TaxTMI 
TaxTMI 
2024 (3) TMI 691
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.... provisions of section 75 of the act on the service tax confirmed at(ii) above. iv. I impose penalty of Rs.200/-(Rupees two hundred only) per day or @2% of the service tax, per month, whichever is higher, starting with the first day after the due date till the actual payment of the outstanding amount of service tax under section 76 of the Finance Act,1994. However, this penalty will be applicable for the period till 10.05.2008 in view of the amendment to section 78 incorporated vide Finance Bill 2008, under section 76 of the Finance Act, 1994, for their failure to discharge the appropriate service tax in accordance with the provisions of section 68 of the Act and the rules made there under. v. I impose penalty of Rs. 5000/-under the provisions of section 77 of the Act. vi. I impose penalty of Rs.7,66,82,997/-(Rupees seven crores sixty six lakhs Eighty Two Thousand Nine Hundred and Ninety seven only) for suppressing the fact of having provided the taxable value, suppressing the receipt of the taxable value thereof and the contravention of the provisions of the act and the rules made their under, with intent to evade payment of service tax under Section 78 ....
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....x Rules, 1994 is the appellant. Consequently, Show Cause Notice was issued on 23.06.2011 to the appellant demanding service tax of Rs7,66,82,997/-(Rupees seven crores Sixty Six Lakhs Eighty Two Thousand Nine Hundred and Ninety seven only) for the period from 01.04.2008 to 31.03.2010 with interest and proposal for imposition of penalty. On adjudication, the demand with interest has been confirmed and penalty was imposed, mentioned as above. Hence, the present appeal. 3.1. Learned Senior advocate Shri Lakshmi Kumaran for the appellant has submitted that the appellant is an 100% EOU engaged in the manufacture of Thin Client, which is a computer with nominal storage capacity. These Thin Clients are also described as dumb terminals. Unlike personal computers (PCs), which hosts various applications, performs processing tasks and stores files locally, Thin Client does little more than transmitting keyboard and mouse inputs to the server and display the resulting output on the local screen. Out of the total production, 90% of Thin Clients are exported either directly or through merchant exporters. The Thin Clients are loaded with off the shelf packaged software i.e. Microsoft Operating ....
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....ce (ITSS, for short) in terms of sub-clause (zzzze) of Section 65(105) of the Finance Act, 1994. They have submitted that the Department has misconstrued the activity of the appellant, as there is no procurement of software/right to use software and the appellant is merely procuring labels (COA) and affixing on Thin Clients manufactured by them. They have entered into one time agreement with MS which permitted to replicate software images of MS on the Thin Clients. Accordingly, they acquired a software toolkit from local authorized dealer of MS which enables them to replicate software / OS into the Thin Clients. As a means of informing the end user, the Thin Client is authentic, a sticker is affixed on each Thin Client and the said COA is non-removable, sequentially numbered and contains additional anti-piracy features. It is submitted that the COA consists of (a) serial number (b) name of software and (c) internal part of MS. COAs could be purchased only by OEM agreement holders of MS and from authorized dealers only. The appellant had procured COAs on High Sea Sales (HSS) basis from M/s. Priya Limited. They have further submitted that affixation of such COAs on the Thin Clients d....
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....ight to use information software technology for commercial exploitation including right to reproduce, distribute and sell information technology software'. The scope of ITSS has been explained by the Board in Circular dated 29.02.2008. He has also submitted that the right to use software is "for commercial exploitation" which would mean the transfer of producer's own right to distribute and sell the software itself to the ultimate market. In support they have referred to the judgment of the Tribunal in the case of Infrasofttech India Ltd. Vs. CCE, Mumbai [2021(46) GSTL 141 (Tri. Mum.)]. Further, it is submitted that the right to commercially exploit, reproduce, distribute and sell software as mentioned in the aforesaid taxable entry of ITSS under Section 65(105)(zzzze) of the Finance Act,1994 are "copyrights" as understood under Section 14(a) and (b) of the Copyright Act, 1957. It is also clear from the Board's instruction dated 04.11.2009 that IPR portion of the cost of software was brought under the service tax net under the taxable category of ITSS. 3.9. Further, it is submitted that in the present case, the transaction is sought to be taxed is the procurement of COA/sticker,....
