Custom, Excise & Service Tax Tribunal
3I Infotech Ltd vs Commissioner Of Service Tax Mumbai-Ii on 18 September, 2018
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNAL, WEST ZONAL BENCH AT MUMBAI
Appeal No. ST/85707/2014
(Arising out of Order-in-Original No. 72-75/ST-II/RS/2013 dated
29.11.2013 passed by Commissioner of Service Tax, Mumbai)
M/s 3i Infotech Ltd. Appellant
Vs.
Commissioner of Service Tax, Respondent
Mumbai II Appearance:
Shri A.R. Krishnan, Advocate for appellant Shri M.K. Sarangi, Jt. Commr (AR) for respondent CORAM:
Hon'ble Mr. S.K.Mohanty, Member (Judicial) Hon'ble Mr. Sanjiv Srivastava, Member (Technical) Date of Hearing: 10.05.2018 Date of Decision : 18.09.2018 FINAL ORDER NO. A/87362/2018 Per: Sanjiv Srivastava This appeal is directed against order-in-original No. 72- 75/ST-II/RS/2013 dated 29.11.2013 passed by Commissioner of Service Tax, Mumbai. Vide the impugned order the adjudicating authority has confirmed the service tax demand of Rs.86,41,89,809/- along with interest thereon 2 Appeal No. ST/85707/14 and also imposed penalty under Sections 75, 76, 77 and 78 of the Finance Act, 1994.
2.1 The adjudication is in respect of three show-cause notices earlier remanded back by this Tribunal vide its order No. A/29/13/CSTB/C-I dated 14.01.2013. While deciding the matter in remand proceedings, the Commissioner has also adjudicated another show-cause notice on the same issue for subsequent period. Chronologically four show-cause notices under cover by the adjudication order are as follows:-
Table 1 Show Cause Notices adjudicated by the impugned order Show Cause Period Demand under Taxable Notice Date Service 19/10/2009 1.4.2004 to 31.3.2009 Maintenance & Repair 20/10/2010 1.4.2009 to 31.3.2010 Information Technology Software 21/10/2011 1.4.2010 to 31.3.2011 Information Technology Software 22/10/2012 1.4.2011 to 31.3.2012 Information Technology Software 2.2 While remanding the matter back the Tribunal has in its earlier order observed as follows:-3
Appeal No. ST/85707/14 "4. We have considered the submissions made by both the sides. We have also perused the impugned order. From the impugned order, it does not come out clearly how the Service Tax liability has been computed.
If the appellant has purchased from third parties and sold the same on payment of VAT and also supplied hardware on payment of VAT, the same would not be liable to service tax. The liability to service tax would arise only in respect of software which the appellant has developed as per customer's specifications and supplied to their customers. Therefore, there is a need to go through the agreements entered into with the clients, bills raised for the services rendered and the goods supplied and the payments made towards service tax liability under the category of 'information technology service'. Only after going through all these documents, correct service tax determination can be done. Accordingly, we remand the matter back to the adjudicating authority to consider the matter afresh after taking into account all the documentary evidences which the appellant would submit in support of their claim that they have discharged the service tax liability correctly. The appellant is directed to co- operate with the department and produce all the 4 Appeal No. ST/85707/14 documentary evidences by way of sales invoices, contracts/agreements entered into with the clients and other necessary documents, and payment of service tax made in respect of the services rendered by them etc....."
4. The demands confirmed against the appellant by the order-in-original can be classified in following categories:-
S Particular SCN 1 SCN 2 SCN 3 SCN 4 Total
No
1 2 3 4 5 6 7
1 Third party
standardize
d software 41108 88337 21663 77753 51933
products 729 7 13 68 787
[VAT
charged]
2 In-house
developed 55949 13426 23068 88751 93333
standardize 970 970 874 2 326
d software
3 Software
41039 41039
developmen 0 0 0
2471 2471
t services
4 Sale of 10601 82262 56087 36123 28048
Hardware - 4427 840 970 114 8351
5 Services to 14008 14008
0 0 0
SEZ unit 000 000
6 Service
rendered in 0 24859 0 0 24859
J&K
7 Octroi 42204 46823
0 0 46182
charges 8 0
5
Appeal No. ST/85707/14
8 Services on
which 13773
0 12846 82359 10397
service tax 793
226 3 4
paid
9 Other items
deducted to (3782 (1951 (2330
0 0
arrive at the 8) 80) 08)
demand
Total 61342 10944 96576 44740 86418
7769 4272 798 970 9809
Penalty
Penalty u/s Not
Levied Levied Levied
76 levied
Penalty u/s
5000 5000 5000 5000 20000
77
Penalty u/s 61342 44740 65816
0 0
78 7769 970 8739
5. On the issue, learned Consultant appearing for appellant challenged the impugned order on the following grounds:-
(a) The SCN 1 was issued demanding Service Tax under the category of "Maintenance and Repair Services", in the first round of adjudication Commissioner had confirmed the demand under the category of "Maintenance and Repair Services" uptil 15.05.2008 and from 16.05.2008 under the category 6 Appeal No. ST/85707/14 Information Technology Software Services. In the remand proceedings Commissioner has confirmed the demand under the category of "Intellectual Property Right" services up till 15.05.2008 and from 16.05.2008 under the category of Information Technology Software Services. Since the adjudication order has in case of this show cause notice demanded the service tax under the category which were never in dispute in Show Cause Notice, the order is bad in law.
[Mahakoshal Beverages Pvt Ltd. Vs, CCE (2006) 6 STR 148 (T-Bang)] & [Glass Fibres vs CCE (2010) 18 STR 726 (T-Bang)]
(b) The impugned order has gone beyond the scope and directions of the Tribunal in remand order dated 14.01.2013 for demand of service tax on sale of software and hardware. Hence, to the extent of Rs. 42,57,55,464/- for the period 01.04.2004 to 31.03.2012 is unsustainable. The tribunal earlier 7 Appeal No. ST/85707/14 decision to this effect as it has not been challenged hence binding on the revenue authorities [CCE Vs Costa & Co Pvt Ltd (2015) 321 ELT 475 (T-Mum)], {Triveni Rubber Vs CCE (2017) 346 ELT 41 (ALL)] & [CCE Vs Raj Leather Clothes Industries Pvt Ltd (2005) 186 ELT 332 (T-DEL] & [CBEC Circular No 81/2/2005 dated 7.10.2005]
(c) Show-cause notice No.2nd , 3rd and 4th (period 01.04.2009 to 31.3.2012) does not put forth any reasons why the revenues are liable for service tax. Therefore, the demand in respect of these three show- cause notices is not sustainable.
(d) On merits, sale of third party software charged to VAT and sale of in-house developed software (VAT exempt) are in the nature of 'sale of goods' hence are not liable to service tax. {TCS vs State of AP (2004) 178 ELT 22 (SC)] & [ Para 4 of the Order of Tribunal in their 8 Appeal No. ST/85707/14 own case while remanding the matter back to adjudicating authority)
(e) Software developed services are not liable to service tax prior to 16.05.2008 and hence entire demand prior to 16.05.2008 is not on any merits. The demand confirmed under IPR services not sustainable as IPR services, as IPR in software is copy right and copy right is excluded from IPR Services.
