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Brief background :
The Finance Act, 2008 brought some new services
under the Service Tax net. One of them is Information Technology
Software Service.
Inclusion of a new services category —
Information Technology Software Services — within the ambit of
Service Tax legislation has created confusion among software firms.
The levy of this new service along with other services has become
effective from 16 May, 2008.
Post the Notification, many feel that from 16
May, 2008, packaged software will also attract 12.36% of Service
Tax. So far, packaged software attracts Value Added Tax (VAT) of 4%
and 12% of excise duty.
The confusion arises as the Notification does
not make a clear demarcation of whether ‘software’ is to be sold as
goods and hence liable for sales tax (VAT) or considered as
‘services’ and liable for a Service Tax or both.
Packaged softwares are products that are sold
off the shelf. Examples of the products that would fall under this
are Microsoft, Autodesk, Adobe and several security software
packages for computers. This will also include accounting software
from Tally.
Normally Service Tax is payable to the Central
Government when a service is offered, while VAT is applicable when a
product is sold.
In case of softwares which are not sold off the
shelf, the sale price includes free initial installation and
implementation of the software. This includes some modifications or
customisations to suit the customers, but without disturbing the
basic structure of the software or its performance.
The copyright in the software is protected and
always remains the property of the creator. What is sold is the
right to use the software.
The sale is with a condition for exclusive use
of the software by the customer at the exclusion of others. The sale
gives absolute possession and control to the purchaser/user of the
right to use the software.
The sale normally gives a warranty period and
after the said period some annual maintenance charges are recovered
for the services rendered, popularly called Annual Maintenance
Contract (AMC).
At present the sale
is subjected to tax under the Maharashtra Value Added Tax Act, 2002,
(MVAT) and AMC is subjected to Service Tax.
The confusion is created due to the amendment in
the Service Tax by the Finance Act, 2008 which has added
"Information Technology Software Service" by way of sub-clause
(zzzze) in Cl. 65(105) of the Finance Act, 1994, and further
sub-clause (53a) in Cl. 65, defining the term "information
technology software."
The query :
Whether Service Tax is applicable to the sale of
computer software ? Whether MVAT is also applicable to the same
?
Questions to be answered/verified
:
To answer the query, the following crucial
questions will have to be addressed :
1. Is the software ‘Goods’ and covered as a
‘Sale’ under the MVAT Act, 2002 ?
2. Is it a service chargeable to Service Tax
under Cl. 65(105)(zzzze) of the Finance Act, 1994 ?
3. Whether both the MVAT and Service Tax are
applicable ?
4. What is the value chargeable to Service
Tax, if applicable ?
5. Facts from the sale/licence
agreements.
6. Conclusion.
Analysis of
the questions :
1. Is the
software ‘Goods’ ?
1.01
The question is very important and is relevant to decide its
taxability.
The
question assumes importance, because if it is ‘Goods’, it is
subjected to tax under the MVAT. If it is not goods, then it may be
subjected to Service Tax.
1.02 ‘Goods’ is defined in S. 2(12) under the
Maharashtra Value Added Tax Act, 2002, as :
"In this Act, unless the context otherwise
requires, goods means every kind of moveable property not
being newspapers, actionable claims, money, stocks, shares,
securities or lottery tickets and includes livestocks, growing crop,
grass and trees and plants including the produce thereof including
property in such goods attached to or forming part of the land which
are agreed to be severed before sale or under the contract of
sale."
1.03 Under Article 366(12) of the Constitution
of India,
"Goods include all materials, commodities, and
articles."
1.04 Further, Entry 39 in Schedule C to the
Maharashtra Value Added Tax Act, 2002, which decides the rate of
tax, describes goods under that entry as :
"Goods of intangible or incorporeal nature as
may be notified, from time to time, by the State Government in the
Official Gazette"; and the Notification VAT-1505/CR-114/Taxation-1,
dated 1-6-2005 notifies a list of goods in which Item (5) reads
:
"Software Packages."
