Summary
The Revenue demanded about Rs 56 crore in service tax from Quick Heal for 2011 to 2014. It treated the sale of its antivirus software on CDs/DVDs with licence keys to end users as an information technology software service. The CESTAT set the demand aside, but in a connected case the Madras High Court upheld a similar demand against another seller. The Court held that, following TCS, canned software put on a medium and marketed is goods. Under the end-user licence agreement, the user received the right to use the software for the licence period with free updates. That was a deemed sale under Article 366(29A)(d), excluded from service by Section 65B(44). Applying BSNL, the lump-sum transaction could not be split into a sale of the CD and a service of updates. The Revenue's appeal was dismissed and the seller's appeals allowed.
Issues
- Whether supply of pre-packaged antivirus software on CDs/DVDs with licence keys to end users is a sale of goods or deemed sale under Article 366(29A)(d), or a taxable information technology software service under the Finance Act, 1994.
- Whether the transaction can be split into a sale of the CD and a separate service of providing updates, so as to levy service tax.
Provisions considered
- Article 366(29A)(d), Constitution of IndiaThe transfer of the right to use goods is a deemed sale. Under the licence agreement the end user got the right to use the software for the licence period with free updates, so the transaction was a deemed sale and not a service. (¶¶ 37, 44, 45, 51, 52, 55)
- Sections 65(105)(zzzze), 65B(44) and 66E, Finance Act, 1994Section 65B(44) excludes from service any transfer, delivery or supply of goods that is a deemed sale under Article 366(29A). As the supply of canned software was a deemed sale, no service tax was leviable on it. (¶¶ 35, 36, 39, 55)
Held
- Following Tata Consultancy Services, software is goods once it is put on a medium and marketed. That is so whether it is canned or uncanned, since it can be transferred, delivered, stored and possessed. The software and the medium cannot be split, as the buyer pays for the intellectual property on the disc. (¶¶ 42, 43)
- A transfer of the right to use goods is a deemed sale. Delivery is not essential and effective control need not be physical. The parties' agreement, read as a whole, determines the nature of the transaction. (¶¶ 44, 45, 51, 52)
- Quick Heal's end-user licence agreement let the user use the software from activation to expiry with free updates and technical support. Retention of title and the usual restrictions did not interfere with the user's free enjoyment of the software, so the transaction was a deemed sale under Article 366(29A)(d). (¶¶ 32, 33, 53)
- Under BSNL, a composite transaction cannot be artificially vivisected. Once a lump sum is charged for the CD and sales tax paid, service tax cannot be levied again on the ground that updates are supplied. The updates are part of the single sale of software, so no service tax was payable. (¶ 55)
- The Madras High Court's reliance on Infotech Software Dealers Association, which did not consider Tata Consultancy Services, was misplaced. The connected seller, which had paid VAT on its sales, was likewise not liable to service tax. (¶¶ 70, 71, 73)
Result
The Revenue's appeal against the CESTAT order in favour of Quick Heal is dismissed. The seller's appeals are allowed and the Madras High Court's orders dismissing its writ appeal and review are set aside; no order as to costs.