(f) Software development services has been categorically included under ITSS {Section 65 (105)(zzzze)], a new service taxable only from 16.05.2008 [Indian National Shipowners Association vs UOI (2009) 14 STR 289 (Bom)]
(g) They are paying service tax on software development services under category of ITSS post 16.05.2008, except for an amount of Rs 1,15,19,500/- for the period 16.05.08 to 31.03.2009, which was omitted to be paid due to oversight in the initial period 9 Appeal No. ST/85707/14 of levy. For this period the demand has been confirmed under the category of ITSS, contrary to the fact that demand was made under category of Management Maintenance and Repair Services. {Aurobindo Pharma Ltd vs CCE (2208) 10 STR 611 (T- Bang)]
(f) Sale of hardware like servers, printers, computers, UPS, hard disks, etc. are not liable to service tax as these are goods chargeable to VAT. Further while demanding service tax in respect of these cases, order-in-original fails to specify any category of taxable service under which the tax has been demanded.
(g) In respect of the service provided to SEZ unit, the same are exempted under SEZ Act [section 26(1)(e) read with Section 51) which has an overarching effect over all other laws. Further exemption Notification No. 9/2009-S.T. dated 03.03.2009, also exempts the 10 Appeal No. ST/85707/14 services provided to SEZ Unit/ Developer. [Intas Pharma Vs CST (2013) 32 STR 543 (Tri- Ahmd)], {M/s Reliance Port & Terminals Ltd vs CCE & ST [(2013) TIOL 1473 CESTAT-AHM] & Tata Consultancy Services Ltd Vs CCE & ST [(2013) 29 STR 393], Trimurthy Industrial Co- operative Society Ltd Vs CCE [2018 TIOL 206 CESTAT MUM} & DHL Lemuir Logistics Pvt. Ltd. Vs CCE 2017 (47) STR 309 (T-Mum)]
(h) In respect of Octroi charges in service tax is not demandable as these are essentially in relation to the sale of hardware. Octroi is a tax paid to bring goods into a state and is not in the nature of consideration for any services and hence not liable to tax.
(i) Services rendered in Jammu & Kashmir are rendered outside the taxable territory and hence are not liable to service tax.
6. Replying to the contentions of the appellant learned D.R. made submissions as follows:-
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Appeal No. ST/85707/14
(a) In respect of show-cause notice No.1, though the show-cause notice has been issued under the category of 'management, maintenance and repair service, demand has been confirmed under 'Intellectual Property Services' upto 15.05.2008 and thereafter under 'Information Technology Services'., and the Appellant contention for challenging the said demand is on the basis that they were not put to notice in this regards.
(b) The said demand has been confirmed under the said categories after going through the "Full Use Program Distribution Agreement dated 17th May 2010 with Oracle India" as per which appellant have been granted non exclusive, non transferable right to distribute to the end user the programmes. They may order programs, learning credits and / or service from Oracle. All reselling criteria are subject to change at Oracles' discretion. As per clause-D, the licensor 12 Appeal No. ST/85707/14 retains all ownership and intellectual property right to the programs and learning credits. As per clause-F, the appellant has to ensure that any distribution of programs, learning credits and / or service to end user is subject to a legally binding end user license agreement.
(c) As per Purchase Order dated 20.11.2009 (Annual Technical Support) for Oracle License with the purchaser namely Shriram General Insurance, they will get access right to Oracle Metalink site for software, version update software and patches on need basis which can be downloaded directly. The appellants will be providing value added services through their representative at Shriram.
(d) As per Software Order and Licensing agreement dated 18th June 2010 with Kotak Mahindra Bank, 'software' has been defined to mean computer software owned or distributed by Licensor including 13 Appeal No. ST/85707/14 without limitation Oracle database software. As per clause, the software is licensed, not sold for use only under the terms and condition of the agreement. As per clause 2 having stipulated additional restriction not other rights have been granted while stating that all right, title and interest to software shall at all time remain with Licensor. The Licensee does not grant any right to assign or transfer to third party.
(e) As per software development agreement dated 06th May 2002 with ICICI Webtrade, it is providing hosting management service and additional services including software development, customization, maintenance of both in-house development and those procured from 3rd parties and support services.
(f) As per the earlier CESTAT order dated 14.01.2003, liability to service tax would arise only in respect of software which the appellant have developed as per customers' specification and supplied 14 Appeal No. ST/85707/14 to customer. Matter was remanded to AA for going through the agreement, bills raised and payment towards service tax liability under "Information Technology Services." As per appellants' reply dated 11.11.13 demand on account of sale of 3rd Party software is Rs 10.2 Crores, whereas demand on account of in house developed software, development and customization of software is Rs 51.37 Crores. As per them, sale of software is not provision of service.
Further customization of software as per client's specification is not "maintenance or repair service". Software development (including up-gradation, implementation etc) has been included under ITSS wef 16.05.2008.
(g) As per Circular dated 07.10.2005 and 07.03.2006, software being goods, any service in relation to maintenance, repair or servicing of software will be liable under 'Maintenance or repair service". 15
Appeal No. ST/85707/14
(h) The decision of Hon'ble Supreme Court in the case of Tata Consultancy Services - 2004 (174) ELT 22 (SC) is not applicable in the present case as in that case the issue was whether canned software can be termed as goods and assessable to Sales Tax. In para 16 it referred to earlier decision as per which properties which are capable of being abstracted, consumed and used and/ or transmitted, transferred, delivered, stored or possessed are "goods" for the purpose of sales tax. In para 24 relying on the definition of goods in Article 366(12) of the Constitution of India it observed that copyright in software may remain with originator, but the moment copies are made and marketed, it becomes :goods: and susceptible to Sales Tax. The matter pertains to Tribunal order dated 12.12.1996 hence the changes made with reference to intangible property are not under discussion in the said case. Hence the said decision could not be relevant for 16 Appeal No. ST/85707/14 the present controversy. In any case the decision is not relevant after 16.05.2008 since when software has been subjected to service tax. Even otherwise whether software is 'goods' or not is not relevant but as per the agreement, what is the intention of parties is relevant. It is not applicable for customized/ canned software.
(i) Hon'ble High Court of Madras has in the case of Infotech Software Dealer Association [2010 (20) S.T.R. 289 (Mad.)] considered "End User License Agreement"
and held that software supplied to customer as per the said agreement is to be treated as service. It was held that when the goods as such are not transferred, question of deeming sale of goods under Article 366(29A) (d) does not arise, and the transaction would be only a service and not a sale.
(j) In the case of State v. IBM India Pvt. Ltd. - 2015-
TIOL-2298-HC-KAR-VAT in similar situation pertaining to ERP software implementation service, it was held 17 Appeal No. ST/85707/14 that they are not goods available in market and it is client specific, hence the demand of VAT was set aside. Earlier decision in case of Infotech Software Dealer Association was followed.
(k) In case of Mahyco Mosanto Biotech [2016 (44) S.T.R. 161 (Bom.)] Hon'ble Bombay High Court has held that mere inclusion of franchise under MVAT Act would not automatically make all franchise agreement liable to sales tax dealing with permissive use. It observed that the agreement refers to mere permissive use of defined intangible rights.
(l) From the agreements under consideration it is apparent that-
a. It does not show that software is sold through CD only. After software installation CD has hardly any value and Software needs periodic up- gradation.
18
Appeal No. ST/85707/14 b. In case of customization at client's site, definition of goods is not relevant.
(m) In case of Safety Retreading [2017 (46) STR 97 (SC)], the facts were different in as much as Revenue wanted to charge tax on 100% value which includes material portion. From para 11, 12, & 13, it is clear that service portion 30% defined under local Act was never challenged in the SCN nor the invoice showing breakup of material and service portion was disputed in order and the affidavit filed before Court. It cannot be applied in present case.
