TMI Blog2024 (3) TMI 691X X X X Extracts X X X X X X X X Extracts X X X X ..... said purpose, to acquire the necessary software to be embedded with the system, they entered into an agreement with MS, whereby they were authorized to procure off-shelf MS OS software, which also provided them the right to replicate into individual hard discs installed later into the Thin Clients. The software would be operational or functional only with affixation of the stickers i.e. COAs procured separately for each of the Thin Clients from the authorized MS distributors. Clause m of the Licence Grants and Limitations makes it clear that the appellant shall not advertise, provide a separate price for, or otherwise market or distribute the Licensed products or any images as a separate item from the Embedded system. Merely by affixing the stickers / labels providing authenticity to software loaded to each of the Thin Clients cannot be construed as a service received by the appellant under the category of ITSS as held by the Commissioner in the impugned order - in the absence of a transfer of copyright of the software but only on mere right to use the software as clarified in the aforesaid circulars in explaining the scope of the levy as service' under ITSS, distinguishing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 76 of the Finance Act,1994. However, this penalty will be applicable for the period till 10.05.2008 in view of the amendment to section 78 incorporated vide Finance Bill 2008, under section 76 of the Finance Act, 1994, for their failure to discharge the appropriate service tax in accordance with the provisions of section 68 of the Act and the rules made there under. v. I impose penalty of Rs. 5000/-under the provisions of section 77 of the Act. vi. I impose penalty of Rs.7,66,82,997/-(Rupees seven crores sixty six lakhs Eighty Two Thousand Nine Hundred and Ninety seven only) for suppressing the fact of having provided the taxable value, suppressing the receipt of the taxable value thereof and the contravention of the provisions of the act and the rules made their under, with intent to evade payment of service tax under Section 78 of the Finance Act, 1994, which shall be reduced to 25% of the service tax confirmed provided the entire amount of service tax along with interest and reduce penalty are paid within 30 days of the receipt of the order. 2. Briefly stated the facts of the case are that the appellants are holders of service tax registration for providing Maintena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he demand with interest has been confirmed and penalty was imposed, mentioned as above. Hence, the present appeal. 3.1. Learned Senior advocate Shri Lakshmi Kumaran for the appellant has submitted that the appellant is an 100% EOU engaged in the manufacture of Thin Client, which is a computer with nominal storage capacity. These Thin Clients are also described as dumb terminals. Unlike personal computers (PCs), which hosts various applications, performs processing tasks and stores files locally, Thin Client does little more than transmitting keyboard and mouse inputs to the server and display the resulting output on the local screen. Out of the total production, 90% of Thin Clients are exported either directly or through merchant exporters. The Thin Clients are loaded with off the shelf packaged software i.e. Microsoft Operating System. 3.2. The appellant had entered into a Microsoft OEM Customer License Agreement for embedded systems (Microsoft OEM CLA) dated 11.01.2007 with Microsoft Corporation (MS, for short), which grants them certain non-exclusive, limited world-wide license. In pursuance to the license granted by the MS, the appellant builds (replicates) MS images using soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to replicate software images of MS on the Thin Clients. Accordingly, they acquired a software toolkit from local authorized dealer of MS which enables them to replicate software / OS into the Thin Clients. As a means of informing the end user, the Thin Client is authentic, a sticker is affixed on each Thin Client and the said COA is non-removable, sequentially numbered and contains additional anti-piracy features. It is submitted that the COA consists of (a) serial number (b) name of software and (c) internal part of MS. COAs could be purchased only by OEM agreement holders of MS and from authorized dealers only. The appellant had procured COAs on High Sea Sales (HSS) basis from M/s. Priya Limited. They have further submitted that affixation of such COAs on the Thin Clients does not amount to import of software service nor acquiring of the software licence / right to use of the software. 3.5. Further he has submitted that once the COAs/Stickers are affixed on the Thin Client and is sold to the customers as a part of the embedded system i.e. Thin Client and no splitting of values is envisaged in the transaction with the end customer. 3.6. It is argued that the appellants purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y have referred to the judgment of the Tribunal in the case of Infrasofttech India Ltd. Vs. CCE, Mumbai [2021(46) GSTL 141 (Tri. Mum.)]