License To Use Software Is "Deemed Sale";Service Tax Not Leviable On Ground That Updates Are Provided : Supreme Court In QuickHeal's Case

The Supreme Court has dismissed the appeals filed by the Commissioner of Service Tax seeking to levy service tax to the tune of over Rs 56 crores on Quick Heal Technologies Ltd for its sale of anti-virus software during the period 2012-2014.The Court held that the sale of software in CDs/DVDs is a sale of goods and once sales tax has been paid on the sale consideration, service tax is not leviable on the same transaction on the ground that updates are being provided to the customer.The End User License Agreement giving the end customer the license to use the software is a transfer of right to use goods and is a "deemed sale" as per Article 366(29A)(d) of the Constitution.Referring to the decision of the Supreme Court in Tata Consultancy Services v. State of Andhra Pradesh, (2005) 1 SCC 308, a bench comprising Justices Abhay S Oka and JB Pardiwala held :"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".The bench affirmed the finding of the Customs Excise and Service Tax Appellate Tribunal (CETSTAT) that service tax is not applicable to the retail sale of packaged software and dismissed the appeals filed by the revenue against the CETSTAT ruling in favour of QuickHeal.Supreme Court's analysisThe judgment authored by Justice Pardiwala extensively relied on the Constitution Bench judgment in Tata Consultancy Services case in which it was held that sale of packaged software in medium like CD/DVD to the end customer is a sale of goods.It was held in TCS that n 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 whether an item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed,etc. The revenue in the instant case argued that the service tax is leviable on the End User Licensing Agreement(EULA), whereby the company has agreed to provide regular electronic updates to the customer on the software originally installed. The revenue relied on the judgment in BSNL versus Union of India (2006) 3 SCC 1, where the issue was whether sale of mobile SIM cards would attract sales tax or service tax. Based on this precedent, the revenue argued that the service component in the software EULA can be dissected.The Supreme Court noted that in the BSNL case, it was held that the access to electromagnetic waves given by a mobile telephone company cannot be regarded as a sale of good and it was held to be a service.The Court also referred to Article 366(29A) of the Constitution, which defines certain transactions as "deemed sale". According to Article 366(29A)(d) the transfer of the right to use any goods for any purpose for valuable consideration is deemed to be a sale.The Court further noted that the analysis of the definition of "service" as given in Section 65B(44) of the Finance Act 1994 makes it clear that the service will not include those activities which includes transfer, delivery or supply of any goods which is deemed to be sale within the meaning of Clause (29A) of Article 366 of the Constitution.EULA is transfer of right to use software, therefore a "deemed sale"In this background, the Court approved the finding of the Tribunal that the EULA was in effect a transfer of the right to use the software, which will be a deemed sale under Article 366(29A)(d)."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.Thus, viewed from any angle, the transaction in the present Appeal results in the right to use the software and would amount to "deemed sale"It is,...

License To Use Software Is "Deemed Sale";Service Tax Not Leviable On Ground That Updates Are Provided : Supreme Court In QuickHeal's Case

Manu Sebastian

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