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TMI Blog2025 (3) TMI 1248X X X X Extracts X X X X X X X X Extracts X X X X ..... s are engaged in the business of providing various professional services such as corporate finance and legal consultancy accounting services, pay roll processing services, corporate secretarial services to corporate clients. The appellants are registered under service tax as a "Management Consultant" w.e.f. 25.11.1998. The appellants are also engaged in designing and developing of 'software packages' catering to corporate clients and are selling the same on payment of VAT. During the audit, the department found that in respect of design and development of software solutions to corporate clients, the appellants were raising invoices on their customers under two heads namely license fee and separate customisation fee. It is the case of the department that the appellant was paying service tax on the customisation charges, but it was not paying tax on license fee. The department being of the view that they should have paid service tax on the full value of the invoice under 'Information Technology Software Services' issued a Show Cause Notice demanding Service Tax for the period May 2008 to December 2010 along with applicable interest and imposition of penalties. After due process of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther elaborates the methodology of product implementation as under: i) On agreement of the assignment with the customer, appellants' implementation team would carry the Product CD to the customer place and install the software on the customer's hardware recommended/suitable for the software to run. The CD will give a permanent license to the customer to use appellants' product for the specified license users. It is a onetime license fee for the software product. ii) On completion of installation, the implementation team will conduct an interview with the process / department stakeholders of the customer and collect necessary data to be migrated into the installed software. Based on the interview conducted, gaps in the installed software are identified for customisation. iii) On agreement with the stakeholders on the gaps/customisation, the software is tuned to suite their business process. The customised software is then demonstrated to the business process stakeholders and User Acceptance Test (UAT) will be conducted by the customer on the capability of the software to carry out all the business transactions and data of customer is migrated into the software for GO LIVE. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nowledging that appellant is customising the software as per the requirements of the client and provide the same to the client for consideration received in money, since the agreement entered with the clients neither specified any sale or supply of goods nor bifurcation of the invoice value, the transaction as has occurred is sought to be negated as their plea of payment of sales tax on licence fee cannot be taken cognizance of as there is no concept of sale in respect of the information technology software services. We are unable to subscribe to the aforesaid view of the appellate authority for reasons elaborated infra. The impugned OIO which has been upheld in its entirety by the appellate authority, itself has recorded findings as under: 7 During the course of the Audit of the assessee, by the Department they have provided a note on 'Pro-Active Services'. They stated in the note that their Software Division provides tailor made Software solutions for their clients; that they sell these products by sale of its 'License' and charges a 'License Fee' to its clients to use the software., that it raises invoices with appropriate sales tax on sale of its Softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Invoicing and Sales Analysis 8.3 The other salient features of the Agreement are as below * Customization is required to integrate the software Solution provided by Pro Active with other existing legacy/ERP systems like MS Project. SAP etc * The entire Solution is web enabled for online transactions * The IPR (Intellectual Property Rights) of all the products of Pro-Active that is implemented / used for developing the solution to VVD will belong to Pro-Active * Delivery of the solution will be in phases and the payment is linked to the phased delivery of the solution. * The bug removal facility is provided free of charge during the warranty period and commences on the date of installation. * The Annual maintenance cost will be charged at the rate of 20% of the total order value. (emphasis supplied) 11. Apart from the summarised version above, we have also perused the agreement provided in the appeal records. It can be seen from a perusal of the agreement as a whole that the solution which the appellant provides is a software solution. The solution is to meet the specified business requirements of the client. The solution is to be made available in the customer/clien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2016 preferred by the State against the order of the Tribunal that set aside the orders of assessment passed against the respondent/assessee for the assessment years 2002-03, 2003-04 and 2004-05 under the KGST Act, we find that the reasoning given by the Tribunal is that customised software developed and supplied to its clients by the assessee could not be brought to tax under the KGST Act since the Constitution Bench judgment of the Supreme Court in Tata Consultancy [supra] dealt only with canned software or software that was available off the shelf and not customised software. On a reading of the judgment of the Supreme Court in Tata Consultancy [supra], we find that the findings therein are clearly applicable not only to canned software but also to uncanned or customised