(n) As appellant did not seek any clarification from department and there was failure to disclose position in ST-3 returns, there was suppression and hence extended period has been correctly invoked. For which reliance has been placed on CCE v. Reliant Advertising [2013 (31) STR 166 (Tri-Del) and Vodafone Digilink Vs CCE [2013 (29) STR 229 (Raj)]. 19
Appeal No. ST/85707/14
(o) In case of demand of Service Tax under Section 73, it is not required to prove that the nonpayment of tax was with intent to evade as required under Central Excise Act, 1944 as held in Touraids Travels Vs CCE [2014 (35) STR 235 (ALL)]
(p) Further payment of VAT is not relevant factor for determining the liability to service tax as has been held by the Apex Court in case of IDEA Mobile. [2011 (23) STR 433 (SC)]
(q) It was also submitted that the sale of hardware as shown is not per se sale of hardware is nothing but sale of complete software solution to the issuance being passed by the clients its sale of hardware has to be seen in conjunction with the entire contract agreement and then it can be decided whether these are to be considered as sale of hardware per se for provisioning for sale liable to service tax. 20
Appeal No. ST/85707/14
8. The Chartered Accountant appearing on behalf of the Appellants after conclusion of the hearing sought liberty to file additional written submissions which in interest of justice was allowed by the bench. Accordingly the Chartered Accountant filed additional written submissions vide his letter dated 15.05.2018. In this submission he submitted that-
i. "Full use Program Distribution Agreement" dated 17.05.2010 with Oracle India, only indicates that they have the right to distribute Oracle Program, which is a copyrighted article.
ii. As per Purchase order dated 20.11.2009, of M/s Shriram General Insurance, three copies of "Oracle Database Enterprise Edition - Processor Perpetual Full Use" and three copies of "Internal Application Server Enterprise Edition - Processor Perpetual Full Use" are to be delivered within 4-6 weeks and 21 Appeal No. ST/85707/14 Oracle Programme was to be installed by the Appellant.
iii. In respect of "Product Support" they have already paid the service tax.
iv. Software Order and Licensing Agreement dated 18.06.2010 with M/s Kotak Mahindra Bank, is transaction of sale of copy of appellant's own branded software in CD Form. Reliance placed by revenue on clause 2.1 of agreement to state "The software is licensed, not sold, to Licensee for use only under the terms and conditions of this agreement ...." Is not correct as in the same agreement clause 2.2 provides "Delivery: Licensor shall deliver to the licensee 1 (one) copy of the software application and the associated programme documentation."Thus clause 2.2 is clearly providing for the sale of copy of copyrighted software. The purpose of license agreement and clause 2.1 is to 22 Appeal No. ST/85707/14 clearly demarcate that what is being sold is a copy of copyrighted article and not software along with the copyright. Since the appellants have transferred the right of ownership (i.e. sale) in the copy of computer programme to the customer for a consideration thus resulting in sale of the CD containing a software.
v. Software development agreement dated 6.05.2002 with ICICI Webtrade, is for development of customized Software development service and falls under the category of Information Technology Software Service (ITSS) after 16.05.2008 and liable to service tax. Since this service was notified as liable to service tax from 16.05.2008, they have paid the service tax in respect of these services with effect from that date.
vi. Apex Court decision in case of Tata Consultancy Services [2004 (178) ELT 22 (SC)] is relevant both 23 Appeal No. ST/85707/14 prior to and after 16.05.2008 and the sale of copy of computer programme would still be sale of goods and not services.
vii. It is intention of the parties to sell a copy of the software so that the property in the copy passes to the buyer and hence it is sale.
viii. In view of the decision of Karnataka High Court in case of State of Karnataka Vs IBM India [2015-TIOL- 2298-HC-KAR-VAT], and Infosys Ltd vs Dee Commissioner of Commercial Taxes [2015-TIOL- 2106-HC-KAR-VAT], a. sale of Third Party Standardized Software and sale of In-house Developed Standardized Software, will be sale liable to VAT;
b. Service Tax will be payable on pure service contract, software development services on which service tax is paid.
24
Appeal No. ST/85707/14 ix. By applying the principles laid down by the Bombay High Court in case Mahyco Monsanto Biotech (India) Pvt. Ltd. vs UOI [2011 (44) STR 161 (Bom)], since the copy of software is exclusively given to the customer, and he is free to use it, not to use it or even destroy it, and not to return the same except in case of termination of agreement due to breach of stipulated conditions, the transaction is that of sale, and will not be liable to service tax. x. Madras High Court Decision in case of Infotech Software Dealers Association Vs Union of India [2010 (20) STR 289 (MAD)] also do not advances the case of the department.
xi. Even if the contention is accepted in respect of the sale of software on CD, then since the In-house Developed Standardized Software's are always sold on CD, demand of Rs 9,33,33,326/- is required to be dropped.
25
Appeal No. ST/85707/14 xii. Show Cause Notice or Order in Original do not makes any distinction between sales of software on CD or by way of download hence making such a distinction at this stage would not be proper. xiii. Service Tax under the category of "Information Technology Software Services (ITSS)" is not leviable on the sale of Third Party Standardized Software or on Sale of In-house Developed Standardized Software as these fall in the category of deemed sale under Article 366(29A)(d) of the Constitution of India.
xiv. Reliance placed by the revenue on the decision in case of Hong Kong Industries (P) Ltd Vs CCE & ST [(2017) 4 GSTL 257 (T-DEL)] and CST Vs Air Charter Services Pvt. Ltd. [2017-TIOL-2005-CESTAT-DEL] to argue that demand can be confirmed in order in original in category other than that alleged in show cause notice is not correct as in both the cases there 26 Appeal No. ST/85707/14 was no difference in the category of service alleged in the show cause notice and the category in which demand was confirmed by order in original.
10. We have considered the submissions made by both the appellant as well as Revenue. The issues for consideration can be put across in four or five points.
10.1 Whether the order-in-original while confirming the demand raised by the first three show-cause notices have travelled beyond the scope of remand order or Commissioner was right in confirming the said demand as has been done by him. While remanding the matter back, the Tribunal has made observation which have been reproduced above in para 3. As per the said observation it is clear that the direction was to both the agreements entered into with the clients, bills raised for the service rendered and the goods supplied and the payment made towards service tax liability under the category of 'Information Technology Service'. Only after going through all these documents, 27 Appeal No. ST/85707/14 correct service tax determination was to be done and matter was remanded for taking into account of documentary evidences which would submit in support of their claim of having discharged of service tax liability. While passing the order, Commissioner has done the same. He has considered looking into agreements and has concluded what he deemed fit in respect of leviability of service tax. The remand order does not conclude anything in respect of the nature of the software supplied or to say that these could not have been leviable to service tax. Accordingly, the order of Commissioner cannot be faulted on this count. 10.2 In para 18 of his order, Commissioner had examined the agreement entered between the appellant and M/s Oracle on 17.05.2010. In para 20(ii), he had examined the purchase order from M/s Shriram, bearing No. PO- ETG/SOF/SI/00168/0-10 dated 25.11.2009 and other documents supplied by the noticee during the course of adjudicating proceeding. After considering the said 28 Appeal No. ST/85707/14 agreement, the Commissioner has in para 23 and 24 concluded as follows:-
"23. The software programme developed by software developers like Oracle consists of various commands which enable the computer to perform a designated task. A programme containing instruction in computer language is subject-matter of a license, having value to the end user. Such programme is useful to the end user enabling him to obtain the desired results. The material evidence on record indicate that the impugned software developed by Oracle and other software developers supplied by the Noticee to the end user under a licensed agreement is not a packaged software sold off the shelf but a software designed to meet specific requirement of the end user and made available for use under a license. The terms of the agreement between the Noticee and Oracle, as mentioned above, clearly lay down that these software's have to be distributed in conjunction with their value added package and have to be used only for the internal business operations of the end users. The agreement further stipulates that the ownership and intellectual property rights are with Oracle only. In case of packaged software designed and created for 29 Appeal No. ST/85707/14 sale to more than one person for the use of large number of users on a variety of hardware, the intellectual property is incorporated on a media for purposes of transfer. However, in the instant case, the intellectual property of the software supplied by the Noticee is with the developer of the software, like Oracle. Thus, the Noticee is actually temporarily transferring the intellectual property right by way of selling the License to use the software developed by Oracle along with the support and update programs. If it is the case of purchase of packaged software sold off the shelf, then there is no need for the Noticee to enter into License Agreement.
