TMI Blog2018 (9) TMI 1281X X X X Extracts X X X X X X X X Extracts X X X X ..... is settled law that software is nothing but an Intellectual Property of a person who has developed the said software. The right to use the software is something what gets transferred and not software has per se. Even if it is provided on a media such as CD or Hard Drive. Software cannot be altering, modified or reproduced by the user of the said software. He can only use the same for the purposes authorized by the rightful owner and in the manner authorized and this is further supported by the fact that in each case the recipient enters into an End User License Agreement (EULA) which is binding in nature before he can make use of the said software - The approach of commissioner while dealing with the issues is in accordance with the international practices of treatment of the software related transactions. Thus the order of the Commissioner holding that these services are classifiable under the category of ‘Information Technology Software Services’ after 16.05.2008 and prior to that under the category of ‘Intellectual Proper Services’ cannot be faulted with. Valuation - inclusion of value of hardware provided in terms of Section 67 of the Finance Act, 1994 in assessable value - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Noticee have contended that the notice dated 19th October 2009 is barred by limitation as they were under bonafide belief that the amount received by them under these Acts were not leviable to service tax - Held that:- The said argument with regards to bonafide belief cannot be allowed. During the entire period, noticee was aware about leviability of service tax on the said products and in case they had any doubt they could have sought clarification from the concerned authorities - Without seeking such clarification and on his own deciding not to pay the tax cannot be a bonafide reason - time limitation rightly invoked. Demand of Interest - Held that:- As the demand of taxes is liable to be confirmed for the period after 16.05.2008 appellant are required to pay the interest also. It is settled law that interest liability flow from the liability to pay tax if not paid in time. Penalty - Held that:- In the present case the penalty imposed are mandatory penalties provided in law, they are to be held as civil liability accordingly. Reliance on Section 80 would be of no help in this case - however Commissioner should reconsider the issue of penalty afresh and determine whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loped as per customer s specifications and supplied to their customers. Therefore, there is a need to go through the agreements entered into with the clients, bills raised for the services rendered and the goods supplied and the payments made towards service tax liability under the category of information technology service . Only after going through all these documents, correct service tax determination can be done. Accordingly, we remand the matter back to the adjudicating authority to consider the matter afresh after taking into account all the documentary evidences which the appellant would submit in support of their claim that they have discharged the service tax liability correctly. The appellant is directed to cooperate with the department and produce all the documentary evidences by way of sales invoices, contracts/agreements entered into with the clients and other necessary documents, and payment of service tax made in respect of the services rendered by them etc .. 4. The demands confirmed against the appellant by the order-in-original can be classified in following categories:- S No Particular SCN 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5000 5000 20000 Penalty u/s 78 613427769 0 0 44740970 658168739 5. On the issue, learned Consultant appearing for appellant challenged the impugned order on the following grounds:- (a) The SCN 1 was issued demanding Service Tax under the category of Maintenance and Repair Services , in the first round of adjudication Commissioner had confirmed the demand under the category of Maintenance and Repair Services uptil 15.05.2008 and from 16.05.2008 under the category Information Technology Software Services. In the remand proceedings Commissioner has confirmed the demand under the category of Intellectual Property Right services up till 15.05.2008 and from 16.05.2008 under the category of Information Technology Software Services. Since the adjudication order has in case of this show cause notice demanded the service tax under the category which were never in dispute in Show Cause Notice, the order is bad in law. [Mahakoshal Beverages Pvt Ltd. Vs, CCE (2006) 6 STR 148 (T-Bang)] [Glass Fibres vs CCE (20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hargeable to VAT. Further while demanding service tax in respect of these cases, order-in-original fails to specify any category of taxable service under which the tax has been demanded. (g) In respect of the service provided to SEZ unit, the same are exempted under SEZ Act [section 26(1)(e) read with Section 51) which has an overarching effect over all other laws. Further exemption Notification No. 9/2009-S.T. dated 03.03.2009, also exempts the services provided to SEZ Unit/ Developer. [Intas Pharma Vs CST (2013) 32 STR 543 (Tri- Ahmd)], {M/s Reliance Port Terminals Ltd vs CCE ST [(2013) TIOL 1473 CESTAT-AHM] Tata Consultancy Services Ltd Vs CCE ST [(2013) 29 STR 393], Trimurthy