assessee, being aggrieved with the order passed by the Additional Director General (Adjudication), DGCEI, preferred the Service Tax Appeal No. 51175 of 2016 before the Tribunal. 11. The Tribunal allowed the appeal filed by the assessee herein essentially on the following three grounds:5 i. The antivirus software did not have an element of interactivity. ii. As per the decision of the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh, (2005) 1 SCC 308, ("TCS"), the prepackaged/ canned software would be treated as goods. Once the software is put on a medium like a CD and then sold, such software would be treated as goods. iii. The Central Board of Excise ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing a service. Since the question did not pertain to the canned software being a "service", this Court did not make any comment on whether the canned software could be a "service". He would submit that in such circumstances, the Tribunal committed an error in relying on the ratio of the decision of this Court in the case of TATA Consultancy Services (supra). 15. The learned counsel would further submit that the entire transaction of selling or trading of the software can be divided into two stages: (a) Up to the replication of the Master CD by the replicators under the terms of agreement. This is covered by this Court's judgment in the case of TATA Consultancy Services (supra). There rises no dispute of paying duty at this stage, since, the recording of the software on their CDs and making them marketable makes it 'Goods' which is chargeable to the Central Excise Duty; (b) The supply to the endusers under a separate End User Licensing Agreement, consists of 2 parts: (i) Supply of Antivirus software in the CD. (ii) Providing electronic updates to the software originally provided. 16. He would submit that the present dispute is one relating t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntivirus software was interactive. Mr. Datar would submit that the Tribunal rightly held that a programme could be said to be interactive only when it involves the user to have exchange of information or when there is action and communication between the user and the software. The learned senior counsel gave an example by pointing that the MS Word, Excel, etc. are interactive softwares which can be run only after the receipt of the instructions from the user. On the other hand, there is no interactivity in an antivirus software as there is no requirement of giving any command for detecting and removing the virus. In other words, no manual input is required to operate an antivirus software as it acts automatically upon detecting any virus. He would submit that the antivirus software which is installed in a computer system cannot be treated as an interactive software. 21. The learned senior counsel thereafter took this Court through the decision rendered by this Court in the case of TATA Consultancy Services (supra). The learned senior counsel offered the following comments on the impact of the decision in the case of TATA Consultancy Services (supra) : "4.1 The question ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ramming, customization, adaptation, upgradation, enhancement, implementation of information technology software" 4.8 Further, section 65B (28) defined "information technology software" which was almost identical to the earlier definition under section 65 (63a)." 22. The learned senior counsel thereafter made his submissions on the CBEC Circular/Education Guide. Following comments have been offered as regards the said Circular in the written note furnished to this Court:14 "5.1 After the negative regime came into force on 1.7.2012, reproduced above, the CBEC Education Guide issued the following guidelines: (i) Prepackaged or canned software would not be covered by the entry relating to information technology software. This is because such software as "goods" as held by the Supreme Court in the TCS case. The guidelines specifically reproduced the text of the Supreme Court ruling. (ii)It then concluded that if prepackaged or canned software, were sold, then the transaction would be in the nature of a sale of goods and no service tax would be levied." 23. The learned senior counsel thereafter submitted as regards the excise duty/tariff entry an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e mutually exclusive. He would submit that : " 8.1 It is well settled that sales tax and VAT is covered by Entry 54 of ListII in the VII Schedule of the Constitution. Only State Legislatures can levy VAT on the sale of goods. On the other hand, service tax is leviable under the Finance Act, 1994 (as amended) on the provision of service and such levy is permissible under Entry 97 of ListI. 8.2 It is also well settled that there could be no overlapping of taxes as the taxing powers have been carefully split between Union and the State. Accordingly, the taxation of goods has been allotted to the State Legislatures while taxing of service is retained by the Centre. 8.3 In Imagic Creative Pvt. Ltd. v. CCT, (2008) 9 STR 337 (SC) : (2008) 2 SCC 614, this Court held that payment of VAT and service tax are mutually exclusive. After the TCS judgment, the controversy was put to rest in intellectual property where software or music or film which has been put on a medium such as a CD will be treated as goods and consequently can subject only to sales tax/VAT." 26. In such circumstances referred to above, the learned senior counsel appearing on behalf of the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er 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 continues 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) defi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ware which does not involve the transfer of "right to use" would neither be a transfer of title in goods nor a deemed sale of goods. Such an activity would fall in the ambit of definition of "service". Thus, if a prepackaged or Canned Software is not sold but is transferred under a license to use