TMI Blog2020 (1) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... e that viruses existed and that they have been detected and removed. No interactivity takes place nor there is any requirement of giving any command to the software to perform its function of detecting and removing virus from the computer system. It is also seen from the meaning assigned to interactive that a program should involve the user in the exchange of information. There has to be action and communication between the two. A user should communicate with the computer facility and receive rapid responses, which can be used to prepare the next inputs. In contract, in other softwares like ERP, EXCEL, MS Word, there is continuos interaction between the user and the computer system and these softwares perform only after receipt of input from the user - Such being the position, no service tax was leviable under section 65(105)(zzzze) of the Act prior to 1 July, 2012. Even after 1 July, 2012 the definition of information technology software under section 65B(28) remained the same and so also service tax was not leviable. It is clear from the decision of the Supreme Court in TATA CONSULTANCY SERVICES VERSUS STATE OF ANDHRA PRADESH [ 2004 (11) TMI 11 - SUPREME COURT] that intel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopers have to keep continuous surveillance on Viruses, Malware and Spam, and this is achieved by providing continuous updates to virus definitions. This enables Anti-Virus Software to maintain the computer system virus free . 3. According to the Appellant, during the disputed period from 1 March, 2011 to 31 March, 2014, the Antivirus Software was developed by M/s Softtalk Technologies Ltd., M/s Jupiter International Ltd. and M/s IP Softcom (India) Pvt. Ltd. for the Appellant in a ready to sell condition mentioning unique Key number (license key) and MRP. Being a Canned Software [Canned Software means that it is not specifically created for a particular customer], it was in the nature of goods and was subject to Sales Tax/ VAT and so no service tax was to be paid. This Antivirus Software was, therefore, sold by the aforesaid manufactures to the Appellant on payment of VAT. They were thereafter transferred by the Appellant to various Sales Offices of the Appellants from where the ultimate sale took place on payment of applicable VAT in the respective States. The Appellant claims that this activity was initially undertaken from Pune by sending the Master CD to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of information technology software service under Section 66E(d) of the Finance Act, 1994 for providing Quick Heal brand Antivirus software license key/code supplied along with CD/DVD replicated with Quick Heal brand Antivirus software through dealers/distributors to the end-customers in India. 17. Investigations conducted against M/s QHTPL has revealed that during the period 01.03.2011 to 31.03.2014, M/s QHTPL had supplied Quick Heal brand Antivirus software key/codes in retail packs to the end-user through dealers/distributors without discharging their Service Tax liability on such transactions . Packaged anti-virus software consists of license code which assists the end-user for receiving future updates of antivirus software electronically direct from the antivirus software owner for a certain period depending on the license to use the antivirus software. The end-user is provided with the temporary (non-exclusive) right to use the antivirus software as per conditions of end-user license agreement entered with M/s QHTPL and the same cannot be treated as deemed sale under Article 366(29A)(d) of the Constitution. In consideration of payment of the License Fee, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso pointed out that generation of license key/ code was neither a manufacturing activity nor service and that license key was neither software nor could it function or work as Antivirus Software. The updates/ upgrades were free and the activity was without consideration and, therefore, not a service. The Appellant also contended that the extended period of limitation under the proviso to section 73 of the Finance Act, 1994 [ The Act ] could not have been invoked. 6. The Adjudicating Authority, however, did not accept the contentions of the Appellant and confirmed the demand of service tax with interest and penalty. The Adjudicating Authority noticed that the whole transaction could be divided in two stages, namely (a) up to the replication of the Master CD by the replicators under the terms of agreement; and (b) Supply of Antivirus Software in CD to End-Users under a separate End User Licensing Agreement. It also noticed that the second part (i.e. b) consisted of two parts, namely (i) Supply of Antivirus Software in CD and (ii) Providing electronic updates to the software originally provided. The Adjudicating Authority observed that the first stage of the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecified period only. Therefore, it appears that the receiver of the software does not enjoy the same rights in the arrangement as a buyer of goods in general. As a result, the transaction is in the nature of a service and chargeable to service tax. ii) Subsequent supply as electronic updates It is not disputed that electronic updates are provided to the end customers under the license. Such electronic supply is an activity for a consideration. As such, it is clearly in the nature of supply of services. Hence, it is taxable. 9. The Adjudicating Authority also held that the extended period of limitation was correctly invoked and that the Appellant was also required to pay penalty and interest amount. 