Industrial Cooperative Society Ltd Vs CCE [2018 TIOL 206 CESTAT MUM} DHL Lemuir Logistics Pvt. Ltd. Vs CCE 2017 (47) STR 309 (T-Mum)] (h) In respect of Octroi charges in service tax is not demandable as these are essentially in relation to the sale of hardware. Octroi is a tax paid to bring goods into a state and is not in the nature of consideration for any services and hence not liable to tax. (i) Services rendered in Jammu Kashmir are rendered outside the taxable territory and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing hosting management service and additional services including software development, customization, maintenance of both in-house development and those procured from 3rd parties and support services. (f) As per the earlier CESTAT order dated 14.01.2003, liability to service tax would arise only in respect of software which the appellant have developed as per customers specification and supplied to customer. Matter was remanded to AA for going through the agreement, bills raised and payment towards service tax liability under Information Technology Services. As per appellants reply dated 11.11.13 demand on account of sale of 3rd Party software is ₹ 10.2 Crores, whereas demand on account of in house developed software, development and customization of software is ₹ 51.37 Crores. As per them, sale of software is not provision of service. Further customization of software as per client s specification is not maintenance or repair service . Software development (including up-gradation, implementation etc) has been included under ITSS wef 16.05.2008. (g) As per Circular dated 07.10.2005 and 07.03.2006, software being goods, any service in relation to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to sales tax dealing with permissive use. It observed that the agreement refers to mere permissive use of defined intangible rights. (l) From the agreements under consideration it is apparent that- a. It does not show that software is sold through CD only. After software installation CD has hardly any value and Software needs periodic up-gradation. b. In case of customization at client s site, definition of goods is not relevant. (m) In case of Safety Retreading [2017 (46) STR 97 (SC)], the facts were different in as much as Revenue wanted to charge tax on 100% value which includes material portion. From para 11, 12, 13, it is clear that service portion 30% defined under local Act was never challenged in the SCN nor the invoice showing breakup of material and service portion was disputed in order and the affidavit filed before Court. It cannot be applied in present case. (n) As appellant did not seek any clarification from department and there was failure to disclose position in ST-3 returns, there was suppression and hence extended period has been correctly invoked. For which reliance has been placed on CCE v. Reliant Advertising [2013 (31) STR 166 (Tri-De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rogramme documentation. Thus clause 2.2 is clearly providing for the sale of copy of copyrighted software. The purpose of license agreement and clause 2.1 is to clearly demarcate that what is being sold is a copy of copyrighted article and not software along with the copyright. Since the appellants have transferred the right of ownership (i.e. sale) in the copy of computer programme to the customer for a consideration thus resulting in sale of the CD containing a software. v. Software development agreement dated 6.05.2002 with ICICI Webtrade, is for development of customized Software development service and falls under the category of Information Technology Software Service (ITSS) after 16.05.2008 and liable to service tax. Since this service was notified as liable to service tax from 16.05.2008, they have paid the service tax in respect of these services with effect from that date. vi. Apex Court decision in case of Tata Consultancy Services [2004 (178) ELT 22 (SC)] is relevant both prior to and after 16.05.2008 and the sale of copy of computer programme would still be sale of goods and not services. vii. It is intention of the parties to sell a copy of the software so th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... original. 10. We have considered the submissions made by both the appellant as well as Revenue. The issues for consideration can be put across in four or five points. 10.1 Whether the order-in-original while confirming the demand raised by the first three show-cause notices have travelled beyond the scope of remand order or Commissioner was right in confirming the said demand as has been done by him. While remanding the matter back, the Tribunal has made observation which have been reproduced above in para 3. As per the said observation it is clear that the direction was to both the agreements entered into with the clients, bills raised for the service rendered and the goods supplied and the payment made towards service tax liability under the category of Information Technology Service . Only after going through all these documents, correct service tax determination was to be done and matter was remanded for taking into account of documentary evidences which would submit in support of their claim of having discharged of service tax liability. While passing the order, Commissioner has done the same. He has considered looking into agreements and has concluded what he deemed fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase of packaged software sold off the shelf, then there is no need for the Noticee to enter into License Agreement. 