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.... judgment of the Hon'ble Supreme Court in SBI Vs. Collector of Customs [(2000) 1 SCC 727], learned advocate has submitted that differentiation was made by the Supreme Court between the right to reproduce and the right to use computer software. In the former, it would amount to a parting of copyright by the owner, whereas in the latter case, it would not. Therefore, the runtime licence like a distribution agreements do not create any interest or right on the licensee, which would amount to use of or right to use copyright but would be a licence, which means restrictions or conditions for use of software. Therefore, the transaction of import of COAs purchased from M/s. Priya Limited does not involve any licence of copyright in the software and at best it could be a software licence that grants access right to such off the shelf-packaged software. Such activity would fall outside the scope of taxable service under ITSS. Also, referring to Karnataka Value Added Tax Act, 2003, it is submitted that COAs / sticker labels affixed on the Thin Client does not confer a copyright licence in software and hence specifically covered as software licence under entry 34 of the said Act being 'goods'....
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....nded period of limitation is unsustainable. Also, accordingly the interest and penalty imposed under the provisions of Section 75 of the Act is also not sustainable. 4. Per contra, the learned AR for the Revenue has submitted that the appellants are manufacturer of Thin Client, which are loaded with Microsoft OS procured, locally. The appellant had entered into an agreement with Microsoft Corporation, which allows them to obtain COA from authorized dealers. The COAs are in the form of sticker labels. For the COA, in an invoice, a runtime key, alternatively known as the product identification key is also included. As per the agreement with Microsoft, no Thin Clients loaded with MS software could be sold without COA. Referring to the agreement between the appellant and the Microsoft Licensing GP, some of the clauses viz. COA, Runtime License Envelope, ALP, Licence Grants and Limitations of the agreement, countered the argument of the appellant that they have not imported any software or right to use software during the material period by way of neither downloading any software nor any software licence is received along with the sticker, the learned AR for the Revenue reading the d....
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....challenge to the vires of the levy of service tax on such transactions. After analysing the transactions, the Hon'ble High Court held that the transactions are not sale of goods and levy of service tax is not ultra vires of the constitution. 4.3. Further countering the argument of the appellant that goods being purchased from M/s. Priya Ltd., and Indian company, on High Sea Sale basis, therefore, reverse charge mechanism is not applicable, the learned AR for the Revenue has submitted that the agreement dated 11.01.2007 is between the appellant and the Microsoft for purchase of the licence. The Bills of Entry filed by the appellant stating that the supplier to be M/s. Daymount Ltd., who are located in UK and do not have any place of business in India; hence it is quite clear that the supplier remains an off shore entity and hence the appellants are correctly fastened with the service tax liability under Section 66A of Finance Act, 1994. Further, it is submitted that even, if goods were invoiced to M/s. Priya Limited, the service receiver remained with M/s. VXL i.e. the appellant. It is M/s. VXL who had entered into an agreement with M/s. Microsoft and the software is loaded by th....
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....untime images, which are transferred to a master flash disc. The said disc is transferred to a replicator machine. The replicator machine has the provision to copy the images from the master flash disc to any number of flash discs. Flash discs are then loaded on to the 'Thin Clients'. The license of the tool kit provides the appellant right to replicate the software on to the Thin Clients; but for sale of the Thin Clients containing the software, the appellant is required to affix the MS software licence (sticker labels) / COA, which are imported. The said stickers are initially purchased by one M/s. Priya Limited from M/s. Daymount Limited, UK. M/s. Priya Limited in turn sold the stickers / labels to the appellant on HSS basis, which were cleared by the appellant by filing necessary Bills of Entry declaring "MS software licence (sticker label)(Windows XP Embedded)" falling under Chapter heading No.4907 00 30 of the Customs Tariff Act and availed benefit under Sl.No.157 of the Notification No.21/2002 dated 01.03.2022 at 'nil' rate of duty. 8. The Revenue's contention is that the MS Windows Embedded 2009 Tool Kit purchased locally and loaded into Thin Clients manufactured by the ....