1.05 Further, it would be worth to look to the
definition of ‘Sale’ under the Maharashtra Value Added Tax Act,
2002, S. 2(24) :
"Sale means a sale of goods made within the
State for cash or deferred payment or other valuable consideration,
but does not include a mortgage, hypothecation, charge or pledge;
and the words ‘sell’, ‘buy’ and ‘purchase’, with all their
grammatical variations and cognate expression, shall be construed
accordingly.
Explanation :
For the purpose of this clause :
(a)
(b) (iv) the transfer of right to use any goods
for any purpose (whether or not for a specified period) for cash,
deferred payment, or other valuable consideration;
shall be deemed to be a
sale."
1.06 It can be seen that ‘goods’ has been
defined under all the relevant acts very widely and includes the
right to use any goods which can be sold.
1.07 There have been many instances where the
courts of law had occasions to examine whether the software is
goods. Although with some limitations, but the most relevant on the
subject was the case of :
(i) Tata Consultancy Services v. State of
A.P., (2004) 271 ITR 401 (SC)
This is a landmark judgment of the Supreme Court
of India, on the definition of ‘Goods.’ A detailed discussion on the
same throws light on the term in the correct perspective.
1.08 Tata Consultancy Services (TCS) provides
consultancy services including computer consultancy services. They
prepare and load on customers’ computers custom-made software and
also sell ready-made computer software packages off the shelf. The
readymade software is also known as canned software.
The assessing officer, first appellate authority
and the Sales Tax Tribunal Andhra Pradesh held that canned softwares
are goods and sales tax is leviable on their sale.
TCS filed a tax revision case to the Hon. Andhra
Pradesh High Court, which was dismissed.
The appellant preferred an appeal before the
Supreme Court and the question raised in the appeal was whether
canned software sold by the appellant can be termed to be
‘goods’.
The appellant submitted that the term ‘goods’ in
S. 2(h) of the Andhra Pradesh General Sales Tax Act only includes
tangible moveable property, and the words ‘all material articles and
commodities’ also cover only tangible moveable property, and
computer software is not tangible moveable property.
The appellant further submitted that the
definition of ‘computer’ and ‘computer programme’ in the Copyright
Act, 1957 shows that a computer programme falls within the
definition of Literary Work and is intellectual property of the
programmer.
The appellant also submitted that computer
software is nothing but a set of commands, on the basis of which the
computer may be directed to perform the desired function.
It was further contended by the appellant that
software is unlike a book or a painting. When the customer purchases
a book or a painting, what he gets is the final product itself and
in the case of software the consumer does not get any final product,
but all that he gets is a set of commands which enable his computer
to function.
It was further argued that having regard to its
nature and inherent characteristic, software is intangible property
which cannot fall within the definition of the term ‘goods’ in S.
2(h) of the Andhra Pradesh General Sales Tax Act.
The Supreme Court did not agree with these
arguments and held as under :
The term ‘goods’ as used in Article 366(12) of
the Constitution of India and as defined under the said Act are very
wide and include all types of movable properties, whether these
properties be tangible or intangible. We are in complete agreement
with the observations made by this Court in Associated Cement
Companies Ltd., (2001) 124 STC 59. A software programme may
consist of various commands which enable the computer to perform a
designated task. The copyright in that programme may remain with the
originator of the programme, 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 media, whether it be in
the form of books or canvas (in case of painting) or computer disks
or cassettes, and marketed would become "goods". We see no
difference between a sale of a software programme on a CD/floppy
disc from a sale of music on a cassette/ CD or a sale of a film on a
video cassette/ CD. In all such cases, the intellectual property has
been incorporated on a media, for purpose of transfer. Sale is not
just of the media which by itself has very little value. The
software and the media cannot be split up. What the buyer purchases
and pays for is not the disc or the CD. As in the case of paintings
or books or music or films, the buyer is purchasing the intellectual
property and not the media; i.e., the paper or cassette or
disc or CD. Thus a transaction of sale of computer software is
clearly a sale of ‘goods’ within the meaning of the term as defined
in the said Act. The term, "all materials, articles and commodities"
includes both tangible and intangible/incorporeal property which is
capable of abstraction, consumption and use and which can be
transmitted, transferred, delivered, stored, possessed, etc. The
software programmes have all these attributes.
