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 analysis
The 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, therefore, not possible to accept the contention of the learned Authorized Representative of the Department that the transaction would not be covered under subclause (d) of article 366(29A) of the Constitution", the Tribunal had held.
The judgment explained from the judicial decisions, the settled essential requirement of a transaction for the transfer of the right to use the goods as :
(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 transaction for the transfer of the right to use goods, delivery of the 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;
(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 the period of contract exclusive right to use goods along with permits, licenses, etc., vests in the lessee.
The Court dismissed the Commissioner's appeals by holding that the the impugned order of the Tribunal suffers from no jurisdictional or any other legal infirmity.
Case Title : Commissioner of Service Tax New Delhi versus Quick Heal Technologies Ltd
Citation : 2022 LiveLaw (SC) 660
Service Tax - License to use software through End User License Agreement a "deemed sale" as per Article 366(29A)(d) of the Constitution- Service tax not leviable merely because updates are given to the customer
Service Tax - Sale of software - whether service tax leviable - 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 - Followed Tata Consultancy Services v. State of Andhra Pradesh, (2005) 1 SCC 308 - Paragraph 55
Constitution of India - Article 366(29A)(d) - Transfer of right to use goods "deemed sale" - principles explained - Paragraph 52
Finance Act 1994 - Section 65B(44) - Definition of "service" -does not include activities listed as "deemed" sale under Article 366(29A) of Constitution - Para 36