TMI Blog2022 (8) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... e updates and the technical support. In view of the Tribunal, the right to use the software would amount to the deemed sale . The Tribunal rejected the contention of the revenue that the transaction would not be covered under subclause (d) of the Article 366(29A) of the Constitution. The declared services include the services of renting of immovable property, works contract, hire purchase/instalment payment system, supply of food/drink, etc. In other words, under the Constitution what is related to deemed sale is also covered under the deemed service as per the above Section. The sum and substance of the ratio of the case of BHARAT SANCHAR NIGAM LTD. (BSNL) VERSUS UNION OF INDIA [ 2006 (3) TMI 1 - SUPREME COURT] as discernible is that the contract cannot be vivisected or split into two. 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. 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 transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The assessee is registered with the Service Tax Commissioner, PuneIII for providing taxable services, inter alia, under the category of Information Technology Software Service . The assessee is engaged in the development of Quick Heal brand Antivirus Software which is supplied along with the license code/product code either online or on the replicated CDs/DVDs to the endcustomers in India. 6. It appears from the materials on record that it came to the notice of the Directorate General of Central Excise Intelligence (Headquarters) that the assessee engaged in the development of Quick Heal brand Antivirus Software had not been paying service tax prior to 01.07.2012 on the services covered under the category of Information Technology Software Service falling under Item No. (vi) of clause (zzzze) of subsection (105) of Section 65 of the Act 1994 w.e.f 01.07.2012 on the services covered under the category of Information Technology Software Service under Section 66E(d) of the Act 1994 for providing Quick Heal brand Antivirus Software license key/code supplied along with the CD/DVD replicated with the Quick Heal brand Antivirus Software through the dealers/distributors to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Andhra Pradesh, (2005) 1 SCC 308, ( TCS ), the prepackaged/ canned software would be treated as goods. Once the software is put on a medium like a CD and then sold, such software would be treated as goods. iii. The Central Board of Excise Customs (CBEC) issued guidelines when the negative regime was issued on 1.7.2012. The guidelines clarified that the prepackaged/ canned software would not be goods even if there was a licence. 12. The revenue, being dissatisfied with the order passed by the Tribunal, has come up before this Court with the present appeal under Section 35L(b) of the Act 1944. 13. The revenue has in its memorandum of appeal formulated the following questions of law for consideration of this Court:6 (i) Whether the Tribunal is right in holding that the transaction in the present case results in the right to use the software and would amount deemed sale? (ii) Whether the Antivirus Software license key/code supplied by the respondent along with CD/DVD replicated with Quick Heal Brand Antivirus Software through dealers/distributors to the EndCustomers is liable to Service Tax? (iii) Whether the service provided by the respondent is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensing Agreement, consists of 2 parts: (i) Supply of Antivirus software in the CD. (ii) Providing electronic updates to the software originally provided. 16. He would submit that the present dispute is one relating to part (b) as above of the transaction. 17. Referring to the decision of this Court in the case of Bharat Sanchar Nigam Ltd. v. Union of India, (2006) 3 SCC 1, (for short, BSNL ), he would submit that the same deals with the composite transaction of giving telephone connection that involves service and sale. It was held therein by the majority that it is possible for the State to tax the sale element provided there is a discernible sale and the dominant intention test is satisfied. To put it in other words, the learned counsel would submit that the test for a composite contract other than those mentioned in the Article 366(29A) of the Constitution continues to be did the parties have in mind or intend separate rights arising out of the sale of goods? . If there was no such intention, there is no sale even if the contract could be disintegrated. According to the learned counsel, the test for deciding whether a contract falls into one category or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered by this Court in the case of TATA Consultancy Services (supra). The learned senior counsel offered the following comments on the impact of the decision in the case of TATA Consultancy Services (supra) : 4.1 The question as to whether software can be treated as goods was referred to a bench of five judges in the aforesaid TCS case. 4.2 The State of Andhra Pradesh had levied VAT/sales tax on software CDs, which were packed and sold to customers. This Hon ble Court, after extensive consideration of India and U.S. decisions, held that even though the copyright in a software program may remain with the originator of the program, the moment the software is loaded onto a CD and copies are made and marketed, they become goods, which are susceptible to sales tax . 4.3 There is no difference between sale of a software program on a CD/floppy disc or the sale of music or film CD. It categorically held that the software and the medium cannot be split up in a sale of a computer software, which is a sale of goods. Apart from the judgment of Justice Variava, Justice S.B. Sinha gave a concurring opinion giving additional reasons as to why software, which is put on a medium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, then the transaction would be in the nature of a sale of goods and no service tax would be levied. 