24 It is thus observed that Oracle and other software developers only license the software for use by the end user subject to the terms and conditions of the agreement, thereby giving the right to use the software, which includes the right to install, run and get updates. As per the terms and conditions of the agreement, the end user is neither permitted to tamper / modify the software nor is allowed to sell the same, as the ownership and intellectual property rights remain with Oracle. Such right to use of the software 30 Appeal No. ST/85707/14 does not amount to sale of software. There will be sale of software only if source code and entire property in software is transferred to buyer."
10.3 The argument on merits advanced by the appellant is with regards to the decision of the Hon'ble Apex Court in the case of Tata Consultancy Services. Relying on the said decision they have argued that the third party software supplied by them are nothing but sale of copy righted article and hence sale of goods leviable to VAT hence cannot be leviable to service tax. There is no law which provides that levy of VAT bars to levy of service tax. On the contrary if authority to levy of service tax on a particular transaction can be traced back then no other levy cannot bar such a levy. It is the context that the decision of Madras High Court referred above needs to be examined. It is the submission of the party and is reproduced in reference to this argument:-
Sl.No. Questions Held
1. Whether 'software' is Software is goods.
'goods'?
31
Appeal No. ST/85707/14
2. When a copy of it is Whether the
supplied to any end transaction would
customer under and "End amount to sale or
User License Agreement: - service would depend
is it a sale or a service upon the individual
transaction.
3. Whether the Parliament Section 65(105)(zzzze)
has the legislative cannot be held to be
competency to bring in the unconstitutional so long
amended provisions of as the Parliament has
Section 65 (105)(zzzze) by the legislative
virtue of the powers under competency to enact
Entry 97 of List I of law in respect of tax on
Schedule VII of the service in exercise of
Constitution of India? powers under Entry 97
of List I of Schedule VII.
10.4 When the Hon'ble High Court has held that Section 65 (105) (zzzze) cannot be held unconstitutional as Parliament was having legislative competency to levy such tax. Levy of service tax in respect of these services cannot be followed just for the reason that these transactions would have been levied to VAT.
10.5 After examining various agreements, contract, invoices, the Commissioner has recorded the following in paragraph 21 of his order:-
32
Appeal No. ST/85707/14 "21. Further, from the documents produced by the Noticee it is seen that they had supplied Licenses to use the software developed by Oracle as well as other software developers, which they have categorized in the basket of 'Product Taxable'. Some of the transactions are as under-
Vide Invoice No. MNV-MUM-10015 dated 22.04.2004, the Noticee had supplied a Integrated Treasury Management- Kastle, Additional 50 user License and application enhancements, to Federal Bank, Ernakulam. Under invoice No. MNV-AHM-15064 dated 30.12.2004, the Noticee have supplied Microsoft Licenses to National Collateral Management Services Ltd.
Under Invoice No. MNV-MUM-19905 dated 30.04.2007, the Noticee had supplied Oracle software License to M/s. ICICI Bank Ltd.
Under Invoice No. MNV-MUM-19967 and MNV-MUM- 20017, dated 09.05.2007 and 22.05.2007, respectively, the Noticee have supplied Citrix software License and Oracle software License to Kisan Group of companies. Vide Invoice No. MNV-MUM-20902, dated 13.09.2007 and MNV-MUM-23048, dated 21.03.2008 the Noticee have supplied Oracle ASFU Standard One Edition Single Processor Base License to M/s. SISCO Research Laboratories Ltd. and M/s. Pratibha Industries Ltd. 33
Appeal No. ST/85707/14 Vide Invoice No. INV-MU&M-6100002769 dated 30.09.2008, the Noticee have billed M/s. Nippon Data Systems for supply of software License and Product support.
Vide Invoice No. INV-DEL-6100002853 dated 09.10.2008 and INV-DEL-6100002881 dated 10.10.2008 the Noticee have billed M/s. Softcell Technologies for supply of Hyperion Pre System 8.3.2 Intelligence Explorer with support.
Vide Invoice No. INV-MUM-6100003848, INV-MUM- 6100003850, INV-MUM-6100003852, INV-MUM- 6100003857, INV-MUM-61000072, INV-MUM- 6100005281-84 and INV-MUM-6100005857 the Noticee have supplied Oracle Standard Edition software - 5 user Licenses.
Vide Invoice No. INV-MUM-6111001979 dated 22.06.2010, one server license is sold to M/s. J.B. Chemicals & Pharmaceuticals Ltd.
Vide Invoice No. INV-BGL-6111002209 dated 25.06.2010, DMS Software service based with 20 concurrent License- Datascan.online is supplied to Bangalore Development Authority.
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Appeal No. ST/85707/14 One Auto Deal software License is supplied to M/s. Nissan Motor India Pvt. Ltd. vide Invoice No. INV-MUM- 6111003204 dated 27.07.2010.
One Orion ERP Software License is supplied to NET 4 India Ltd. vide invoice No. INV-MUM-6111004830 dated 13.09.2010 One Auto Deal software License is supplied to M/s. Nissan Motor India Pvt. Ltd. vide Invoice No. INV-MUM- 6111009474 dated 29.03.2011.
An amount of Rs.1,40,000/- is billed vide invoice No. INV- MUM-6110002109 dated 28.07.2009 towards software License, implementation charges and packaging cost for Auto Deal."
10.6 After examining the context of these agreements, Commissioner concluded that the transaction undertaken by the party in respect of third party software a nature of supply of services and hence leviable to service tax. Under the category of 'Information Technology Software services' from 16.05.2008. For period prior to 16.05.2008, the adjudicating authority has held that these transactions will 35 Appeal No. ST/85707/14 be classified under the category of 'Intellectual Property Rights'.