. Further, it is submitted that the right to commercially exploit, reproduce, distribute and sell software as mentioned in the aforesaid taxable entry of ITSS under Section 65(105)(zzzze) of the Finance Act,1994 are copyrights as understood under Section 14(a) and (b) of the Copyright Act, 1957. It is also clear from the Board s instruction dated 04.11.2009 that IPR portion of the cost of software was brought under the service tax net under the taxable category of ITSS. 3.9. Further, it is submitted that in the present case, the transaction is sought to be taxed is the procurement of COA/sticker, which are procured from M/s Priya Limited Bombay on high seas basis. It is required to be affixed on the embedded system and does not grant license off the shelf packaged software under the scope of ITSS. 3.10. Rebutting the allegation at para 20 of the show cause notice, they have submitted that no licence in a document form is imported along with sticker/ labels imported in the present case, a Run Time licence also does not grant copyright licence in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which would amount to use of or right to use copyright but would be a licence, which means restrictions or conditions for use of software. Therefore, the transaction of import of COAs purchased from M/s. Priya Limited does not involve any licence of copyright in the software and at best it could be a software licence that grants access right to such off the shelf-packaged software. Such activity would fall outside the scope of taxable service under ITSS. Also, referring to Karnataka Value Added Tax Act, 2003, it is submitted that COAs / sticker labels affixed on the Thin Client does not confer a copyright licence in software and hence specifically covered as software licence under entry 34 of the said Act being goods and not services . 3.12. Refuting the confirmation of service tax demand in terms of Section 66A of the Finance Act, 1994 read with Rule 2(l)(d)(iv) of the Service Rules, 1994, the learned advocate submitted that the said provisions are applicable only when taxable services have been received from a person outside India. Such liability cannot be fastened on a recipient in India, if the service received is not a taxable service. The procurement of the stickers / COAs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the COA, in an invoice, a runtime key, alternatively known as the product identification key is also included. As per the agreement with Microsoft, no Thin Clients loaded with MS software could be sold without COA. Referring to the agreement between the appellant and the Microsoft Licensing GP, some of the clauses viz. COA, Runtime License Envelope, ALP, Licence Grants and Limitations of the agreement, countered the argument of the appellant that they have not imported any software or right to use software during the material period by way of neither downloading any software nor any software licence is received along with the sticker, the learned AR for the Revenue reading the definition of ITSS submitted that the COA along with runtime key are nothing but licence granted to the appellant, which allows them to sell these Thin Clients with MS operating system. 4.1. Referring to the impugned order, he has submitted that the COAs certify that the Thin Client contained original software/OS.M/s. Daymount, UK, raised commercial invoices to M/s. Priya Ltd. for sale of these licences and these were later purchased through HSS basis by the appellant. As per the licence agreement, no Thin C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the appellant and the Microsoft for purchase of the licence. The Bills of Entry filed by the appellant stating that the supplier to be M/s. Daymount Ltd., who are located in UK and do not have any place of business in India; hence it is quite clear that the supplier remains an off shore entity and hence the appellants are correctly fastened with the service tax liability under Section 66A of Finance Act, 1994. Further, it is submitted that even, if goods were invoiced to M/s. Priya Limited, the service receiver remained with M/s. VXL i.e. the appellant. It is M/s. VXL who had entered into an agreement with M/s. Microsoft and the software is loaded by the appellant into the Thin Client and sold the same with COA. 4.4. Further, responding to the argument of revenue neutrality advanced on behalf of the Appellant, the learned AR for the Revenue referred to the judgment of the Hon ble Supreme Court in the case of CCE ST, Bangalore Vs. Northern Operating Systems [2022(61) GSTL 129 (SC)] and submitted the service tax liability on ITSS cannot be ignored as the appellant would receive cash refund under Rule 5 of CENVAT Credit Rules, 2004 on import of services. Responding to the arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said stickers are initially purchased by one M/s. Priya Limited from M/s. Daymount Limited, UK. M/s. Priya Limited in turn sold the stickers / labels to the appellant on HSS basis, which were cleared by the appellant by filing necessary Bills of Entry declaring MS software licence (sticker label)(Windows XP Embedded) falling under Chapter heading No.4907 00 30 of the Customs Tariff Act and availed benefit under Sl.No.157 of the Notification No.21/2002 dated 01.03.2022 at nil rate of duty. 8. The Revenue s contention is that the MS Windows Embedded 2009 Tool Kit purchased locally and loaded into Thin Clients manufactured by the appellant necessarily to be affixed with COA as per the agreement dated 11.01.2007; hence the stickers/labels which are imported/ purchased on HSS basis are not goods but service falling under the taxable category of ITSS during the relevant period. 