The Supreme Court dismissed the appeal and held
that canned software is "goods".
This judgment more or less has defined the test
to decide what is goods and the event when it becomes goods
i.e., 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 media, whether it be in the form of
books or canvas (in case of painting) or computer disks or
cassettes, and marketed would become "goods".
1.09 In the landmark judgment of Bharat
Sanchar Nigam Ltd. v. Union of India, (2006) 1453 STC 91 — the
Hon. Supreme Court held that a goods may be a tangible property or
an intangible one, it would become goods, if it satisfies the test.
It observed in para 56 that :
This view was adopted in Tata Consultancy
Services v. State of Andhra Pradesh, for the purposes of levy of
sales tax on computer software. It was held :
"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 being transmitted, transferred,
delivered, stored and possessed. If a software whether customised or
non-customised satisfies these attributes, the same would be
goods."
This makes it clear that whether the software is
a customised one or otherwise, it would be goods.
1.10 Further in the latest judgment of —
Infosys Technologies Ltd. v. Special Commr. of Commercial
Taxes, (2008) 17 VST 256 (Mad.), while deciding the question
"whether customised or non-customised software satisfies the test of
the ‘goods’ and is ‘goods’ for sales tax ?", following the Supreme
Court judgment in Bharat Sanchar Nigam Ltd. v. Union of India,
(2006) 145 STC 91, it was held that goods may be a tangible
property or an intangible one, it would be goods provided it has the
attributes having regard to (a) its utility, (b) capable of being
bought and sold; and (c) capable of being transmitted, transferred,
delivered, stored and possessed.
If a software, whether customised or
non-customised, satisfies these attributes the same would be
goods.
2.0 Is it a
service chargeable to Service Tax under Cl. 65(105) (zzzze) of the
Finance Act, 1994 ?
2.01 The services provided under the Information
Technology Software Service head on or after 16-5-2008 have been
made taxable.
2.02 The statutory definition in S. 65(53a) of
the Finance Act, 1994 is :
‘information technology software’ means any
representation of instruction, data, sound or image, including
source code and object code, recorded in machine readable form, and
capable of being manipulated or providing interactively to a user,
by means of a computer or an automatic data processing machine or
any other device or equipment.
2.03 S. 65(105) (zzzze) of the Finance Act,
1994, inserted, defines taxable service as :
"any service provided or to be provided to any
person, by any other person in relation to information technology
software for use in the course, or furtherance, of business or
commerce, including :
(i) development of information technology
software,
(ii) study, analysis, design and programming of
information technology software,
(iii) adaptation, upgradation, enhancement,
implementation and other similar services related to information
technology software,
(iv) Providing advice, consultancy and
assistance on matter related to information technology software,
including conducting feasibility studies on implementation of a
system, specifications for a database design, guidance and
assistance during the startup phase of a new system, specification
to secure a database, advice on proprietary information technology
software,
(v) Acquiring the right to use information
technology software for commercial exploitation including right to
reproduce, distribute and sell information technology software and
right to use software components for the creation of an inclusion in
other information technology software products,
(vi) Acquiring the right to use information
technology software supplied electronically.
On a plain reading of the scope, apparently Sale
of Software seems to be covered under the charge of Service
Tax.
2.04 The Circular/Letter D. O. F. No.
334/1/2008-TRU, dated 29-2-2008, discusses salient features of the
changes made by the Finance Act, 2008. It states in Para 4.4.1.,
that :
Transfer of the right to use any goods is
leviable to Sales Tax/VAT as deemed sale of goods [Article
366(29A)(d) of the Constitution of India]. Transfer of right to use
involves transfer of both possession and control of the goods to the
user of the goods.
It also states in Para 4.4.2, that :
Excavators, wheel, loaders, dump-trucks, crawler
carriers, compaction equipment, cranes, etc. offshore construction
vessels & barges, geotechnical vessels, tug and barge,
flotillas, rigs and high-value machineries are supplied for use,
with no legal right of possession and effective control. Transaction
of allowing another person to use the goods, without giving legal
right of possession and effective control, not being treated as sale
of goods, is treated as service.