such software, the terms and conditions of the license to use such software would have to be seen to arrive at a conclusion whether the license to use the packaged software involves a transfer of "right to use" such software in the sense the phrase has been used in subclause (d) of article 366(29A) of the Constitution. The guidelines also provide that in case a license to use prepackaged software imposes restrictions on the usage of such licenses, which restriction interfere with the free enjoyment of the software, then such a 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. However, every condition imposed would not make it leviable to service tax. The condition should be such so as to restrain the right to free enjoyment on the same lines as a person who has otherwise purchased goods is abl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 destroyed 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 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lying 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 virusdatabase 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 He....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 with a license to use this software and Quick Heal RDM services subject to the terms and conditions of this Agreement." 32. After due consideration of the terms of agreement, the Tribunal proceeded to observe the following in para 45 of the impugned order : " 45. The agreement provides that the licensee shall have right to use software subject to terms and the conditions mentione....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he meaning of clause (29A) of Article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force. Explanation 1.For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,- (A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or (B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or (C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. Explanation 2.For the purposes of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....very or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;" 38. Thus, the above clause specifies the cases which the tax in relation to sale and purchase of goods will include and also outlines its applicability even in the case of deemed sale. 39. Section 66E deals with the concept of declared services. This Section reads as follows: "66E. The following shall constitute declared services, namely:-- (a) renting of immovable property; (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completioncertificate by the competent authority. Explanation.For the purposes of this clause, ( I) the expression "competent authority" means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of nonrequirement of such certificate from such authority, fro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransferring right of possession and effective control of such machinery, equipment and appliances." POSITION OF LAW 42. TATA Consultancy Services (supra) was a case in which the specific issue of computer software packages was considered as is the concern in the present case also. There was, however, a distinction drawn insofar as the 'uncanned software' and 'canned software' alternatively termed as 'unbranded' and 'branded' is concerned. The distinction is in that a 'canned software' contains programmes which can be used as such by any person purchasing it, while an 'uncanned software' is one prepared for a particular purchaser's requirements by tweaking the original software to adapt to the specific requirements of a particular entity. While a 'canned software' could be sold over the shelf, an 'uncanned software' is programmed to specific and particular needs and requirements. This Court held that in India the test to determine whether a property is "goods", for the purpose of sales tax, is not confined to whether the goods are tangible or intangible or incorporeal. The correct test would be to determine wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "... In our view a correct statement would be that all intellectual properties may not be 'goods' and therefore branded software with which we are concerned here cannot be said to fall outside the purview of 'goods' merely because it is intellectual property; so far as 'unbranded software' is concerned, it is undoubtedly intellectual property but may perhaps be outside the ambit of 'goods'." (emphasis supplied) 29. Mr Sorabjee submitted that the High Court correctly held that unbranded software was "undoubtedly intellectual property". Mr Sorabjee submitted that the High Court fell in error in making a distinction between branded and unbranded software and erred in holding that branded software was "goods". We are in agreement with Mr Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted, consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even unbranded software, when it is market....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y in the present statutory scheme as we have already observed that the word "goods" as defined under the Customs Act has an inclusive definition taking within its ambit any moveable property. The list of goods as prescribed by the law are different items mentioned in various chapters under the Customs Tariff Act, 1997 or 1999. Some of these items are clearly items containing intellectual property like designs, plans, etc". (underlining by us for emphasis) 44. We may also refer to and rely upon a decision of this Court in the case of 20th Century Finance Corpn. Ltd. v. State of Maharashtra, reported in (2000) 6 SCC 12. In this decision, this Court considered the incorporation of clause (d) of Clause (29A) of Article 366 of the Constitution referred to above. It is apt to quote the following relevant portion from the judgment : " 26... The various subclauses of clause (29A) of Article 366 permit the imposition of tax thus: subclause (a) on transfer of property in goods; subclause (b) on transfer of property in goods; subclause (c) on delivery of goods; subclause (d) on transfer of the right to use goods; subclause (e) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7. Article 366(29A)(d ) further shows that levy of tax is not on use of goods but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer of right. In other words, right to use arises only on the transfer of such a right and unless there is transfer of right, the right to use does not arise. Therefore, it is the transfer which is sine qua non for the right to use any goods. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee. Thus, the situs of taxable event of such a tax would be the transfer which legally transfers the right to use goods. In other words, if the goods are available irrespective of the fact where the goods are located and a written contract is entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of right to use goods. But in case of an oral or implied transfer of the right to use goods it may be effected by the delivery of the goods." (Emphasis Supplied) 46. In BSNL (supra) this Court took....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others." 48. In the case of BSNL (supra), His Lordship noticed that none of the aforesaid attributes were present in the relationship between the telecom service provider and a consumer of such services. 49. His Lordship thereafter in para 117 of the judgment referred to the Sale of Goods Act, 1930. We quote para 117 as under: "117. Sale of Goods Act, comprehends two elements, one is a sale and the other is delivery of goods. 20th Century Finance Corporation Limited vs. State of Maharashtra, 2000 (6) SCC 12 at p. 44, para 35 ruled that "35. (c) where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use. (d) In cases where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e agreement or the contract between the parties would determine the nature of the contract. Such agreement has to be read as a whole to determine the nature of the transaction. If the consensus ad idem as to the identity of the good is shown the transaction is exigible to tax. (i) The locus of the deemed sale, by transfer of the right to use goods, is the place where the relevant right to use the goods is transferred. The place where the goods are situated or where the goods are delivered or used is not relevant. 52. From the judicial decisions, the settled essential requirement of a transaction for the transfer of the right to use the goods are : (i) it is not the transfer of the property in goods, but it is the right to use the property in goods; (ii) Article 366(29A)(d) read with the latter part of the clause (29A) which uses the words, "and such transfer, delivery or supply"... would indicate 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 tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lity for any deletion or modification authorised by the user in any case, and the indemnification clause would become applicable. 6. Disclaiming Warranties Certain features of the software may require additional payment. The developer disclaims any claim for reimbursement of expenses arising out of endusers' usage of such features. 7. Governing Law The Endusers are obliged to comply with all laws, regulations of India and any foreign law, including privacy, obscenity, confidentiality, copyright laws, while using the software. 8. Data Collection On updating every licensed copy, the developer would collect "the current product status information", which include the state of monitoring service in the system. This information is used for improving the developer's technical support towards its customers. No files or personal data is collected. 9. Intellectual Property Rights of the Developer The Endusers do not have any right, title, or interest to the intellectual property, including any error corrections, enhancements, updates, or modifications to the software, whether made by the developer or third party. 54. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wo. Once a lumpsum has been charged for the sale of CD (as in the case on hand) and sale tax has been paid thereon, the revenue thereafter cannot levy service tax on the entire sale consideration once again on the ground that the updates are being provided. We are of the view that the artificial segregation of the transaction, as in the case on hand, into two parts is not tenable in law. 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. 56. In view of the aforesaid, we have reached to the conclusion that the impugned order of the Tribunal suffers from no jurisdictional or any other legal infirmity warranting any interference at our end in the present appeal. 57. In the result, the appeal fails and it is hereby dismissed. 58. There shall be no order as to costs. 59. Pending application(s), if any, also stands disposed of. CIVIL APPEALS ARISING OUT OF S.L.P. (C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as goods cannot be taken away and that it fell within the ambit of "deemed sales". The said authority further imposed penalty and levied interest as well. 65. The appellant filed Writ Petition No. 25923 of 2018 before the Madras High Court and a learned single Judge admitted the writ petition and also granted interim stay noting that the VAT had already been paid on the goods. 66. While the writ petition was pending, the Tribunal, Chennai Branch followed the decision of the Tribunal, Delhi Bench in the case of Quick Heal Technologies Ltd. (supra) and allowed the appeals filed by the appellant in their earlier cases. It is significant to note that against this order of the Tribunal, Chennai Bench no further appeal has been filed by the Department and thus, the view taken by the Tribunal became final in so far as the appellant is concerned. 67. When the abovementioned Writ Petition No. 25923 of 2018 came up for final disposal, the learned single Judge vide order dated 29.10.2020 dismissed the Writ Petition, inter alia, on the ground that the High Court was not bound by the decision of the Tribunal, Delhi Bench in the case of Quick Heal Technologies Ltd. and the appellant's o....