9. The contention of the appellant on the other hand is that stickers / labels imported by them is in the nature of goods being affixed to the Thin Clients before sale to identify and authenticate the software, assessed by Customs authorities under CTH 4907 00 30 documents of title conveying right to use Infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produce the said instruction / circular. 4.1 INFORMATION TECHNOLOGY SOFTWARE SERVICE: 4.1.1 Information Technology (IT) software service includes,- Development (study, analysis, design and programming) of software. Adaptation, up-gradation, enhancement, implementation and other similar services in relation to IT software. Provision of advice and assistance on matters related to IT software, including: Conducting feasibility studies on the implementation of a system, Providing specifications for a database design, Providing guidance and assistance during the start-up phase of a new system, Providing specifications to secure a database, Providing advice on proprietary IT software. Acquiring the right to use,- IT software for commercial exploitation including right to reproduce, distribute and sell, o software components for the creation of and inclusion in other IT software products, IT software supplied electronically. 4.1.2 Software consists of carrier medium such as CD, Floppy and coded data. Softwares are categorized as normal software and specific software . Normalised software is mass market product generally available in packaged form off the shelf in retail outlets. Specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce is being deleted. To include testing and analysis of IT software services under Technical testing and analysis service [section 65(105)(zzh)]. To include Certification of IT software services under Technical inspection and certification service [section 65(105)(zzi)]. To clarify as removal of doubts that Management, maintenance or repair of properties includes Management, maintenance or repair of IT software [section 65(105)(zzg)]. Maintenance of packaged software (being goods) is also leviable to service tax under the said service. Services provided in relation to advice, consultancy and assistance on matters related to IT software shall be leviable to service tax under the IT software service. Consulting engineer s service [section 65(105)(g)] in the discipline of computer hardware engineering is leviable to service tax whereas consulting engineer s service in the discipline of computer software engineering is not leviable to service tax by way of specific exclusion. Specific exclusion of consultancy in the discipline of computer software engineering from the scope of consulting engineer s service is not necessary and, therefore, being deleted. To clarify that a consultancy se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT companies and their associations represented that if such IT software is imported, it is likely to be subjected to double taxation. While for calculating additional duty, the value of right to use supplied alongwith the software would be included (as per the provisions of the Customs Valuation Rules) by the Customs authorities, the service tax authorities would charge service tax on the same value (i.e. on right to use) considering it to be import of ITSS. 6. Accepting their plea, in Budget 2009, two parallel notifications were issued on the excise and customs side. Vide notification no. 22/2009-C.E., dated 7-7-2009, partial exemption from excise duty was provided to packaged or canned software on that portion of the value which represents the consideration for the transfer of the right to use for commercial exploitation, as on this portion, service tax would be leviable under the ITSS. Similar exemption from CVD was provided vide notification No. 80/2009-Customs dated 7-7-2009 on such software. These exemptions were notified to ensure that while importing or manufacturing packaged software, the importer/manufacturer is spared from paying customs duty/excise duty on the value at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for notification No. 80/2009-Customs. As for the second case, the notification No. 80/2009-Cus itself envisages splitting of the value of the imported goods into that pertaining to software on media and the one pertaining to right to use. In such cases, there is no rationale for the department to deny splitting of value unless there are reasons to believe that such a splitting has been done in order to evade payment of duty. 11. The assessment of the shrin wrapped packaged software may be done keeping in view the above directions. 12. This issues with the approval of the Member (Budget ST). 