It further states in Para 4.4.3, that
:
Proposal is to levy Service Tax on such services
provided in relation to supply of tangible goods, including
machinery, equipment and appliances, for use, with no legal right of
possession or effective control. Supply of tangible goods for use
and leviable to VAT/sales tax as deemed sale of goods, is not
covered under the scope of the proposed service. Whether a
transaction involves transfer of possession and control is a
question of facts and is to be decided based on the terms of the
contract and other material facts. This could be ascertained from
the fact whether or not VAT is payable or paid.
Although the clarification is under the head
Supply of Tangible Goods for Use, it is equally applicable in the
present case also.
This is because the Supreme Court also has held
the right to use as goods.
It is obvious that the test to decide any
transaction as a sale as is accepted in taxing statutes, is whether
a transaction involves transfer of possession and control is a
question of facts and is to be decided based on the terms of the
contract and other material facts.
2.05 The further test for checking about the
applicability of Service Tax is to check whether MVAT is payable or
paid.
It is obvious from the clarification by the
Department itself that transfer of right to use any goods is
subjected to VAT and where VAT is payable or paid, the service is
not covered under the scope of Service Tax.
2.06 This is a very important point as it
relates to a clarification per Constitution.
2.07 Further, Service Tax since its inception
has never been intended to be levied on Sale of Goods and the same
principle has throughout been followed consistently by the
Department. The reason is obviously related to the Constitutional
power of the Union Government to levy tax on an item covered under
Article 246 read with List II — State List — to Schedule VII to the
Constitution of India. This is more particularly explained in the
following paras 3.00 to 3.14.
2.08 The mutual exclusivity of taxes which has
been reflected in Article 246(1) of the Constitution means that
taxing entries must be construed so as to maintain
exclusivity.
(i) Gujarat Ambuja Cements Ltd. v. UOI,
(2005) 4 SCC 214, (para 23)
2.09 Presumption that a Legislature is acting
within its competence :
In constructing an enactment of a Legislature
with limited competence, the Court must presume that the Legislature
in question knows its limits and that it is only legislating for
those who are actually within its jurisdiction.
(i) State of Bihar v. Charusila Dasi,
1959 S.C. 1002
(ii) P. N. Krishna Lal v. Govt. of
Kerala, (1995) Supp.(2) SCC 18 (Para 8)
(iii) Anant Prasad Laxminiwas Genriwal v.
State of A.P., 1963 S.C. 853.
In all the amendments that may take place, the
Legislature has to remain in the framework defined by the
Constitution.
Service Tax is never intended to, nor can it, be
levied on subjects which are enumerated in List-II i.e., a
State List.
Hence, even if wordings are drafted to suggest
some different meanings, it cannot travel beyond the
framework.
The Courts have laid down the principles of
interpretations and while deciding matters like this the test called
‘pith and substance’ has to be applied ignoring the apparent
words.
2.10 The State Legislature has legislative
competence to treat a particular sale or purchase as the first sale
or purchase.
(i) Food Corporation of India v. State of
Kerala, (1997)
(ii) Arjun Flour Mills v. State of
Orissa, (1998) 8 SCC 89 (Para 1).
2.11 Whenever the question of legislative
competence arises, the issue must be solved by applying the rule of
pith and substance whether that legislation falls within any of the
entries in List-II. If it does, no further question arises and
article 246 cannot be brought in to yet hold that the State
Legislature is not competent to enact the law.
(i) State of A.P. v. McDowell & Co.,
(1996) 3 SCC 709 (para 7)
2.12 Doctrine of pith and substance
This doctrine means that if an enactment
substantially falls within the powers expressly conferred by the
Constitution upon the Legislature which enacted it, it cannot be
held to be invalid, merely because it incidentally encroaches on
matters assigned to another Legislature.
(i) Bharat Hydro Power Corpn. Ltd. v. State
of Assam, (2004) 2 SCC 553-561 (para 18)
The doctrine of pith and substance is sometimes
invoked to find out the nature and content of the legislation.