23. The learned senior counsel thereafter submitted as regards the excise duty/tariff entry and exemption notifications as under : 6.1 It is pertinent to note that S. No. 84A of the third schedule to the Central Excise Act, 1944, deals with entry 8523 80 20 corresponding to Packaged software or canned software . The Explanation provided thereunder defined packaged software or canned software as a software which is intended for sale or capable of being sold offtheshelf. 6.2 Moreover, Notification No:14/2011 CE dated 01032011 adopted this definition and exempted excise duty on such packaged software or canned software . 24. He vehemently submitted that the transaction cannot be bifurcated into two components as suggested by the revenue i.e. (i) sale of CD, and (ii) supply of updates. In this regard, he submitted as under : 7.1 During the arguments, the Department submitted that apart from the sale of CD, the updates which were to be provided under the contract would amount to service. It is submitted that this is incorrect because the prepackaged anti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as goods and consequently can subject only to sales tax/VAT. 26. In such circumstances referred to above, the learned senior counsel appearing on behalf of the assessee, prays that there being no merit in the present appeal, the same may be dismissed. ANALYSIS : 27. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is, whether the Tribunal committed any error in passing the impugned order? 28. Before we advert to the rival submissions canvassed on either side, we must look into some of the reasons assigned by the Tribunal while allowing the appeal preferred by the assessee against the order of the adjudicating authority. We quote: 25. The contention of the Appellant is that the software developed 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 65B(28) remained the same and so also service tax was not leviable. 31. The matter can be examined from another angle. Section 65B (51) defines a taxable service to mean any service on which service tax is leviable under section 66B. Section 66B provides that there shall be levied service tax on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Section 65B (44) define service to mean any activity carried out by a person for consideration, and includes a declared service, but shall not include, amongst others, an activity which constitutes merely such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution. 29. The Tribunal thereafter proceeded to consider the decision of this Court rendered in the case of TATA Consultancy Services (supra). Upon analysis of the ratio of the said decision, the Tribunal recorded the following findings : 35. It is clear from the aforesaid decision of the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 31. The Tribunal thereafter proceeded to consider the terms of the agreement to ascertain whether there was transfer of the right to use goods . The Tribunal in para 44 of its order recorded the following relevant provisions of the Quick Heal Internet Security EndUser License Agreement: 16. BY USING THIS SOFTWARE OR BY ACCEPTING OUR SOFTWARE USAGE AGREEMENT POLICY OR ATTEMPTING TO LOAD THE SOFTWARE IN ANY WAY, (SUCH ACTION WILL CONSTITUTE A SYMBOL OF YOUR CONSENT AND SIGNATURE), YOU ACKNOWLEDGE AND ADMIT THAT YOU HAVE READ, UNDERSTOOD AND AGREED TO ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT, THIS AGREEMENT ONCE ACCEPTED BY YOU [ AS AN INDIVIDUAL (ASSUMING YOU ARE ABOVE 18 YEARS AND/OR HAVING LEGAL CAPACITY TO ENTER INTO AN AGREEMENT), OR THE COMPANY OR ANY LEGAL ENTITY THAT WILL BE USING THE SOFTWARE (HEREINAFTER REFERRED TO AS YOU' OR YOUR' FOR THE SAKE OF BREVITY] SHALL BE A LEGALLY ENFORCEABLE AGREEMENT BETWEEN YOU AND QUICK HEAL TECHNOLOGIES PRIVATE LIMITED, PUNE, INDIA (HEREINAFTER REFERRED TO AS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RDM service to manage your device (a maximum of 10 devices in one account.) You cannot: A. emulate, or adapt any portion of the software. B. sublicense, rent or lease any portion of the software. C. try making an attempt to reveal/discover the source code of the software. D. debug, decompile, disassemble, modify, translate, reverse engineer the software. E. create derivative works based on the software or any portion thereof with sole exception of a nonwaivable right granted to You by any applicable legislation. F. remove or alter any copyright notices or other proprietary notices on any copies of the software. G. reduce any part of the software to human readable form. H. use the software in the creation of data or software used for detection, blocking or treating threats described in the user manual. I. use for unlicensed and illegal purpose. J. remove your user account from Quick Heal RDM service once registered K. retrieve deleted location entries and back up data from the user account on the Quick Heal RDM service. L. attempt to gain unauthorized access to Quick Heal RDM networks. 5. LICENSE PERIOD A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s initiated due to the same and Quick Heal assumes no liability/ responsibility in any case and the Clause of Indemnification shall be applicable. II. that Quick Heal assumes no liability/responsibility for any date deletion, including but not limited to any deletion/ loss of personal, and/or confidential date; and/or uninstallation of thirdparty apps; and/or change in settings; specifically authorized by You or occurs due to the actions, inactions (whether intentional or not) by You or any third party whom You have authorized to use, handle you Device due to features or software/RDM services. III. that to avail/use certain features of the software/RDM services, you may be required to incur some cost and that Quick Heal does not warrant that the usage of certain features of the software/RDM services are free of cost and that Quick Heal shall not entertain and expressly disclaims, any claim for reimbursement of any expenses including but not limited to any direct or incidental expenses arising 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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. 