10.7 It is settled law that software is nothing but an Intellectual Property of a person who has developed the said software. The right to use the software is something what gets transferred and not software has per se. Even if it is provided on a media such as CD or Hard Drive. Software cannot be altering, modified or reproduced by the user of the said software. He can only use the same for the purposes authorized by the rightful owner and in the manner authorized and this is further supported by the fact that in each case the recipient enters into an End User License Agreement (EULA) which is binding in nature before he can make use of the said software. The issue has been considered by the Commissioner in his order in paragraphs 45 to 53:-
"45. So far as the present case is concerned, there is no dispute about the fact that the software developers like Oracle had developed the software and given right to 36 Appeal No. ST/85707/14 distribute such software to the end users on entering the end users license agreement. The intellectual property right in respect of the program remained with the said developer of software and the end user were only using the data contained in the software in furtherance of their business. In other words, the said software developers had only transferred the right to use the software temporarily. The Noticee acted as an intermediate on behalf of the software developers in transferring the intellectual property right. As such, the Noticee, being the 'holder' of the intellectual property right by way of the agreement entered by them with the software developers like oracle, are the provider of the 'intellectual property services', defined under Section 65(55b) of the Finance Act, 1994 read with Section 65(105)(zzr) ibid. Even in respect of the software developed in-house or customized software, as brought out in the above paras, the Noticee were only transferring the right to use the program contained in the software and the intellectual property rights and ownership of such software supplied to the customers, remained with the Noticee only. Thus, even in respect of the supply of software developed in- house or customized software, the services provided by the Noticee are classifiable under the category of the 'intellectual property services'.37
Appeal No. ST/85707/14
46. Information Technology Software Services, defined under Section 65(53a) of the Finance Act, 1994 was introduced with effect from 16.05.2008. The taxable service is defined under Section 64(105)(zzzze) ibid, which includes providing 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. The taxable services also includes providing the right to use information technology supplied electronically. The CBEC too has clarified vide Circular DOF No. 334/1/2008-TRU, dated 29.02.2008 read with DOF No. 334/13/2009-TRU, dated 06.07.2009 that the Information Technology Software services includes providing the right to use IT software for commercial exploitation including right to reproduce, distribute and sell, software components for creation of and inclusion in other It software products and IT software supplied electronically.
47. Thus, the right to use the software programs has been later on covered separately under the 'Information Technology Software Services' with effect from 16.05.2008. Prior to 16.05.2008 transfer of right to use the programs 38 Appeal No. ST/85707/14 contained in the software, being the intangible property, were covered under the 'Intellectual Property Services'.
48. CBEC while communicating the changes made in the Union Budget for 2008-09 vide DOF No.334/1/2008-TRU, dated 29.02.2008, had clarified under para 3.4 as under - "3.4. Seven services are being separately defined as taxable services. Specifying as service separately as a taxable service does not necessarily mean or suggest that services falling within the scope of newly specified service were not earlier classifiable under any one of the existing taxable services. Grouping of services under a specific taxable service may change. The scope and coverage of a taxable service are to be determined strictly in accordance with the language of the relevant statutory provision existing during the material period."
49. The Hon'ble Tribunals' Order dated 30.10.2013 passed in the case of Sodexho Pass services India Pvt. Ltd. vs. commissioner of Service Tax, Mumbai, in Appeal No. Service Tax/156, 173/08-Mum, is also relevant here. The issue when a new entry is introduced covering a particular activity without amending the earlier entry, whether the earlier entry can cover the subsequently introduced entry, was 39 Appeal No. ST/85707/14 examined by the Larger Bench of Tribunal, Mumbai, in this case. The Appellant contended that in such cases it cannot be said that the earlier entry covered subsequently introduced entry. Hon'ble CESTAT observed that this proposition may be true in certain situations and not in other situations. In this case demand of Service Tax was issued classifying the service provided under Business Auxiliary Service for the period 01.07.2003 to 31.12.2005. The assessee in this case had been paying Service Tax suo moto with effect from 01.05.2006 under Support Services of Business & Commerce. This service has been notified as a separate taxing service with effect from 01.05.2006. Hon'ble Tribunal held that the services provided by the assessee are covered under Business Auxiliary Service at the time when the Business Support Service was not in existence. The relevant portion of the CESTAT's order are reproduced below-
"Para 12. Ld. Counsel has given a lot of emphasis and cited certain judgments to argue the point that once a new entry is introduced covering a particular activity without amending the earlier entry, it cannot be said that earlier entry covered the subsequently introduced entry. We are of the view that this proposition may be true in certain situations while in other situations, this may not be true.40
Appeal No. ST/85707/14 After the introduction of Finance Act, 1994, practically every year new services were introduced in the Service Tax net. The introduction of new service did not bear any specific pattern or coverage to particular sector. In central Excise Tariff as also Customs Tariff, the classification is based upon various entries in the Service Tax, it is not unusual to find that a particular activity service may get covered by more than one entry/classification. In fact, Section 65A of the Finance Act, 1994 recognizes this fact. The said Section is reproduced below:-
65. Classification of taxable services (1) For the purpose of this Chapter, classification of taxable services shall be determined according to the terms of the sub-clauses of clause (105) of Section 65.
(2) When for any reason, a taxable service is, prima facie, classifiable under two or more sub-clauses of clause (105) of Section 65, classification shall be effected as follows:-
(a) The sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description;
(b) Composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified 41 Appeal No. ST/85707/14 as if they consisted of a service which gives them their essential character, insofar as this criterion in applicable;
(c) When a service cannot be classified in the manner specified in clause (a) or clause
(d) It shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration.
Para 13. It is obvious from the Section that the Act itself recognizes that service may be classifiable under two or more sub-clauses of clause (105) of Section 65. In view of the above provision, we are of the view that the proposition made by the ld. Counsel does not hold merit. Ld. Counsel has cited certain case laws in support of his contention. We have gone through the cited case laws. In the case of India National Shipowners Association vs. UOI reported in 2009 (14) S.T.R. 289 (BOM), the Hon'ble Mumbai High Court was considering the question whether marine logistics services- offshore support vessels, marine construction barges and harbor tugs provided to exploration and production companies would get covered under supply of Tangible Goods service from 16.05.2008 or under mining service prior to that date. It is in this context that they had made observation relating to the said two entries. In fact, in this 42 Appeal No. ST/85707/14 case, the Supreme Court had observed that the nature of work that was required to be carried out could not be strictly said to be a service in relation to mining of mineral, oil or gas. It is in this context that the Court has made certain observation. Another case cited by the Ld. Counsel is Cameo Corporation Services Ltd. Vs. Commr. Of Service Tax, Chennai, reported in 2008 (11) S.T.R. 161 (Tri. Chennai). In this case, the issue before the Tribunal was, whether Share Transfer Agent service which was introduced with effect from 01.05.2006 could be covered under Business Auxiliary Service prior to that date. Share Transfer Agents are a separate category and they do the work of their own and registered with SEBI and it is in this context, the Tribunal held that this cannot be covered under Business Auxiliary Service and made certain observations. Similarly in the case of CCE vs. Trumac Engg. Co. Pvt. Ltd. reported in 2008 (10) S.T.R. 148 (Tri. Ahmd.) the issue was between the Consulting Engineering Service and Intellectual property service w.e.f. 10.09.2004. The fees and royalty paid for technical know- how was not to be covered under Consulting Engineer Service and in this context the Tribunal held that services are chargeable under Intellectual Property Service with effect from 10.09.2004 and are not covered under Consulting Engineer services prior to that date and observations are 43 Appeal No. ST/85707/14 made in that context. Similarly, in the case of Glaxo Smithkline Pharmaceuticals Ltd. vs. CCE, Mumbai IV reported in 2005 (188) ELT 171 (Tri. Mum) the issue was whether the activities which are in the nature of executor services would be covered under Management Consultancy services. The executor services were held to be not covered under Management Consultancy services. In the case of IBM India Pvt. Ltd. vs. Commissioner of Service Tax, Bangalore reported in 2010 (17) S.T.R. 317 (Tri.Bang) the issue was relating to Management Consultant Service, software implementation which was executor in nature and it is in this context certain observation was made by the Tribunal. The facts in the present case are very different. As discussed earlier, we are of the view that the activity of the assessee helps in promoting the sale of goods and services of its affiliates and clearly covered by the specific entry under Business Auxiliary Service. Moreover, prima facie, we do not find that the said activity gets covered under Business Support services. In any case, since the activities are more specifically covered under Business Auxiliary Service as per Sec. 65A(2), the same would be covered under Business Auxiliary Service. The various observation made in various case laws cited are not applicable in the facts and circumstances of the present case."
