Lawyers are familiar with accessing judgments/statutes/notifications using softwares installed on our computer from a DVD or a pen drive/dongle. Some of these applications require we plug in a dongle for its functioning. These applications are usually provided by publishers of law journals along with the journals for free or at a price, and in a way provides digital access to what is published in the journals (eg:- ExCus).
The Authority for Advance Ruling ('The Authority' in short), Tamil Nadu examined an interesting question regarding the taxability of such services in a recent decision. The question examined by the Authority was "whether the content published in books when provided in an electronic format in DVDs/CDs with a software to search and read it in computers comes under the category of E-book?"
The applicant was paying GST at the rate of 18% for the supply of DVDs/CDs and Pen Drives. The confusion arose when a specific entry was subsequently inserted that reads - "supply consisting only of e-book". It was in the light of this new entry the advance ruling was sought.
GST Rate for E-books
Printed publications are exempt under the GST. However, supply of e-books used to be taxed at 18%. In the 28th GST Council meeting it was decided that the supply of e-books shall be taxed at 5%. The entry regarding supply of e-books falls under Heading 9984 in the list of services. The entry reads "Supply consisting only of e-book". This entry was brought in through Notification No.13/2018 – Central Tax (Rate) dated 26th July 2018.
The wordings employed to define an e-book is peculiar and could itself lead to future confusions in the publishing industry. "E-books" for the purpose of the notification means "an electronic version of a printed book supplied online which can be read on a computer or a hand held device". Will just one printed copy suffice for publishers to take advantage of the reduced GST rates on e-books ? Should the printed copies be put on sale in the market or will a copy/copies kept at the office of the publisher suffice? A strict reading of the entry also qualifies that the supply should be done online. What if the e-books are supplied through an optical drive like a DVD? These perplexing questions exist and are yet to be answered.
Breakdown of the Service Provided by the Applicant
The applicant sells the printed law journals/books/periodicals in electronic form of DVDs along with a dongle which acts as a security lock. The DVD contains the proprietary software and the electronic library. The proprietary software in the DVD has to be installed the first time and subsequently the customer can access the electronic library only by plugging in the dongle which acts as a security lock. The service is rendered on a subscription basis. The initial subscription is for a period of one year which can be renewed every year for a fee. The library is regularly updated when the customer connects to the internet within her subscription period. The software enables search of judgments published since 1914 using key words, citation, case title, party names, judgment date, courts etc.
The applicant also provides a web based version on their website. A user with a user id and password can log in and search for judgments.
Ruling of the Authority on Advance Ruling
The Authority made the observation that the DVD in effect contain software which requires an End User License Agreement to be accepted by the user. The authority further observed that the DVD is not an electronic version of the print journals. The reasoning adopted by the Authority to make this conclusion is that, if the DVD was to be called electronic versions of the print journals, then the DVD would have machine readable files in formats like .doc, .txt, .pdf or any other readable file and not the executable file (software setup application).
The Authority found that the nature of the initial supply (first time installation of the software from the DVD) is that of a composite supply. It was found that the supply consists of: supply of DVD and dongle along with the software application (goods) and the license to use the same for a prescribed period (service). The Authority found that the principle supply is the supply of goods which is the supply of DVD and the dongle loaded with the software.
After analyzing the notification 13/2018, the Authority observed that as per the explanation, "e-books are electronic version of a printed book and supplied online which can be read on a computer or a hand held device, while in the case at hand, the contents supplied in the form of DVD/CD is a software which is used to access content…… The DVD/CDs do not contain electronic versions of the journals but an executable software application".
In the light of the above observations, the Authority ruled that the initial supply of DVDs with the loaded software along with its end user license is a supply of goods classifiable under the heading 8523 and not that of e-books.
With regarding the renewal of subscriptions after the end of one year, the Authority noted the applicant's statement that renewal do not require supply of DVDs and also that they supply an online version which is available on their website that can be accessible through a user id and password. In the context of access to online database, it was found that it is a supply of service classifiable under SAC 998431 (on-line text based information such as on -line books, on -line newspapers and periodicals, on-line directories and mailing list). The Authority ruled that in this case also, the supply is not of e-books as mentioned in the notification but that of supply of access to an online database.
As per the notification, what is taxed at 5% is a supply consisting only of e-books. As per the notification, an e-book is "an electronic version of a printed book supplied online which can be read on a computer or a hand held device". The essential characteristics of an e-book according to the Authority is that it should be digitalized into a single machine readable file in any format which can be read on a computer or a hand held device.
In the instant case, it can be clearly seen that what is being supplied is a software that retrieves judgments from its database and displays it to the user. Even though it offers 'Print Out of the Original Page" (an option to print the judgment as available in the print journal), it is only one feature among the many other features offered by the software. What is conceived in the notification as 'e-book' is electronic version of a printed book supplied online. The applicant has failed to prove what is accessed is exact digital replica of the printed journals. The supply in this instant case is that consisting of the software and not only of e-books. Therefore the ruling of the Authority that the applicant cannot take benefit of the Notification no. 13/2018 is correct in my opinion.
However, I cast a slight doubt on the reasoning adopted by the Authority to reach the said ruling.
The Authority reasoned that the supply is a composite supply, where the principal supply is the supply of goods in form of DVD and Pen Drive with the software. The supply was categorized into supply of DVD and Dongle along with the software application (goods), and the license to use the same for a prescribed period (service) by the Authority.
It is pertinent to note that Clause (c) of Para 5 of Schedule II of the Central Goods and Services Tax Act, 2017 (CGST Act in short) deems "temporary transfer of permitting the use or enjoyment of any intellectual property right" as a supply of service. The same is found under Heading 9973 in Serial No. 17 the list of services which reads "Temporary or permanent transfer or permitting the use of enjoyment of Intellectual Property (IP) right in respect of Information Technology Software".
As rightly observed by the Authority, the DVDs contain a "software which requires an End User License Agreement to be accepted by the user. On a closer examination, it becomes vivid that what gets transferred here is the license to use the software. The license and software are not two taxable supplies, but in effect one supply and therefore cannot be called a composite supply. This transaction clearly falls specifically under the Heading 9973.
A satisfactory explanation was not given by the applicant to show that the supply is of "e-books" as defined under the notification. The entry itself is of limited scope. The benefit of the entry can be claimed only if one proves that the supply consists only of e-books. In the applicant's case, it is very hard to prove that the transaction consists only a supply of e-books. Even if the applicant were to succeed in proving that users were getting access to e-books, it would still not help his case. In that case, the transaction becomes a bundled transaction consisting of the software that gives enables search and retrieval of the e-books and the e-books.
Click here to download the AAR decision
Click here to download notification 13/2018
(The author is an Advocate in High Court of Kerala and may be reached at [email protected])