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....g the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and the 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; 11. After introduction of service tax on Information Technology Software Service (ITSS) w.e.f. 16.05.2008, comprehensive Circular was later issued by the Board on 04.11.2009 explaining the distinction between sale of software and software service. It is relevant to reproduce the said instruction / circular. 4.1 INFORMATION TECHNOLOGY SOFTWARE SERVICE: 4.1.1 Information Technology (IT) software service includes,- • Development (study, analysis, design and programming) of software. • Adaptation, up-gradation, enhancement, implementation and other similar services in relation to IT software. • Provision of advice and assistance on matters related to IT software, including: • Conducting feasibility studies on the implementation of a sys....
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....tax levy. Service tax paid shall be available as input credit under Cenvat credit Scheme. 4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service. 4.1.6 With the proposed levy on IT software services, information technology related services will get covered comprehensively. 4.1.7 Following consequential amendments in other taxable services are also being made: • At present, 'Information technology service' is specifically excluded from the scope of Business auxiliary service [section 65(105)(zzb)]. Consequent on the proposed IT software service, information technology services get covered comprehensively for the purpose of levy of service tax and, therefore, specific exclusion of 'Information technology service' under Business auxiliary service is being deleted. • To include 'testing and analysis of IT software' services under Technical testing and analysis service [section 65(105)(zzh)]. • To include 'Cer....
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.... plastic cover). 3. Normally, cost of a software supplied in a media consists of two cost components, namely,- a. the cost of the actual software, i.e. set of information which is placed on a media; and b. the cost of the Intellectual Property Right (IPR) relating thereto. 4. In 2008 budget, the IPR portion of the cost of software was brought under the service tax net under a new taxable service 'IT Software Service' (ITSS). As per the definition, a service provided in relation to IT software for use in the course, or furtherance, of business or commerce was covered under this taxable service. In specifics, the taxable service included, - ................................................ (v) providing the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology 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 and the term 'service provider' shall be construed accordi....
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....or creation of and inclusion in other IT software products are fulfilled. Thus a conjunctive meaning of the term 'and' has been taken and it has been held that since the importer did not fulfill all the conditions, they should be denied the benefit of the notification. 9. In another case in Chennai, where fully packed product (FPP) was imported by a company which produced split value (i.e., one value for media CVD and other for right to use software) in a single invoice shown separately, the jurisdictional authorities have refused to accept such split value for the purpose of claiming notification No. 80/2009-Customs and taken the view that CVD should be charged on entire amount. 10. The above instances show that the field formations have failed to appreciate the scope of the said notification. In the first case, the view taken by officers is legally untenable because the phrase used in notification No. 80/2009-Cus is inclusive in nature and it is a well-known principle that in an inclusive expression, the word 'and' is to be understood as 'or' and that even if one of the activities (such as right to reproduce, right to distribute, right to sell etc.) mentioned in....
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....r to distribution and sale of the thin clients the certificate of authenticity (COA) which are procured at high seas as Microsoft software license (sticker label), which represents the runtime licence of the end-user product are affixed. The assessee's are procuring Certificate of Authenticity (COA) which are stickers/labels that are affixed to each of the thin client devices and terminals manufactured by them. These COA's basically certify that the thin client devices and terminals contain the original software/operating systems. I further, find from the sample invoice no. 0028040 dated21.07.2009 that M/s Daymont Ltd., 1st Floor, Battle House,1 East barnet Road, Herts EN4 8RR,U.K., has raised commercial invoices for sale of Microsoft Software license (Sticker Labels) (Windows XPE Embedded) 2000 pieces to M/s Priya Limited,C-23/TTC Industrial Estate,Thane Belapur road, Opp. HICO, Pawane Village, Turbhe, New Mumbai, India. The same are in turn sold in high - sees sales toM/s VXL Instruments Ltd., Bangalore as it can be seen from invoice no. HI 10000051 DATED 21.07.2009. As per the license agreement with Microsoft, no thin client or terminals can be sold without the Microsoft softwar....