44
Appeal No. ST/85707/14
50. As can be seen in this case, the service of transfer of right to use the intangible property, i.e. the software was classifiable under the category of 'Intellectual Property Services' and were taxable in terms of Section 65(105)(zzr) of the Finance Act, 1994. In the Union Budget of 2008-09, a new service, viz. 'Information Technology software' service has been carved out and defined separately under Section 65(53a) and taxable in terms of Section 65(105)(zzzze) ibid, wherein such right to use the software has been specifically included in the aforesaid service, taxable with effect from 16.05.2008.
51. In view of the clarification of CBEC given vide the above said circular dated 29.02.2008, so far as first Show Cause Notice dated 19.10.2009 is concerned, the services provided by the Noticee in respect of the supply of the third party software and the software developed in-house or the customized software, wherein the Noticee had temporarily transferred the right to use the software to their clients for consideration, are classifiable under the category of 'Intellectual Property Services' for the period prior to 16.05.2008 and with effect from 16.05.2008 the said services are classifiable under the separately specified category of 'Information Technology Software services'. 45
Appeal No. ST/85707/14
52. The show cause Notice dated 19.10.2009 has classified the impugned services provided by the Noticee under the category of 'Management, Maintenance or Repair Services' for the period from April 2004 to 16.05.2008. the classification rule says that the classification of a service should be done under the head which is more specific, viz., temporary transfer of right to use the software are found to be more appropriately classifiable under the category ' Intellectual Property Services' and with effect from 16.05.2008 are specifically covered under the category 'Information Technology Software services'. As regards the management, maintenance and repair services of computer hardware/ software provided by the Noticee either under the Annual Maintenance Contract (AMC) or otherwise, there is no dispute that the same are covered under the category of 'Management, Maintenance or repair services' only, which are defined under Section 65(64) of the Finance Act, 1994 and taxable under Section 65(105)(zzg) of the Finance Act, 1994, during the entire period of demand.
53. From the foregoing it is evident that the services under consideration provided by the Noticee, are classifiable under 'Intellectual Property Services' prior to 16.05.2008 and under 'Information Technology Software Services' with effect from 46 Appeal No. ST/85707/14 16.05.2008. However, the Noticee claims that the services provided by them are classifiable only under 'Information Technology Software Services' and only with effect from 16.05.2008 and not under 'Intellectual Property Services' prior to 16.05.2008. it is pertinent to mention that the change of classification of the impugned services from 'intellectual property services' or 'information technology software services', as applicable for the relevant period, would not have any bearing so far as the Service Tax demand is concerned as the applicable rate of Service Tax is same for both the services."
10.8 All the issues under consideration have been the part of the deliberations in the Conference of "Committee of Experts on International Co-operation in Tax Matters"
Fifteenth Session at Geneva from 17 to 20th October 2017.
The paper presented at the said conference on "SOFTWARE PAYMENTS AS ROYALTIES UNDER ARTICLE 12 [E/C.18/2017/CRP.25]" has considered the treatment of the 47 Appeal No. ST/85707/14 payments received for transaction in software's. Most of the issues under consideration are aptly covered by the said paper and it also highlights the international practices in this regard. The relevant excerpts from the said paper are reproduced below:
"OECD History Historically, the work for development of guidance in respect of application of Article 12 on software payments originally appears in a report titled "Software: An Emerging Industry"
that was published by the OECD in 1985. The recommendations made in Appendix 3 of the "Software: An Emerging Industry" for changes in Commentary on Article 12 led to the insertion of the paragraphs 12 to 19 of the OECD Commentary on Article 12. These changes were the first major guidance included in the Commentary on Article 12 in respect of software payments.
2. The second set of further guidance that was subsequently incorporated and continues to remain as existing guidance 48 Appeal No. ST/85707/14 was adopted on the basis of another report titled "The 2000 Update to the Model Tax Convention" adopted by the OECD Committee on Fiscal Affairs on 29 April 2000, leading to modification of some of the paragraphs and insertion of paragraph 12, 12.1, 12.2, 13.1, 14, 14.1, 14.2, 14.3 and 14.4 in the OECD Commentary.
3. The third set of major changes in this guidance resulted from the recommendations made in the OECD report titled "Treaty characterization issues arising from E-Commerce"
which was adopted by the OECD Committee on Fiscal Affairs on 7 November 2002, consequently leading to another report titled "The 2002 Update to the Model Tax Convention"
adopted by OECD Council on 28 January 2003, which led to the paragraphs 11.1, 11.2 11.3, 11.5, 11.6, 17.1, 17.2, 17.3 and 17.4 of the OECD Commentary.
UN History
4. Article 12, paragraph 3, of the UN Model reproduces Article 12, paragraph 2, of the OECD Model but eliminates 49 Appeal No. ST/85707/14 equipment rental from this Article. Moreover, paragraph 3 of Article 12 includes payments for tapes and royalties which are not included in the corresponding provision of the OECD Model. The relevant portions of the OECD Commentary and Committee comments are attached in Annex I.
5. At the 11th session of the Committee in 2015, a Subcommittee was formed to investigate the issue of software-related payments under Article 12 of the UN Model. The Subcommittee mandate was to consider and report on possible improvements to both the UN Model and Commentary.
6. The issue of taxation of royalties under Article 12 was initially scheduled for the 12th session of the committee, but was deferred until the 14th session, after the royalties Subcommittee had had a chance to meet to consider the issues. The relevant paper was E/C.18/2017/CRP.5. The Subcommittee decided not to put forward any text regarding the characterization of royalty payments made for the 50 Appeal No. ST/85707/14 acquisition of software, until other underlying issues are clarified. The Subcommittee proposed amendments to the commentaries of Article 12 of the UN Model at the 14th session. The proposal did not represent the Committee's unanimous recommendation, but reflected the view of the majority of the members of the Subcommittee.
7. The Subcommittee also noted, and the Committee agreed, that it would like to request the next membership of the committee to reconvene the Subcommittee on royalties, so that it could conclude the term of its mandate by addressing the nature of software-related payments and apply corresponding changes to the UN Model and Commentary, as appropriate.
Annexure Relevant parts of the UN Art. 12 Commentary (with quotations from the OECD Commentary) "11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own 51 Appeal No. ST/85707/14 account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulae granted to the licensee and that he does not guarantee the result thereof.