However, when there is an irreconcilable conflict between the two
legislations, the Central legislation shall prevail. However, every
attempt would be made to reconcile the conflict.
(i) Special Reference No. 1 of 2001. In
re, (2004) 4 SCC 489, 499-500 (para 15)
The express words employed in an entry
necessarily include incidental and ancillary matters so as to make
the legislation effective.
(i) Hindustan Lever v. State of Maharashtra,
(2004) 9 SCC 438, 457-58 (para 34)
The Court is required to ascertain the true
nature and character of the enactment with reference to the
legislative power. It must examine the whole enactment, its object,
scope and effect of its provision. If on such adjudication, it is
found that the enactment falls substantially on a matter assigned to
the State Legislature, the enactment must be held valid even though
the nomenclature of the enactment shows that it is beyond the
legislative competence of the State Legislature. When a levy is
challenged, its validity has to be adjudged with reference to the
competency of the State Legislature to enact such a law and real
nature and character of the levy, its pith and substance is to be
found out and adjudged with reference to the competency of the
Legislature.
(i) State of Karnataka v.
Drive-in-Enterprises, (2001) 4 SCC 60, 63-64 (para
6)
If by applying the rule of pith and substance,
the legislation falls within any of the entries of List II, the
State Legislature’s competence cannot be questioned on the ground
that the field is covered by the Union List.
(i) State of Rajasthan v. Vulan Medical &
General Store, (2001) 4 SCC 642, 652-53 (para
11)
In other words, when a law is impugned as
ultra vires, what has to be ascertained is the true character
of the legislation. If on such examination it is found that the
legislation is in substance one on a matter assigned to the
Legislature, then it must be held to be valid in its entirety, even
though it might incidentally trench on matters which are beyond its
competence.
(i) Krishna A. S. v. State of Madras, AIR
1957 SC;
(ii) Kantian Devon Produce & Co. s. State
of Kerala, (1972) 2 SCC 218;
(iii) P. N. Krishna Lal v. Govt. of
Kerala, 1995 Supp (2) SCC 187 (para 8 and 9).
In a situation of overlapping, the rule of pith
and substance has to be applied to determine to which entry a given
piece of legislation relates. Thereafter, any incidental trenching
on the field reserved to the other Legislature is of no
consequence.
(i) Goodricke Group Ltd. v. State of
W.B., 1995 Supp (1) SCC 707 (para 12)
(ii) ITC Ltd. v. A P M C, (2002) 9 SCC
232 (para 182)
(iii) E. V. Chinnaiah v. State of A.P.,
(2005) I SCC 394, 413 (para 29)
It is the function and power of the court to
interpret an enactment and to say to which entry an enactment
relates. The opinion of the Govt. in this behalf is but an opinion
and not more.
(i) Goodricke Group Ltd. v. State of
W.B., 1995 Supp (1) SCC 707 (para 37)
In order to examine the true character of the
enactment, one must have regard to the enactment as a whole to its
objects and to the scope and effect of the provisions. It would be
quite an erroneous approach to the question to view such a statute
not as an organic whole, but as a mere collection of sections, then
disintegrate it into parts, examine under what heads of legislation
those parts would severally fall and by that process determine what
portions thereof are intra vires and what are not.
(i) Bharat Hydro Power Corpn. Ltd. v. State
of Assam, (2004) 2 SCC 553, 561 (para 18)
2.13 It is obvious from the discussion above
that the doctrine of pith and substance has to be applied while
interpreting the situation like the one in the present
case.
3.0 Whether both
the MVAT and Service Tax are
applicable?
3.01 The issue is already clarified by the
Department itself as mentioned in Point No. 2.04 above that, where
VAT/Sales Tax is payable or paid, the service will be beyond the
scope of Service Tax.
This is a very important point as it relates to
a Constitutional clarification. Various courts have clarified this
point in many cases.
3.02 The reason for this is the Constitution of
India gives powers to the Parliament and to the Legislatures of the
States to charge tax on various things/subjects.