13. After introduction of the ITSS, the vires of the same was challenged before the Hon ble Madras High Court in the case of Infotech Software Dealers Association Vs. UOI and others [2010(8) TMI 13 High Court of Madras]. While upholding the constitutional vires of the levy of service tax under ITSS, their Lordships held 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. In other words, it is the transaction between the parties is the decisive factor in determining whether the same is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .03.2002. (emphasis supplied) 16. The Ld. Commissioner on analysing the agreement arrived at the conclusion that since Thin Clients or terminals cannot be sold without the MS software licence (stickers / labels or COA) and thus procurement of stickers/labels is a service and chargeable to tax. 17. In the above context, to examine the transaction between the parties, it is necessary to refer to the relevant clauses of the agreement dt. 11.01.2007 titled as: Microsoft OEM Customer License Agreement for Embedded Systems , between MS and the appellant . Article-1 Definitions ALPs or Additional Licensing Provisions means licensing terms and conditions for the Licensed Product on the Additional Licensing Provisions label affixed to the Licensed Product package. Courtesy copies of the ALPs are available for COMPANY review from MS Distributor. If there are conflicting or incompetent terms between the ALPs on the Licensed Product packaging and the courtesy text presented by MS Listributor, the former shall control. APM Associated Product materials means documentation, external media containing software and/or, other tangible materials related to the Licensed products MS may designate from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r contractors, for installation on Embedded systems. iii) to use Deliverables to install one copy of the MS Binaries as part of an image on the hard disk drive or in non-volatile solid-state memory of an Embedded system, only on Company premises, by company employees or contractors. iv) To Distribute Embedded Systems containing an Image if (A) a COA is affixed to ES in accordance with this Agreement and (ii) Company sublicenses such image to an End user by means of License Terms. Company must acquire Runtime License Envelope from an MS Distributor for the Licensed Product to distribute an ES with that LP. v) To distribute update images and recovery images to end users in accordance with the terms and conditions. h) Unless a COA is not required, company shall permanently affix the applicable COA for each LP to an accessible location on each Embedded System. If this is not physically possible, company shall attach the COA to the APM. Company shall also distribute the APM, if any, with each Embedded System. (m) Not a Stand Alone product: Company shall not advertise, provide a separate price for, or otherwise market or distribute the Licensed products or any images as a separate item f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the OEM supplier under an arrangement with the software company as pre-loaded trial version of software on the computer system requiring the customer to purchase license or PUK after the trial period. Typically these licenses are used either to authorize additional uses against a sale of IT software that has already taken place in the past or to service transactions where the connected software is downloaded electronically by the customer. It has been pointed out that some of the field formations are insisting on the classification of such documents, even when imported without the packaged software, under CTH 8523 i.e. the heading applicable to IT software. It has also been represented that in certain cases the entire value of the license representing the right to use such IT software is sought to be loaded to the value of past imports of IT software by the importer. 2. The issue has been examined. According to Rule 1 of the Rules for the interpretation of the Tariff Schedule, classification is to be determined according to the terms of the heading and any relative Section or Chapter Notes. Heading No. 85.23 refers to Discs, Tapes, Solid-State Non-Volatile Storage Devices, Smart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption has been provided, from payment of Excise duty/CVD, on the portion of value representing consideration for transfer of right to use such packaged/canned software. These exemptions have been issued in order to rule out taxation of this portion of the value twice-once as Excise duty/Additional duty of Customs and another time as Service Tax on the consideration that all package software is not sold as shrink wrapped software and that affixation of retail sale price is not required for certain categories viz. (i) software on optical media supplied free of charge, for which right to use or license is purchased separately; (ii) full pack -packaged software with limited validity, not for resale and generally imported for demonstrations or for OEMs; (iii) up-grade full pack-packaged software-supplied free of charge under annual maintenance/subscription/software assurance contract; and (iv) up-dates for packaged software-supplied free of charge under annual maintenance/subscription/software assurance contract etc. 5. Accordingly, all packaged/canned software imported in shrink wrapped packages, will attract Excise duty/CVD on such retail sale price declared being the combined value ..... X X X X Extracts X X X X X X X X Extracts X X X X
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