11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7 or in the case of the United Nations Model Convention Article 14. 11.3 The need to distinguish these two types of payments, i.e. payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: Contracts for the supply of know-how concern information of the kind described in 52 Appeal No. ST/85707/14 paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information. In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, 53 Appeal No. ST/85707/14 depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to subcontractors for the performance of similar services. 11.4 Examples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include: payments obtained as consideration for after-sales service, payments for services rendered by a seller to the purchaser under a warranty, payments for pure technical assistance, payments for a list of potential customers, when such a list is developed specifically for the payer out of generally available information (a payment for the confidential list of customers to which the payee has provided a particular product or service 54 Appeal No. ST/85707/14 would, however, constitute a payment for know-how as it would relate to the commercial experience of the payee in dealing with these customers), payments for an opinion given by an engineer, an advocate or an accountant, and payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software with non- confidential information in response to frequently asked questions or common problems that arise frequently.
14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in 55 Appeal No. ST/85707/14 transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of 56 Appeal No. ST/85707/14 copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article
7. 14.1 The method of transferring the computer program to the transferee is not relevant. For example, it does not matter whether the transferee acquires a computer disk containing a copy of the program or directly receives a copy on the hard disk of her computer via a modem connection. It is also of no relevance that there may be restrictions on the use to which the transferee can put the software. 14.2 The ease of reproducing computer programs has resulted in distribution arrangements in which the transferee obtains rights to make multiple copies of the program for operation only within its own business. Such arrangements are commonly referred to as "site licenses", "enterprise 57 Appeal No. ST/85707/14 licenses", or "network licenses". Although these arrangements permit the making of multiple copies of the program, such rights are generally limited to those necessary for the purpose of enabling the operation of the program on the licensee's computers or network, and reproduction for any other purpose is not permitted under the license. Payments under such arrangements will in most cases be dealt with as business profits in accordance with Article 7 14.4 Arrangements between a software copyright holder and a distribution intermediary frequently will grant to the distribution intermediary the right to distribute copies of the program without the right to reproduce that program. In these transactions, the rights acquired in relation to the copyright are limited to those necessary for the commercial intermediary to distribute copies of the software program. In such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Thus, in a transaction where 58 Appeal No. ST/85707/14 a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business profits in accordance with Article 7. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the distributor having the right to reproduce the software), or whether the software is subject to minor customization for the purposes of its installation.
15. Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there is a transfer of rights involving:
59
Appeal No. ST/85707/14 exclusive right of use of the copyright during a specific period or in a limited geographical area; additional consideration related to usage;
consideration in the form of a substantial lump sum payment.
16. Each case will depend on its particular facts but in general if the payment is in consideration for the transfer of rights that constitute a distinct and specific property (which is more likely in the case of geographically-limited than time- limited rights), such payments are likely to be business profits within Article 7 (or 14 in the case of the United Nations Model Convention) or a capital gain within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been alienated, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the 60 Appeal No. ST/85707/14 payment of the consideration in installments or, in the view of most countries, by the fact that the payments are related to a contingency.
17. Software payments may be made under mixed contracts. Examples of such contracts include sales of computer hardware with built-in software and concessions of the right to use software combined with the provision of services. The methods set out in paragraph 11 above for dealing with similar problems in relation to patent royalties and know- how are equally applicable to computer software. Where necessary the total amount of the consideration payable under a contract should be broken down on the basis of the information contained in the contract or by means of a reasonable apportionment with the appropriate tax treatment being applied to each apportioned part. 17.1 The principles expressed above as regards software payments are also applicable as regards transactions concerning other types of digital products such as images, sounds or text. The 61 Appeal No. ST/85707/14 development of electronic commerce has multiplied the number of such transactions. In deciding whether or not payments arising in these transactions constitute royalties, the main question to be addressed is the identification of that for which the payment is essentially made. 17.2 Under the relevant legislation of some countries, transactions which permit the customer to electronically download digital products may give rise to use of copyright by the customer, e.g. because a right to make one or more copies of the digital content is granted under the contract. Where the consideration is essentially for something other than for the use of, or right to use, rights in the copyright (such as to acquire other types of contractual rights, data or services), and the use of copyright is limited to such rights as are required to enable downloading, storage and operation on the customer's computer, network or other storage, performance or display device, such use of copyright should 62 Appeal No. ST/85707/14 not affect the analysis of the character of the payment for purposes of applying the definition of "royalties". 17.3 This is the case for transactions that permit the customer (which may be an enterprise) to electronically download digital products (such as software, images, sounds or text) for that customer's own use or enjoyment. In these transactions, the payment is essentially for the acquisition of data transmitted in the form of a digital signal and therefore does not constitute royalties but falls within Article 7 or Article 13, as the case may be. To the extent that the act of copying the digital signal onto the customer's hard disk or other non-temporary media involves the use of a copyright by the customer under the relevant law and contractual arrangements, such copying is merely the means by which the digital signal is captured and stored. This use of copyright is not important for classification purposes because it does not correspond to what the payment is essentially in consideration for (i.e. to acquire data 63 Appeal No. ST/85707/14 transmitted in the form of a digital signal), which is the determining factor for the purposes of the definition of royalties. There also would be no basis to classify such transactions as "royalties" if, under the relevant law and contractual arrangements, the creation of a copy is regarded as a use of copyright by the provider rather than by the customer."
10.9 From the above discussions it is quite evident that the approach of commissioner while dealing with the issues is in accordance with the international practices of treatment of the software related transactions. Thus the order of the Commissioner holding that these services are classifiable under the category of 'Information Technology Software Services' after 16.05.2008 and prior to that under the category of 'Intellectual Proper Services' cannot be faulted with.
10.10 In respect of sale of hardware, party has contended that these sale of hardware is nothing but sale of 64 Appeal No. ST/85707/14 goods and hence they should not be leviable to service tax. After examining the invoices and the purchase orders the Commissioner in para 34 onwards have dealt with the issue. In paragraphs 36 and 37 he has observed as follows:-
"36. The installation of new computer system or its up- gradation/modification normally involves advice and assistance in selection of hardware and software, purchase of hardware and software, development of software as per the specifications are requirements, modification of software to suit the requirement, etc. Such jobs are comprehensive in nature. It is seen from the records submitted by the Noticee that they have supplied large number of computer systems, accessories and components to organizations like RBI, ICICI Bank Ltd., Indian Railways and may more. There is no documentary evidence to suggest that these organizations had given a standalone order for purchase of the computer hardware items supplied to them by the Noticee. The nature of the items supplied indicate that these computer hardware items were part and parcel of a comprehensive computer hardware and/or software solutions order. From the documents mentioned above it is apparent that the said Computer Hardware supplies were consumed while providing such comprehensive computer hardware and/or 65 Appeal No. ST/85707/14 software solutions/services by the Noticee to their clients. The Agreement is admittedly for providing a solution and not merely to supply goods. It is also not the case that there are two independent and stand alone agreements, one for supply of goods and another for provisions of service. The agreement is a single indivisible one. The agreement not being a agreement merely for sale of goods, will be obviously classifiable as service, notwithstanding the predominant nature of goods. Therefore, the Noticee's contention that it is the case of sale of goods is not legally sustainable.
37. However, while charging the clients for the said services rendered, the Noticee have artificially split the costs, one towards materials consumed while providing the said services and the second towards the service charges. As mentioned above, there is nothing on record to show that the sale of Computer hardware items were stand alone transactions. On the contrary the material evidence on record, few of which have been discussed above, clearly show that these Computer Hardware items were consumed while providing the impugned services. Thus, the computer hardware items were essential for provision of the impugned services, which evidently have been consumed while providing the said services. Provider of taxable service is 66 Appeal No. ST/85707/14 entitled to take credit of excise duty paid on excisable goods received for use in the provision of services."