Article 246 enumerates the powers and Lists I,
II and III in Schedule VII to the Constitution enumerate various
matters. List I is a Union List, List II is a State List and List
III is a Concurrent List.
We are at present concerned with List-I and
List-II.
3.03 In List-I
For Service Tax there is a specific Entry 92C —
Taxes on Services — inserted by 95th Amendment Bill, 2003 (to be
called 88th Amendment Act, 2003) and passed by Lok Sabha on 6-5-2003
and Rajya Sabha on 5-5-2003.
But this has not been made yet
effective.
Entry-97 is a residuary entry and presently
Service Tax is covered by this. This reads as :
97. Any other matter not enumerated in List II
or List III including any tax not mentioned in either of those
Lists.
3.04 In List-II — State List
Entry 54 reads :
Taxes on the sale or purchase of goods other
than newspapers, subject to the provisions of Entry 92A of List
I.
(92A in List-I, is for taxes on Sale or Purchase
in the interstate trade.)
3.05 Sale of Goods is a State subject and goods
which are subjected to State Sales Tax/VAT cannot be subjected to
Union tax — i.e., Service Tax in the present case.
There have been many instances where both the
Union and the State claim the taxes. There are instances of
transactions of multiple taxing events. In all such questions as to
whether both the taxes are applicable to the same event, various
courts of law including the Supreme Court, have clarified that there
cannot be a double taxation on the same thing. This is evident from
the following decided cases on the subject.
3.06 Held in International Tourist
Corporation v. State of Haryana, AIR 1981 SC 774; (1981) 2 SCC
319 — that :
Before exclusive legislative competence can be
claimed for Parliament by resort to the residuary power, legislative
incompetence of the State Legislature must be clearly established.
Entry 97 itself is specific in that a matter can be brought under
that Entry only if it is not enumerated in List II or List III and
in the case of a tax, if it is not mentioned in either of those
lists.
3.07 In State of West Bengal v. Kesoram
Industries Ltd., 266 ITR 721 (SC 5-Member Constitution Bench
4 v. 1 judgment), it was held that :
Measure of tax is not determinative of its
essential character. The same transaction may involve two or more
taxable events in its different aspects. Merely because the aspects
overlap, such overlapping does not detract from the distinctiveness
of the aspects. Two aspects of the same transaction can be utilised
by two Legislatures for two levies which may be taxes or
fees.
3.08 It was held in — Builders’ Association
of India v. UOI, 73 STC 370 (SC 5-Member Constitution Bench)
that :
After the 46th Amendment, works contract which
was indivisible one is by a legal fiction altered into one for sale
of goods and the other for supply of labour and services. After 46th
Amendment, it has become possible for States to levy tax on value of
goods involved in a works contract in the way in which sales tax was
leviable on the price of goods and materials supplied in a building
contract which had been entered into two distinct and separate
parts. (Really, in the observation ‘an indivisible works contract,
is by a legal fiction altered into one for sale of goods and the
other for supply of labour and services’, the second part is obiter,
since the 46th Amendment does not provide that other part will be
deemed for supply of labour and services).
Article 366(29A) provides for ‘deemed sale of
goods’ and not ‘deemed provision of service’.
3.09 In Godfrey Philips India Ltd. v. State
of UP, 139 STC 537 (SC 5-Member Constitution Bench), it was
observed as follows :
The Indian Constitution is unique in that it
contains an exhaustive enumeration and division of legislative
powers of taxation between the Centre and the States. This mutual
exclusivity is reflected in Article 246(1).
3.10 In Kerala Agro Machinery Corpn. v. CCE,
(2007) (CESTAT), a strong prima facie view is expressed
that when sales tax is paid on a transaction, service tax will not
be payable.
3.11 In the Shorter Constitution of India, Dr.
Durga Das Basu, while commenting on Union’s and State’s powers and
Entries in Schedule VII :
Scope of
legislative (fiscal) power under Schedule VII — at Page
1693 of 14th edition 2009, — stated that :
There can be no overlapping in the field of
taxation. A tax if specifically provided for under one legislative
entry, effectively narrows the fields of taxation available under
other related entries. It is also natural when considering the ambit
of an express power in relation to an unspecified residuary power,
to give a broad interpretation to the former at the expense of the
latter.