10. Shri M H Patil, learned Counsel for the Appellant submitted that:- i. Quick Heal Antivirus Software supplied in CD is not covered under information technology software service either prior to 1 July, 2012 under section 65(53a) of the Act or after 1 July, 2012 under section 65B (28) of the Act; ii. Even otherwise, Quick Heal Antivirus Software supplied in CD form is a Canned Software which would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the software development process as follows:- Quick Heal Technologies (P) Ltd is developer of Anti-virus software Quick Heal . Antivirus Software Development is a continuous process, which goes for 24/7 a week. This involves R D; rigorous testing and surveillance. We have a Development Centre in Pune where we develop our Software. After developing the software we have to continuously provide updates for the same. These updates contain solution for the new viruses. All these updates/ upgrades are provided as new version. These versions are given numbers for proper Identification. The developed software is offered to Customers in CD media, which cannot run or operate without a key password; These CDs are required in big quantity, a third party on job work basis; at his premises does this mass replication, currently from Moser Bear. The job worker dispatches these replicated CDs to all our branches as per the quantity intimated to them. To register our Software from this CD a special Key number is required. These unique Key Numbers are generated only in our Central Excise Registered premises right from beginning i.e. 1st March 2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cations to secure a database, advice on proprietary information technology software, (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; After 1 July 2012 18. Declared service has been defined under section 65B (22) of the Act to mean any activity carried out by any person for another person for consideration and declared as such under section 66E. In terms of section 66E (d) of the Act, the following shall constitute declared service. 66E (d) development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software; 19. Section 65B (28) of the Act defines information technology software as follows:- 65B(28) information technology software means any representation of instructions, data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by it can neither be manipulated nor does it provide any interactivity to a user and, therefore, does not satisfy the requirement of information technology software . According to the Appellant, once the computer system is booted, the Antivirus Software begins its activity of detecting the virus and continues to do so till the time the computer system remains booted. Thus, there is no interactivity or requirement of giving any commands to the software to perform the function of detecting and removing virus from the computer system. The Appellant further contends that the software developed by it is quite distinct from software like ERP, EXCEL, MS Word, where there is a constant to and fro interaction between the user and the computer system containing the said software. These softwares perform their function only after receipt of input from the user, which is not the case in the Antivirus Software developed by the Appellant. 26. The Appellant has also referred to the meaning of interactive software and the same is as follows:- A. In computer science: Interactive software refers to software which accepts and responds to input ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Adjudicating Authority, however, has not accepted the contention of the Appellant and has observed that the software can issue commands to scan drives, both internal and external and that it has an interface with the user to tune-up the personal computer and that it has also a parallel control feature. These features, according to the Adjudicating Authority, need a command by the user to the software and, therefore, it is interactive. 29. It is not possible to accept this finding. The Antivirus Software developed by the Appellant is complete in itself to prevent virus in the computer system. Once the computer system is booted, the Antivirus Software begins the function of detecting the virus, which continues till the time the computer system remains booted. The computer system only displays a message that viruses existed and that they have been detected and removed. No interactivity takes place nor there is any requirement of giving any command to the software to perform its function of detecting and removing virus from the computer system. It is also seen from the meaning assigned to interactive that a program should involve the user in the exchange of informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become goods . We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD . In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been modified or customized for that particular consumer, the transaction will be considered the sale of tangible personal property if the charge for the modification constitutes no more than half of the price of the sale. 73 . The software marketed by the Appellants herein indisputably is canned software and, thus, as would appear from the discussions made hereinbefore, would be exigible to sales tax. 74 . It is not in dispute that when a programme is created it is necessary to encode it, upload the same and thereafter unloaded. Indian law, as noticed by my learned Brother, Variava, J., does not make any distinction between tangible property and intangible property. A goods may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customized satisfies these attributes, the same would be goods . Unlike the American Courts, Supreme Court of India have also not gone into the question of severability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in case of Tata Consultancy Services vs State of Andhra Pradesh [2002(178) ELT 22(SC) refers]. Sale of pre-packaged or canned software is, therefore, in the nature of sale of goods and is not covered in this entry. 