33. The Tribunal ultimately concluded as under while allowing the appeal filed by the assessee herein : 51. 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. 34. Thus, from the aforesaid, it is evident that the Tribunal laid much emphasis on the fact that in accordance with the agreement the licensee has the right to use the software subject to the terms a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey shall not include any activity relating to use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged; Explanation 3. For the purposes of this Chapter,( a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a nontaxable territory shall be treated as establishments of distinct persons. Explanation 4.A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory; 36. The analysis of the definition of service as above 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. 37. Clause (29A) of Article 366 of the Constitution of India defines the deemed sale. This clause reads as follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncil of Architecture constituted under the Architects Act, 1972; (20 of 1972.) or (B) chartered engineer registered with the Institution of Engineers (India); or (C) licensed surveyor of the respective local body of the city or town or village or development or planning authority; (II) the expression construction includes additions, alterations, replacements or remodeling of any existing civil structure; (c) temporary transfer or permitting the use or enjoyment of any intellectual property right; (d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software; (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; (f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods; (g) activities in relation to delivery of goods on hire purchase or any system of payment by instalments; (h) service portion in the execution of a works contract; (i) service portion in an activity wherein goods, being food or any other article of human con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, delivered, stored, possessed, etc. It was held that both in the case of 'canned' and 'uncanned' software all these are possible (sic para 16). Associated Cement Companies Ltd. v. Commissioner of Customs, (2001) 4 SCC 593, was heavily relied on by this Court. It was held: 27. In our view, the term goods as used in Article 366(12) of the Constitution and as defined under the said Act is very wide and includes all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. A software program may consist of various commands which enable the computer to perform a designated task. The copyright in that program may remain with the originator of the program. 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 program on a CD/floppy disc from a sale of mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... randed software other questions like situs of contract of sale and/or whether the contract is a service contract may arise . 43. Associated Cement Companies Ltd. (supra) considered the question whether the drawings, designs, etc. relating to machinery or industrial technology were goods, leviable to duty of customs on their transaction value at the time of import. It was argued that the transfer of technology or knowhow though valuable was intangible. The technology when transmitted to India on some media does not get converted from an intangible thing to tangible thing or chattel and that in a contract by supply of services there is no sale of goods, was the argument. Reading Section 2(22) of the Customs Act, 1962 which defines the word goods , including clause (c) baggage and clause (e) any other kind of moveable property , it was held that any moveable article brought into India by a passenger as part of his baggage can make him liable to pay customs duty as per the Customs Tariff Act, 1975. Any media whether in the form of books or computer disks or cassettes which contain information technology or ideas would necessarily be regarded as goods under the aforesaid prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (29A), therefore, refer to the words transfer, delivery and supply, as applicable, used in the various subclauses. Thus, the transfer of goods will be a deemed sale in the cases of subclauses (a) and (b), the delivery of goods will be a deemed sale in case of subclause (c), the supply of goods and services respectively will be deemed sales in the cases of subclauses (e) and (f) and the transfer of the right to use any goods will be a deemed sale in the case of subclause (d). Clause (29A) cannot, in our view, be read as implying that the tax under subclause (d) is to be imposed not on the transfer of the right to use goods but on the delivery of the goods for use. Nor, in our view, can a transfer of the right to use goods in subclause (d) of clause (29A) be equated with the third sort of bailment referred to in Bailment by Palmer, 1979 edition, page 88. The third sort referred to there is when goods are left with the bailee to be used by him for hire, which implies the transfer of the goods to the bailee. In the case of subclause (d), the goods are not required to be left with the transferee. All that is required is that there is a transfer of the right to use the goods. In ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... composite contract of service and sale . There may be a transfer of right to use the goods as defined in the providing of access or telephone connection by the telephone service provider to a subscriber. Justice Ruma Pal, speaking for the Bench in her separate judgment, took the view that a subscriber to a telephone service could not reasonably be taken to have intended to purchase or obtain any right to use electromagnetic waves or radio frequencies when a telephone connection is given. Nor does the subscriber intend to use any portion of the wiring, the cable, the satellite, the telephone exchange, etc. At the most, the concept of the sale in a subscriber's mind would be limited to the handset that might have been purchased for the purposes of getting a telephone connection. As