24 It is thus observed that Oracle and other software developers only license the software for use by the end user subject to the terms and conditions of the agreement, thereby giving the right to use the software, which includes the right to install, run and get updates. As per the terms and conditions of the agreement, the end user is neither permitted to tamper / modify the software nor is allowed to sell the same, as the ownership and intellectual property rights remain with Oracle. Such right to use of the software does not amount to sale of software. There will be sale of software only if source code and entire property in software is transferred to buyer. 10.3 The argument on merits advanced by the appellant is with regards to the decision of the Hon ble Apex Court in the case of Tata Consultancy Services. Relying on the said decision they have argued that the third party software supplied by them are nothing but sale of copy righted article and hence sale of goods leviable to VAT hence cannot be leviable to service tax. There is no law which prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollateral Management Services Ltd. Under Invoice No. MNV-MUM-19905 dated 30.04.2007, the Noticee had supplied Oracle software License to M/s. ICICI Bank Ltd. Under Invoice No. MNV-MUM-19967 and MNV-MUM20017, dated 09.05.2007 and 22.05.2007, respectively, the Noticee have supplied Citrix software License and Oracle software License to Kisan Group of companies. Vide Invoice No. MNV-MUM-20902, dated 13.09.2007 and MNV-MUM-23048, dated 21.03.2008 the Noticee have supplied Oracle ASFU Standard One Edition Single Processor Base License to M/s. SISCO Research Laboratories Ltd. and M/s. Pratibha Industries Ltd. Vide Invoice No. INV-MU M-6100002769 dated 30.09.2008, the Noticee have billed M/s. Nippon Data Systems for supply of software License and Product support. Vide Invoice No. INV-DEL-6100002853 dated 09.10.2008 and INV-DEL-6100002881 dated 10.10.2008 the Noticee have billed M/s. Softcell Technologies for supply of Hyperion Pre System 8.3.2 Intelligence Explorer with support. Vide Invoice No. INV-MUM-6100003848, INV-MUM-6100003850, INV-MUM-6100003852, INV-MUM-6100003857, INV-MUM-61000072, INV-MUM-6100005281-84 and INV-MUM-6100005857 the Noticee have s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntering the end users license agreement. The intellectual property right in respect of the program remained with the said developer of software and the end user were only using the data contained in the software in furtherance of their business. In other words, the said software developers had only transferred the right to use the software temporarily. The Noticee acted as an intermediate on behalf of the software developers in transferring the intellectual property right. As such, the Noticee, being the holder of the intellectual property right by way of the agreement entered by them with the software developers like oracle, are the provider of the intellectual property services , defined under Section 65(55b) of the Finance Act, 1994 read with Section 65(105)(zzr) ibid. Even in respect of the software developed in-house or customized software, as brought out in the above paras, the Noticee were only transferring the right to use the program contained in the software and the intellectual property rights and ownership of such software supplied to the customers, remained with the Noticee only. Thus, even in respect of the supply of software developed inhouse or customized so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax, Mumbai, in Appeal No. Service Tax/156, 173/08-Mum, is also relevant here. The issue when a new entry is introduced covering a particular activity without amending the earlier entry, whether the earlier entry can cover the subsequently introduced entry, was examined by the Larger Bench of Tribunal, Mumbai, in this case. The Appellant contended that in such cases it cannot be said that the earlier entry covered subsequently introduced entry. Hon ble CESTAT observed that this proposition may be true in certain situations and not in other situations. In this case demand of Service Tax was issued classifying the service provided under Business Auxiliary Service for the period 01.07.2003 to 31.12.2005. The assessee in this case had been paying Service Tax suo moto with effect from 01.05.2006 under Support Services of Business Commerce. This service has been notified as a separate taxing service with effect from 01.05.2006. Hon ble Tribunal held that the services provided by the assessee are covered under Business Auxiliary Service at the time when the Business Support Service was not in existence. The relevant portion of the CESTAT s order are reproduced below- Para 12. Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws. In the case of India National Shipowners Association vs. UOI reported in 2009 (14) S.T.R. 289 (BOM), the Hon ble Mumbai High Court was considering the question whether marine logistics servicesoffshore support vessels, marine construction barges and harbor tugs provided to exploration and production companies would get covered under supply of Tangible Goods service from 16.05.2008 or under mining service prior to that date. It is in this context that they had made observation relating to the said two entries. In fact, in this case, the Supreme Court had observed that the nature of work that was required to be carried out could not be strictly said to be a service in relation to mining of mineral, oil or gas. It is in this context that the Court has made certain observation. Another case cited by the Ld. Counsel is Cameo Corporation Services Ltd. Vs. Commr. Of Service Tax, Chennai, reported in 2008 (11) S.T.R. 161 (Tri. Chennai). In this case, the issue before the Tribunal was, whether Share Transfer Agent service which was introduced with effect from 01.05.2006 could be covered under Business Auxiliary Service prior to that date. Share Transfer Agents are a separate category ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , a new service, viz. Information Technology software service has been carved out and defined separately under Section 65(53a) and taxable in terms of Section 65(105)(zzzze) ibid, wherein such right to use the software has been specifically included in the aforesaid service, taxable with effect from 16.05.2008. 51. In view of the clarification of CBEC given vide the above said circular dated 29.02.2008, so far as first Show Cause Notice dated 19.10.2009 is concerned, the services provided by the Noticee in respect of the supply of the third party software and the software developed in-house or the customized software, wherein the Noticee had temporarily transferred the right to use the software to their clients for consideration, are classifiable under the category of Intellectual Property Services for the period prior to 16.05.2008 and with effect from 16.05.2008 the said services are classifiable under the separately specified category of Information Technology Software services . 52. The show cause Notice dated 19.10.2009 has classified the impugned services provided by the Noticee under the category of Management, Maintenance or Repair Services for the period f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory Historically, the work for development of guidance in respect of application of Article 12 on software payments originally appears in a report titled Software: An Emerging Industry that was published by the OECD in 1985. The recommendations made in Appendix 3 of the Software: An Emerging Industry for changes in Commentary on Article 12 led to the insertion of the paragraphs 12 to 19 of the OECD Commentary on Article 12. These changes were the first major guidance included in the Commentary on Article 12 in respect of software payments. 2. The second set of further guidance that was subsequently incorporated and continues to remain as existing guidance was adopted on the basis of another report titled The 2000 Update to the Model Tax Convention adopted by the OECD Committee on Fiscal Affairs on 29 April 2000, leading to modification of some of the paragraphs and insertion of paragraph 12, 12.1, 12.2, 13.1, 14, 14.1, 14.2, 14.3 and 14.4 in the OECD Commentary. 3. The third set of major changes in this guidance resulted from the recommendations made in the OECD report titled Treaty characterization issues arising from E-Commerce which was adopted by the OEC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is recognized that the grantor is not required to play any part himself in the application of the formulae granted to the licensee and that he does not guarantee the result thereof. 11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7 or in the case of the United Nations Model Convention Article 14. 11.3 The need to distinguish these two types of payments, i.e. payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information. In the case of contracts for the provision of services, the supplier undertakes to perform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user s computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer s hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (without the distributor having the right to reproduce the software), or whether the software is subject to minor customization for the purposes of its installation. 15. Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there is a transfer of rights involving: exclusive right of use of the copyright during a specific period or in a limited geographical area; additional consideration related to usage; consideration in the form of a substantial lump sum payment. 16. Each case will depend on its particular facts but in general if the payment is in consideration for the transfer of rights that constitute a distinct and specific property (which is more likely in the case of geographically-limited than timelimited rights), such payments are likely to be business profits within Article 7 (or 14 in the case of the United Nations Model Convention) or a capital gain within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nically download digital products (such as software, images, sounds or text) for that customer s own use or enjoyment. In these transactions, the payment is essentially for the acquisition of data transmitted in the form of a digital signal and therefore does not constitute royalties but falls within Article 7 or Article 13, as the case may be. To the extent that the act of copying the digital signal onto the customer s hard disk or other non-temporary media involves the use of a copyright by the customer under the relevant law and contractual arrangements, such copying is merely the means by which the digital signal is captured and stored. This use of copyright is not important for classification purposes because it does not correspond to what the payment is essentially in consideration for (i.e. to acquire data transmitted in the form of a digital signal), which is the determining factor for the purposes of the definition of royalties. There also would be no basis to classify such transactions as royalties if, under the relevant law and contractual arrangements, the creation of a copy is regarded as a use of copyright by the provider rather than by the customer. 