software. We might refer profitably to the findings at paragraphs 27, 78 and 81 of the judgment, where it is stated as follows: "27. In our view, the term "goods" as used in Article 366 (12) of the Constitution of India 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 observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im to obtain the desired results. It indisputably becomes an object of trade and commerce. These mediums containing the intellectual property are not only easily available in the market for a price but are circulated as a commodity in the market. Only because an instruction manual designed to instruct use and installation of the supplier program is supplied with the software, the same would not necessarily mean that it would cease to be a 'goods'. Such instructions contained in the manual are supplied with several other goods including electronic ones. What is essential for an article to become goods is its marketability. 81. It is not in dispute that when a program is created it is necessary to encode it, upload the same and thereafter unload it. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as deemed sale under Article 366(29A) of the Constitution. Thus, on the view that the supply of packed Anti-virus Software to the end user by charging license fee would amount to a provision of service and not sale, the Department had demanded service tax on the appellant. The relevant portions of the said order are as under: "45. The agreement provides that the licensee shall have right to use software subject to terms and the conditions mentioned in the agreement. The licensee is entitled to use the software/RDM services from the date of license activation until the expiry date of the license. The licensee is also entitled for the updates and technical support. The conditions set out in the agreement do not interfere with the free enjoyment of the software by the licensee. Merely because "Quick Heal" retains title and ownership of the software does not mean that it interferes with the right of the licensee to use the software. 46. In this connection, it would be useful to refer to a decision of the Bombay High Court in Mahyco Monsanto Biotech (India) Pvt. Ltd. v. Union of India, [2016 (44) S.T.R. 161 (Bom.)]. In the writ petition filed by the Monsanto India, the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we currently know it is never a sale but only a service. In his formulation, the 'medium' (CD, pen drive, etc.) is irrelevant. Surely this cannot be correct. Software may be downloaded too, without any 'physical medium' intervening - the medium is as intangible as the goods. It is impossible, we think, and does not stand to reason to suggest that unless, say, Microsoft or Adobe wholly cede all control over their software products there is no sale, and when they allow a user to download and use their software they are only providing a service. Indeed, this is demonstrably incorrect. Microsoft and Adobe both have alternative distributions models. One may 'purchase' a license to Microsoft Office or Adobe Photoshop. This may be a one-off, standalone product, delivered either by download or on physical media. That is for the user to keep and do with it what he wishes (except, of course, attempting to decompile it). He does not have to use it all; he can destroy the media and all personal copies of it. The same software is also available nowadays for a subscription - for an annual or monthly fee, the software can be downloaded and used; if the subscription ends, at the very least updates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs Association v. Union of India [2010 (20) S.T.R. 289 (Mad.)], has also been relied upon by the Learned Authorized Representative of the Department. The issue was whether the Parliament had the legislative competence to insert provisions of Section 65(105)(zzzze) in the Act in 2019 by virtue of powers under Entry 97 of List II of Schedule VII of the Constitution. The Madras High Court observed as follows : - "32. The above discussion as to the canned/packaged software or customised software is in respect of the transactions that are prevalent among the software re-sellers and their customers and the discussion is not with reference to any specific transaction. The challenge to the amended provision is only on the ground that the software is goods and all transaction would amount to sales. The said challenge is opposed on the ground that though the software is goods, the transaction may not amount to a sale in all cases and it may vary depending upon the End User Licence Agreement. As already pointed out, the Parliament has the legislative competency to bring in enactments to include certain services provided or to be provided in terms of information technology software for use i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had sold packaged or canned software, both indigenously by remitting appropriate VAT or exporting the same, had preferred an appeal to the Honourable Supreme Court against an order of the High Court of Madras which had dismissed their appeal against an order of a single judge confirming the demand of service tax on the appellant finding that they were covered under the Information Technology Software Service as defined under Section 65(105)(zzzze) of the Act. The Apex Court further observed that the Division Bench vide order dated 5-8-2021 declined to interfere with the order 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. The Hon'ble Supreme Court while allowing the appeal preferred by the appellant in light of their judgement in Civil Appeal (Diary No. 24399 of 2020) of Quick Heal Technologies, observed as under : "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)(zz ..... X X X X Extracts X X X X X X X X Extracts X X X X
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