6.4.4 Would providing a license to use pre-packaged software be a taxable service? The following position of law needs to be appreciated to determine whether a license to use pre packaged software would be goods- As held by the Hon ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh [2002(178) ELT 22(SC)] ] pre-packaged software or canned software or shrink wrapped software put on a media like is goods. Relevant portion of para 24 of the judgment is reproduced below- A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of paint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 66E. Transfer of right to use goods is a well-recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. For understanding the concept of transfer of right to use please refer to point no 6.6.1. A license to use software which does not involve the transfer of right to use would neither be a transfer of title in goods nor a deemed sale of goods. Such an activity would fall in the ambit of definition of service and also in the declared service category specified in clause (f) of section 66E. Therefore, if a pre-packaged or canned software is not sold but is transferred under a license to use such software, the terms and conditions of the license to use such software would have to be seen to come to the conclusion as to whether the license to use packaged software involves transfer of right to use such software in the sense the phrase has been used in sub-clause (d) of article 366(29A) of the Constitution. (See point no 5.6.1). In case a license to use pre-packaged software imposes restrictions on the usage of such licenses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en used in sub-clause (d) of article 366(29A) of the Constitution. The guidelines also provide that in case a license to use pre-packaged software imposes restrictions on the usage of such licenses, which restriction interfere with the free enjoyment of the software, then such a license would not result in transfer of right to use the software within the meaning of Clause 29(A) of article 366 of the Constitution. However, every condition imposed would not make it leviable to service tax. The condition should be such so as to restrain the right to free enjoyment on the same lines as a person who has otherwise purchased goods is able to have. 39. In this connection, it will also be relevant to refer to decisions of the Andhra Pradesh High Court in M/s G S Lamba and Sons v/s State of Andhra Pradesh [ 2012-TIOL-49-HC-AP-CT ] and the Guwahati High Court in Dipak Nath v/s Oil and Natural Gas Corporation Ltd. and others [ 2009 SSC ONLINE GUA 420] . 40. The Andhra Pradesh High Court in M/s G.S. Lambha indicated the settled essential request of a transaction for transfer of the right to use the goods. It observed that it is not on the delivery of the goods used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present appeals, i.e., whether there was a transfer of the right to use the goods covered by the contract agreement between the parties, as laid down by the Apex court, having been understood, the court must now proceed to answer the said question by understanding the correct scope and meaning of the terms of the contract involved in the present cases. 19. The above analysis of the relevant provisions of the contract agreement between the parties indicate the clear dominion and control of ONGC over the crane during the entire period of operation of the contract once a crane is placed at the disposal of the ONGC under the contract. The crane is to be deployed at worksites as per the discretion of the ONGC and though the normal period of deployment is 10 hours in a day, such deployment at the discretion of the ONGC may be for any period beyond the normally contemplated 10 hours. The deployment of the crane in oil field operations as well as other hazardous situations is at the sole discretion of the ONGC. Though the cranes are operated by the crew provided by the contract such crew while operating a crane is under the effective control of the ONGC and its authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E. IF YOU DO NOT AGREE TO ALL THE TERMS AND CONDITIONS BELOW, DO NOT USE THIS SOFTWARE IN ANY WAY AND PROMPTLY RETURN IT OR DELETE ALL THE COPIES OF THIS SOFTWARE IN YOUR POSSESSION. In consideration of payment of the License Fee, which is a part of the price, evidenced by the Receipt. Quick Heal grants the Licensee, a non-exclusive and non-transferable right. Quick Heal reserves all rights not expressly granted, and retains the title and ownership of the software, including all subsequent copies in any media. This software and the accompanying written materials are the property of Quick Heal and are copyrighted. Copying of the software or the written material is expressly forbidden. In addition to this security software, Quick Heal offers you Quick Heal Remote Device Management Services to manage your device(s). Quick Heal reserves all rights not expressly granted, and retains the title and ownership of the software, including all subsequent copies in any media, This software and the accompanying written materials are the property of Quick Heal and are copyrighted. 1. DEFINITIONS -------------- B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Heal RDM service. L. attempt to gain unauthorized access to Quick Heal RDM networks. 