(i) Godfrey Phillips India Ltd., v. State of
U.P., (2005) 2 SCC 515, 544-45 (Para 59); AIR 2005 SC
1103.
3.12 Further on commenting on – Scope of the residuary power — at Page 2367
of 14th edition 2009 — it is stated that :
(3) Where the competition is between an Entry in
list II and Entry 97 in list I, the latter cannot be so expansively
interpreted as to whittle down the power of the State
Legislature.
International Tourist Corpn. v. State
of Haryana, AIR 1981 SC 774 (Para 7) 1981 (2) SCR
364
On the other hand, the Entry in the State list
must be given a broad and plentiful interpretation.
International Tourist Corpn. v. State
of Haryana, AIR 1981 SC 774 (Para 7) 1981 (2) SCR
364
(5) Being aware of the dangers of allowing the
residuary powers of Parliament under Entry 97 of List I of the
Seventh Schedule to swamp the legislative entries in the State List,
the Supreme Court interpreted Entry 54 of List II, together with
Art.366 (29A) of the Constitution, without whittling down the
interpretation by referring to the residuary provision.
Bharat Sanchar Nigam Ltd. v. Union of
India, (2006) 3 SCC 1, 40 (Para 82).
3.13 It is held in Imagic Creative Pvt. Ltd.
v. Commissioner of Commercial Taxes, (2008) 12 STT 392 (SC) that
:
The Court must also bear in mind that where the
application of a Parliamentary and a legislative Act comes up for
consideration, endeavours shall be made to see that provisions of
both the Acts are made applicable (Para 27).
Payments of Service Tax as also VAT are mutually
exclusive. Therefore, they
should be held to be applicable having regard to the respective
parameters of Service Tax and sales tax as envisaged in a composite
contract as contradistinguished from an indivisible contract. It may
consist of different elements providing for attracting different
nature of levy. It was, therefore difficult to hold that in a case
of instant nature, sales tax would be payable on the value of the
entire contract, irrespective of the element of service provided —
the approach of the assessing authority, thus, appeared to be
correct. (Para 28)
4.0 What is
value chargeable to Service Tax, if applicable
?
4.01 S. 67 of the Finance Act, 1994 contains
provisions for valuation of service for charging Service Tax and
Rule 3 of the Valuation Rules provides Manner of determination of
value of taxable service.
4.02 There are instances when some services are
provided free of cost. The courts of law have held that no service
Tax can be charged for free services.
(i) Bharati Cellular Ltd. v. CCE, (2205)
1 STT 73 (CESTAT)
(ii) Kamal & Co. v. CCE, (2007) 10
STT 481 (CESTAT SMB)
4.03 Indus Motor Company v. CCE, (2008)
12 STT 112 is a case very similar to the present one. Free service
provided to automobiles by authorised service station (presumably at
the time of sale) for which no payment is received from anyone and
when its price is included in sale price of vehicle, it cannot be
subjected to Service Tax.
4.04 In Chandravadan Desai v. CCE, (2007)
11 STT 326 (CESTAT), the assessee who was a stockbroker did not
charge brokerage in respect of certain transactions, it was held
that S. 67 does not have any deeming provision and hence Service Tax
is not leviable.
4.05 The discussion in Builders’ Association
of India v. UOI, 73 STC 370 (SC 5-Member Constitution Bench) is
also relevant and is given in Point No. 3.08 above.
4.06 Very important observations are made by the
Supreme Court in the case of Bharat Sanchar Nigam Ltd. v. Union
of India, (2006) 3 SCC 1.
The Court observed that the definition of the
word Sale in Article 366(12) was not altered and hence the same has
to be understood as under the Sale of Goods Act, 1930.
Further, important test laid down by the Court
in deciding a composite contract not covered by Article 366(29A),
that the ‘dominant nature test’ continues to be applied.
The Court observed that after 46th Amendment to
the Constitution, only 3 specific situations were chosen from
several composite transactions which involve service as well as sale
and out of those 3, only works contract and catering contract
involve both the elements of service and sale. Therefore except
these, no other sale was contemplated to be covered or
bifurcated.