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....aries, other software (including Supplemental Code). COAs and APM. "MS Distributor" means an MS-authorized embedded distributor or Licensed Products. COMPNAY shall acquire Deliverables. ALPs, APM and COAs from MS Distributors. MS may amend the list of MS Distributors from time to time. OPK means OEM preinstallation kit. Product keys means a key used to install MS products, product keys are located either on a flyer in the OPK or on the installation CD of the Licensed Product itself. Company will enter the product key when it installs the MS product onto the Embedded system during testing and development. Not all licensed product have product keys. Runtime key means a series of characters that services to identify the Licensed product. Runtime keys are included in the APM for a specific licensed product. The Runtime key is used during manufacturing of the Embedded systems. Runtime License Envelope means the envelope acquired from an MS Distributor that contains the ALPs for the Licensed Product. A Runtime License Envelope may contain COAs. Suppliers means MSCORP and other licensors or suppliers of Licensed Product or portions the....
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....d discs installed later into the Thin Clients. The software would be operational or functional only with affixation of the stickers i.e. COAs procured separately for each of the Thin Clients from the authorized MS distributors. Clause 'm' of the 'Licence Grants and Limitations' makes it clear that the appellant shall not advertise, provide a separate price for, or otherwise market or distribute the Licensed products or any images as a separate item from the Embedded system. 19. The appellant procured / purchased the stickers/labels on HSS basis from M/s. Priya Limited. The imported stickers/labels are considered as 'goods' more or less in line with the Circular No.15/2011 dated 18.03.2011 issued by the Board. The said circular reads as follows:- Government of India Ministry of Finance (Department of Revenue) Central Board of Excise & Customs, New Delhi Subject: Applicability of indirect taxes on packaged software - Regarding. Representations have been received from some industry association on behalf of software dealers about difficulties being expressed in the assessment to customs duty of documents of title for IT software or docume....
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....ot satisfy this definition and therefore do not qualify for classification under this tariff item because they do not contain any representation of instructions, data, sound or image recorded in a machine readable form, which is capable of being manipulated or providing interactivity to a user. On the other hand, tariff item 49070030 of heading 4907 refers directly to "Documents of title conveying the right to use Information Technology software". Hence as per the said Rule 1 mentioned above, such paper licenses which are essentially documents conveying the right to use such IT software, merit classification under CTH 49070030. PUK cards on the other hand are not documents of title conveying the right to use Information Technology software per se but are actually printed matter containing numbers which when entered, enable the importer to access right to use such IT software. Hence they are liable to classified under CTH 4911 as "other printed matter". 3. It is, therefore, clarified that paper licenses or PUKs merit classification as per their individual character under heading 4907 in case of paper license and heading 4911 in case of PUK card, the same being other printed....
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....vice tax under the category ITSS would be levied on such portion subsequently. 6. All pending assessments of software, paper licenses and PUK cards may be finalized accordingly. These instructions may also be brought to the knowledge of the field formations and the trade. Any difficulty faced in implementation of these instructions may be brought to the attention of the Board. Following, the Circular, the Customs Department has assessed the stickers/labels under CTH 4907 00 30 of Schedule to the Customs Tariff Act, 1975. 20. Thus, merely by affixing the stickers / labels providing authenticity to software loaded to each of the Thin Clients cannot be construed as a 'service' received by the appellant under the category of ITSS as held by the Commissioner in the impugned order. We are of the view, in the absence of a transfer of copyright of the software but only on mere right to use the software as clarified in the aforesaid circulars in explaining the scope of the levy as 'service' under ITSS, distinguishing the same from levy of excise duty and applicable customs duty being Information Technology software falling under Chapter 85 of Central Excise Tariff Act, 19....