5. LICENSE PERIOD A. You are entitled to use this software/ RDM Services from the date of license activation until the expiry date of the license. B. You understand, agree and accept that you are entitled for the updates and technical support via the Internet and telephone. Any use of this software/RDM Services for any other purposes is strictly forbidden and probhibited and Quick Heal reserves to take any action against such unauthorized usage. C. License for use of Quick Heal RDM service to manage devices shell be valid till your device secutiry software license is valid. D. You agree, understand that any unauthorized usage of the software/ RDM services or breach of any/all terms and conditions stated herein the Agreement shall result in automatic and immediate termination of this Agreement and the License granted hereunder and which may result in criminal and/ Or civil action by Quick Heal and/ Or its agents against you including but not limited to right to block the key file/ License key/ product key and without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not limited to any direct or incidental expenses arinsing out of Your usage of such features of the software/RDM services. IV. that you be solely responsible and shall comply all applicable laws, regulations of India and any foreign laws including without limitation, privacy, obscenity, confidentiality, copyright laws for using any report, date, information derived as a result of using the software and Quick Heal RDM services. V. that while using the software, Quick Heal suggests some actions to be initiated by You in your sole benefit, for example Quick Heal software may suggest You to uninstall infected applications , however such actions are suggestive and Quick Heal takes no responsibility/liability if you perform such suggestive actions or not and Quick Heal assumes no responsibility/ liability for any liability arising out of such actions/inactions. 9. QUICK HEAL STATUS UPDATE Upon every update of licensed copy, Quick Heal Update module will send current product status information to Quick Heal Internet Centre. The information that will be sent to the Internet Centre includes the Quick Heal protection health status like, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d party the parent impregnated seed and so it would not amount to a deemed sale within the meaning of Clause 29(A)(d) of article 366 of the Constitution. The Court found there was a deemed transfer within the meaning of Clause 29(A)(d) of article 366 of the Constitution and the observation in this connection are as follows:- 37. ------------- The first question is whether there is a 'transfer' within the meaning of article 366(29A)(d). We believe there is. It is true that the essence of a 'transfer' is the divesting of a right or goods from transferor and the investing of the same in the transferee, and this is what Salmond on Jurisprudence and Corpus Juris Secundum both say. In our opinion, the seeds embedded with the technology are, in fact, transferred. Monsanto India is divested of that portion of the technology embedded in these fifty seeds and these are fully vested in the sub-licensee . Mr. Venkatraman is not correct when he says that the effective control of the 'goods' is with Monsanto India. In RINL, the Supreme Court concluded that the contractor (transferee) did not have effective control over the machinery, despite the fact th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... former is clearly a sale. The difficulty with Mr. Venkatraman's argument is that it tries to draw a completely unnecessary distinction between the technology and the medium in which it is delivered. Neither is the subject of the levy. The subject of the levy is not the technology nor the medium. It is the license; and the terms of that license are determinative. Where a license is purchased, it is still a sale, although what the user has 'purchased' is the right to use the software. Every license has a unique key and every sale is therefore uniquely identified. The purchase is therefore a transfer of the right to use that particular, identified software. The proprietory rights to the software do not have to be 'sold' or 'transferred'. Microsoft and Adobe retain all those rights, and all intellectual property continues to vest in them. This is, therefore, a transfer of the right to use that software, and to that extent, the intangible (the software) is sold; but the terms of that license allow the software vendor to retain complete seizin and dominion over all intellectual property rights. The transfer is not of those intellectual property rights, but o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service , in terms of the residuary Entry 97 of List I of Schedule VII, the challenge to the amended provision cannot be accepted so long as the residuary power is available. However, the question as to whether a transaction would amount to sale or service depends upon the individual transaction and on that ground, the vires of a provision cannot be questioned. 35 . For all the above reasons, we dismiss the writ petitions holding that the software is goods and whether the transaction would amount to sale or service would depend upon the individual transaction and for the reason of that challenge, the amended provision cannot be held to be unconstitutional so long as the Parliament has the legislative competency to enact law in respect of tax on service in exercise of powers under Entry 97 of List I of Schedule VII. ( emphasis supplied ) 50. This decision also does not help the Revenue as only the legislative competence of the Parliament was upheld. Software was held to be goods , but whether the transaction would be sale or service, it was held, would depend upon the terms of the agreement. 51. Thus, viewed from any ..... 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