Service Tax – Finance Act, 1994 – s.65(105)(zzzze) and 66E – Constitution of India –Art.366(29A) – Respondent (Assessee) engaged in supply of Quick Heal Antivirus Software license key/code along with replicated CDs/DVDs in the retail packs (i.e. Information Technology Software Service) through its dealers/distributors to the end customers in India –Contention of revenue that transaction pertaining to software can be divided into two components (i) sale of CD, & (ii) supply of updates – Respondent argued that the transaction cannot be bifurcated into two components – Held: 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 transaction of sale of software and once it is accepted that the software put in the CD is “goods”, then there cannot be any separate service element in the transaction – Even otherwise the user is put in possession and full control of the software – It amounts to “deemed sale” which would not attract service tax. Disposing of the appeals, the Court
Held : 1.1 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 and the conditions laid therein. The Tribunal took notice of the fact that in accordance with the agreement the licensee is entitled to use the software/RDM service from the date of the activation of the license till the date of its expiry. The Tribunal also took into consideration the fact that the licensee is also entitled for the updates and the technical support. In view of the Tribunal, the TECHNOLOGIES LTD.
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. [Para 34][951-E-G]
1.2 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. [Para 36][953-C-D]
1.3 The settled essential requirement of a transaction for the transfer of the right to use the goods are (i) it is not the transfer of the property in goods, but it is the right to use the property in goods (ii) Article 366(29A)(d) read with the latter part of the clause (29A) which uses the words, “and such transfer, delivery or supply”... would indicate that the tax is not on the delivery of the goods used, but on the transfer of the right to use goods regardless of when or whether the goods are delivered for use subject to the condition that the goods should be in existence for use; (iii) in the transaction for the transfer of the right to use goods, delivery of the goods is not a condition precedent, but the delivery of goods may be one of the elements of the transaction;
(iv) the effective or general control does not mean always 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. [Para 52][964-B-F]
1.4 The sum and substance of the ratio of the case of BSNL 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 transaction of sale of software and once it is accepted that the software put in the CD is “goods”, then there cannot be any separate service element in the transaction. This is so because even otherwise the user is put in possession and full control of the software. It amounts to “deemed sale” which would not attract service tax. [Para 55][967-E-G]
Tata Consultancy Services v. State of Andhra Pradesh, (2005) 1 SCC 308 : [2004] 5 Suppl. SCR 1040, Bharat Sanchar Nigam Ltd. v. Union of India, (2006) 3 SCC 1 : [2006] 2 SCR 823, M/s Infotech Software Dealers Association v. Union of India, 2010 (20) S.T.R. 289 (Mad.), Associated Cement Companies Ltd. v.
Commissioner of Customs, (2001) 4 SCC 593 : [2001]
1 SCR 608 , 20th Century Finance Corpn. Ltd. v. State of Maharashtra, (2000) 6 SCC 12 : [2000] 1 Suppl. SCR 12, Delta International Ltd. v. Shyam Sundar Ganeriwalla, (1999) 4 SCC 545 : [1999] 2 SCR 541, Ramdev Food Products (P) Ltd. v. Arvindbhai Rambhai Patel, (2006) 8 SCC 726 : [2006] 5 Suppl. SCR 521 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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