far as the subscriber is concerned, no right to the use of any other goods, incorporeal or corporeal, is given to him with the telephone connection. In such circumstances, it was held that the electromagnetic waves or radio frequencies are not goods within the meaning of the word either in Article 366(12) or for the purpose of Article 366(29A)(b) . Emphasis was laid on the fact, whether there a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of service as there was no transfer of right to use the goods at all. 51. The following principles to the extent relevant may be summed up: (a) The Constitution (Fortysixth) Amendment Act intends to rope in various economic activities by enlarging the scope of tax on sale or purchase of goods so that it may include within its scope, the transfer, delivery or supply of goods that may take place under any of the transactions referred to in subclauses (a) to (f) of Clause (29A) of Article 366. The works contracts, hire purchase contracts, supply of food for human consumption, supply of goods by association and clubs, contract for transfer of the right to use any goods are some such economic activities. (b) The transfer of the right to use goods, as distinct from the transfer of goods, is yet another economic activity intended to be exigible to State tax. (c) There are clear distinguishing features between ordinary sales and deemed sales. (d) Article 366(29A)(d) of the Constitution implies tax not on the delivery of the goods for use, but implies tax on the transfer of the right to use goods. The transfer of the right to use the goods contemplated in subcla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lways 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. CONSTRUCTION OF AGREEMENT BETWEEN THE PARTIES:53. The salient features of the Quick Heal Internet Security EndUser License Agreement are as follows: 1. Grant of License, not ownership In consideration of payment of the License Fee, which is a part of the price, Quick Heal (developer) grants the purchaser (enduser) a license which is nonexclusive and nontransferable. The developer reserves all rights not expressly granted and retains the title and ownership of the software, including all subsequent copies in any media. 2. Termination The Enduser is entitled to use the software till the date on which the license expir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.03 For the purpose of the construction of contracts, the intention of the parties is the meaning of the words they have used. There is no intention independent of that meaning. 6.09 Where the words of a contract are capable of two meanings, one of which is lawful and the other unlawful, the former construction should be preferred. Sir Edward Coke [Co. Litt. 42a] expressed the proposition thus: It is a general rule, that whensoever the words of a deed, or of one of the parties without deed, may have a double intendment and the one standeth with law and right, and the other is wrongful and against law, the intendment that standeth with law shall be taken. In more modern times that statement was approved by the Privy Council in Rodger v. Comptoir D'Escomple de Paris, (1869) LR 2 PC 393 : 16 ER 618, in which Sir Joseph Napier, delivering the advice of the Board said: The rule that words shall be construed most strongly against him who uses them gives place to a higher rule; higher because it has a moral element, that the construction shall not be such as to work a wrong. Similarly, in Fausset v. Carpenter, (1831) 2 Dow Cl 232 : 6 ER 71 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Order in Original dated 26.04.2018 passed by the respondent herein. FACTUAL MATRIX 62. The appellant herein obtained the antivirus software replicated from the units in Himachal Pradesh duly assessed to Nil Central Excise duty under the Notification No. 50/2003 CE dated 10.06.2003, and sold antivirus software in the CD form i.e., as a packaged software or canned software both indigenously by remitting appropriate VAT or exported the same. Disputes were raised by the tax authorities claiming that the activities of the appellant herein came within the ambit of the Information Technology Software Service as defined under Section 65(105)(zzzze) of the Act 1994. The initial notices issued ended in the confirmation of demand on the ground that since the appellant was providing the key and allowing updates online, it amounted to digital delivery and therefore it would fall under the above taxable entry. 63. The appellant preferred statutory appeals against these orders passed by the Tribunal, Chennai Branch. 64. The Tribunal was pleased to grant interim stay as the appellant had paid VAT on the sale of the software. While the appeals were pending before the Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the learned single Judge on the ground that an earlier Division Bench decision of the Madras High Court in the case of M/s Infotech Software Dealers Association v. Union of India (supra) covered the issue. It also held that the antivirus software which is installed in the hardware would interact whenever the user of the computer engages the system. 69. In such circumstances referred to above, the appellant herein has come up before this Court by filing the present appeals. 70. These appeals should succeed in the light of the reasoning assigned by us while dismissing the Civil Appeal (Diary No. 24399 of 2020), as above. 71. However, while allowing these appeals, we may only observe that in the case of M/s Infotech Software Dealers Association v. Union of India (supra) the challenge was to the validity of Section 65(105)(zzzze) levying service tax on the information technology software service. The High Court held that the question whether the software is goods or not would depend on the facts and circumstances of individual case. It is evident on plain reading of the judgment rendered by the Madras High Court in the case of M/s Infotech Software Dealers Association (s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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