In para 46 it observed that :
"the test therefore for composite contracts
other than those mentioned in Article 366(29A) 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. The test for deciding
whether a contract falls into one category or the other is as to
what is ‘the substance of the contract.’ We will, for want of a
better phrase, call this the dominant nature test."
In view of the above test, it can well be
concluded that unless the transaction in reality contemplated two
distinct contracts, a composite contract cannot be bifurcated for
levy of Service Tax. One has to go by the substance of the agreement
in the transaction.
5.0 Facts
from the Software Sale Agreement
:
5.01 The software seller normally enters into an
agreement with the buyer and various terms and conditions are
specified and executed by the buyer and the seller.
5.02 The Terms of Agreement normally grant a
licence to use the software and the vendor thereby grants to the
buyer a licence to use the said product or licensed
material.
5.03 Further, there are clauses which enumerate
free services provided like :
Installation of product and it normally states
that- the vendor undertakes to provide on-site training of the
software only to the specified staff of the buyer.
The vendor also normally carries out some
modifications or customisation and also takes up
— Pre-installation. Requirement/GAP analysis
study, conducted by vendor.
— Data migration from all earlier
software.
— Pre- and post-installation system
audits.
All the above come as an inbuilt and inseparable
part of the product and necessarily required with the software and
are free of cost/charge for the same. The price paid is for the
licence/right to use the software.
In many cases e.g., in case of a Tally
software, installation is done by the representative of the vendor
and other stages i.e., migration of the data and system
audit, etc. are done and carried out by the buyer at his own cost.
Even if the same is arranged by the vendor, the cost is paid for the
buyer to a third party and nothing is paid to the vendor.
6.0
Conclusion :
Considering all the relevant facts, and the law
as discussed hereinabove, and relying and based on the same as
mentioned above, we reach the conclusion that :
6.01 In case of the manufacturer/developer, he
sells the right to use of the software.
However in case of the software dealer the
position is slightly different. The software is not developed by
him, but he has got the rights to sale/market/deployment of the
licence/right to use.
Except this, there is no difference between the
two. It is permitted to make only minor modifications to the extent
of incorporating the name, etc. as per the specific
requirements/parameters of the purchaser, without changing any basic
structure of the software.
The vendor is also in some cases, making
requirement/GAP analysis study, data migration from all earlier
software, and arranging pre- and post-installation system audit,
which are either free of cost or included in the software price
itself, except in case of system audit. This is normally required to
be carried out by an independent third party and is paid separately
by the buyer to the third party.
6.02 It is evident that the sale involves both a
Sale and a Service.
The grant of licence is a right to use the
software, with a legal right of possession and effective control,
allowing another person (purchaser) to use the goods
(software).
This is done by copying the original software
and then given possession and control to the buyer. The moment this
is copied for Sale, it becomes goods, as defined by the Supreme
Court of India.
Hence, this is a Sale of Goods under Article
366(12) of the Constitution of India, Entry C-39 of Schedules to the
MVAT Act, 2002 and consequently MVAT is chargeable on sale price of
the same. The position for the developer of the software and the
dealer is the same.
This portion being in List-II, i.e.,
State List of Schedule VII to the Constitution of India, cannot be
subjected to Service Tax.
6.03 The items mentioned in Point No. 5.03 may
be covered and subjected to Service Tax, if any consideration for
the service is received separately in any manner.
Normally the pre-installation, installation,
modifications and successful commencement of use of software, etc.
are provided free of cost.
As held by the Supreme Court (para 4.06) the
dominant intention of parties is to buy and sell. Hence, the sale
price cannot be disintegrated for the purpose of Service
Tax.
Hence, in my opinion these are not chargeable to
Service Tax.
Hence, under the State Vat, the position is now
amply clear.
But, there has to be suitable amendment in the
Valuation Rules and a basic clarification in the definition and the
scope of the service, to tax services part only under the Service
Tax and not the goods part, as this is not permitted under the
Constitution of India. | 