10.9 From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contention that it is the case of sale of goods is not legally sustainable. 37. However, while charging the clients for the said services rendered, the Noticee have artificially split the costs, one towards materials consumed while providing the said services and the second towards the service charges. As mentioned above, there is nothing on record to show that the sale of Computer hardware items were stand alone transactions. On the contrary the material evidence on record, few of which have been discussed above, clearly show that these Computer Hardware items were consumed while providing the impugned services. Thus, the computer hardware items were essential for provision of the impugned services, which evidently have been consumed while providing the said services. Provider of taxable service is entitled to take credit of excise duty paid on excisable goods received for use in the provision of services. 10.11 After examining the contentions raised by the party, it is the fact that the Commissioner has held that the hardware goods have not been provided as hardware but has a complete solution to the issues of up-gradation of the software etc., developed by them for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will the abatement in respect of the same shall be admissible or not needs to be considered. Notification No 12/2003-ST provided for such abatement. While concluding the with regards to the hardware when commissioner has upheld that they are the part of taxable service and their value should be included in the value of taxable services provided, Commissioner needs to consider the argument in respect of the abatement of the value if admissible under rules or notification applicable at the relevant time. 10.13 In respect of Commissioner confirming the demand under the category of Intellectual Property Services for period prior to 16.05.2008 and under the category Information Technology Services from 16.05.2008 in respect of 1st show-cause notice party has relied upon the decisions in the following cases to argue that such confirmation of demand is not tenable:- (i) Mahakoshal Beverages Pvt. Ltd. v. CCE, (2006) 6 STR 148 (Tri. Bang.) affirmed by Karnataka High Court in CCE vs. Mahakoshal Beverages Pvt. Ltd(2014) 33 STR 616 (Kar) (ii) Balaji Contractorv. CCE (2017) 52 STR 259 (Tri-Del.))]. (iii) Enpee Earthmovers vs. C.C.E., Goa(2012) 27 S.T.R. 48 (Tri. Mumbai) (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuated in SEEPZ, Mumbai, towards services names as Maintenance Management Module , Inventory Purchase Module , Sales Marketing Module , Production Management Module , Quality Management Module and Project Management Module . Specifically these services are in relation to the software services and hence are leviable to service tax. In terms of Notification No. 9/2009-ST granted exemption to the specific services supplied to SEZ subject to condition that person liable to pay service tax shall pay service tax as applicable on the specified services provided to the developer or units of SEZ and SEZ shall claim refund of service tax on the services provided to the developer of SEZ. Notification No. 9/2009-S.T was substituted by Notification 17-2011-ST which provided exemption from service tax subject to condition specified therein. One of the conditions specified was that the exemption shall be provided by way of refund of service tax. Accordingly, during the entire period the service provider is not eligible for first stage exemption from payment of service tax. He was required to pay service tax and either SEZ developer or unit located in SEZ could have claimed the exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated by them. When under no statute and obligation has been passed to disclose the entire amounts recovery and thereafter bifurcation in respect of exempted goods not taxable and taxable amounts not declaring of the same shall amount to suppression with intention to evade the taxes. Since the entire demand raised by the show cause notice prior to 16.05.2008 is not maintainable as no notice has been issued under the category in which this demand is sought to be made and confirmed, this ground loses relevance both for the appellant and respondents. 10.20 As the demand of taxes is liable to be confirmed for the period after 16.05.2008 appellant are required to pay the interest also. It is settled law that interest liability flow from the liability to pay tax if not paid in time as per the decision of the Hon ble Supreme Court in the case of Commissioner of Trade Tax, Lucknow v. Kanhai Ram Thekedar 2005 (185) ELT 3 (S.C.). 10.19 Now coming to the question of penalty that have been imposed. For contesting the penalty, the appellant has relied upon the decision of the Hon ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa 1972 (83) ITR 26 (SC). Then variou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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