10.11 After examining the contentions raised by the party, it is the fact that the Commissioner has held that the hardware goods have not been provided as hardware but has a complete solution to the issues of up-gradation of the software etc., developed by them for a specific plants for specific projects. Since supply of the said software is in relation to the provision of the services, the issue is in reference to valuation of the said services and not the classification of such hardware as services. That being so the value of hardware provided in terms of Section 67 of the Finance Act, 1994 needs to be added to the value of the services provided by the appellant. Here also the contention of the appellant based on the fact that they have paid sales tax / VAT on the said would not impact the liability for payment of service tax. Hon'ble Supreme Court in the case of Idea Mobile Communication Ltd. v. CCE & Cus. Cochin - 67
Appeal No. ST/85707/14 2011 (23) STR 433 has held in para 19, which is reproduced below:-
"19. There cannot be any dispute to the aforesaid position as the appellant itself subsequently has been paying service tax for the entire collection as processing charges for activating cellular phone and paying the service tax on the activation. The appellant also accepts the position that activation is a taxable service. The position in law is therefore clear that the amount received by the cellular telephone company from its subscribers towards SIM Card will form part of the taxable value for levy of service tax, for the SIM Cards are never sold as goods independent from services provided. They are considered part and parcel of the services provided and the dominant position of the transaction is to provide services and not to sell the material i.e. SIM Cards which on its own but without the service would hardly have any value at all. Thus, it is established from the records and facts of this case that the value of SIM 68 Appeal No. ST/85707/14 cards forms part of the activation charges as no activation is possible without a valid functioning of SIM card and the value of the taxable service is calculated on the gross total amount received by the operator from the subscribers. The Sales Tax authority understood the aforesaid position that no element of sale is involved in the present transaction."
10.12 Thus, value of goods used for provision of the taxable service cannot be excluded from the gross amount charged as consideration for the services provided just for the reason that sales tax / VAT has been paid on such goods and value of goods is shown separately. However when the goods are sold as part of provision of service and are shown separately then will the abatement in respect of the same shall be admissible or not needs to be considered. Notification No 12/2003-ST provided for such abatement. While concluding the with regards to the hardware when commissioner has upheld that they are the part of taxable service and their value should be included in the value of 69 Appeal No. ST/85707/14 taxable services provided, Commissioner needs to consider the argument in respect of the abatement of the value if admissible under rules or notification applicable at the relevant time.
10.13 In respect of Commissioner confirming the demand under the category of Intellectual Property Services for period prior to 16.05.2008 and under the category Information Technology Services from 16.05.2008 in respect of 1st show-cause notice party has relied upon the decisions in the following cases to argue that such confirmation of demand is not tenable:-
(i) Mahakoshal Beverages Pvt. Ltd. v. CCE, (2006) 6 STR 148 (Tri. - Bang.) affirmed by Karnataka High Court in CCE vs. Mahakoshal Beverages Pvt. Ltd(2014) 33 STR 616 (Kar)
(ii) Balaji Contractorv. CCE (2017) 52 STR 259 (Tri-Del.))].
(iii) Enpee Earthmovers vs. C.C.E., Goa(2012) 27 S.T.R. 48 (Tri. - Mumbai)
(iv) DHL Logistics Pvt. Ltd. vs. CST, Mumbai - I (2014) 36 S.T.R. 874 (Tri. - Mumbai) 70 Appeal No. ST/85707/14
(v) Marubeni India Pvt. Ltd v/s CST (2016) 45 STR 549 (Tri-
Del)
(vi) Warner Hindustan Ltd v/s CCE (1999) 113 ELT 24 (S.C.) 10.14 Relying on the above cases, the party had submitted that the demand cannot be made ahead which is not proposed in the show-cause notice. There is no dispute in that reference to the proposition made. It is settled principle in law to proceed against any person, the basic requirement is that he should be put to sufficient notice about his contravention and allowed to make proper defense. Since the first show cause notice dated 19.10.2009 has been issued demanding service tax under the category of "Management, Maintenance & Repair Service", the confirmation of demand under any other category, namely "Intellectual Property Right Services" for the period prior to 16.05.2008 cannot be justified and the order to that extent is definitely not maintainable.
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Appeal No. ST/85707/14 10.15 In the present case in three show-cause notices in respect of the same issue were proposed under Information Technology Software services and the party was having sufficient notice to answer the same under the said head in respect of the 1st show-cause notice dated 19.10.2009. When there is opportunity available to the extent, their stand in respect of a particular heading the order of Commissioner cannot be faulted with on that account. Even in the submission of the party they have claimed that they are paying service tax on the services provided by them under Information Technology Software services from 16.05.2008 onwards. The only issue which was to be considered was whether in respect of particular transactions the service tax is payable on that head or not. Accordingly, when sufficient notice has been given, it cannot be said that adjudicating authority has travelled beyond the scope of show cause notice while upholding the demand under the said head at least from 16.05.2008. 72
Appeal No. ST/85707/14 10.16 In the adjudication order, number of issues with regards to various services as provided to SEZ has been raised. It is settled law that the exemption in respect of supplies to SEZ has to be updated by way of refund. In the present case it is seen that during the period 01.09.2010 to 29.03.2011, the Notice have raised 44 invoices for a total amount of Rs.13,60,00,000/- on M/s. Geodesic Ltd., situated in SEEPZ, Mumbai, towards services names as 'Maintenance Management Module', 'Inventory & Purchase Module', 'Sales & Marketing Module', 'Production Management Module', 'Quality Management Module' and 'Project Management Module'. Specifically these services are in relation to the software services and hence are leviable to service tax. In terms of Notification No. 9/2009-ST granted exemption to the specific services supplied to SEZ subject to condition that person liable to pay service tax shall pay service tax as applicable on the specified services provided to the developer or units of SEZ and SEZ shall claim refund of 73 Appeal No. ST/85707/14 service tax on the services provided to the developer of SEZ. Notification No. 9/2009-S.T was substituted by Notification 17-2011-ST which provided exemption from service tax subject to condition specified therein. One of the conditions specified was that the exemption shall be provided by way of refund of service tax. Accordingly, during the entire period the service provider is not eligible for first stage exemption from payment of service tax. He was required to pay service tax and either SEZ developer or unit located in SEZ could have claimed the exemption by way of refund of service tax. Further in the present case, appellant has not produced any evidence to show that the services provided by them or only or partly consumed within the SEZ or outside. Thus, there is no dispute about the fact that said exemption or not available to the appellant during the relevant period. Since Commissioner has not considered the matter on this aspect the issue needs to be remanded back 74 Appeal No. ST/85707/14 to him for consideration of the exemption in respect of services supplied to SEZ unit/ developer. 10.17 Octroi Charges are in nature of levy for transportation of good, they cannot be said to be the part of value of taxable services provided by the appellants. Since this issue has not been considered by the Commissioner, the matter should be remanded back to him for reconsideration of the evidences that will be produced by the appellants to establish that these amounts were paid towards octroi. 10.18 Services rendered in J & K.,certain invoices have been pointed that these services have been rendered in J & K. As per Finance Act, 1994, service tax is not payable in respect of the services rendered there. Accordingly, the demand in respect of such services cannot be confirmed. Commissioner should accordingly requantify the demand after factoring in the services provided to the Jammu & Kashmir 75 Appeal No. ST/85707/14 10.19 On the issue of limitation, Noticee have contended that the notice dated 19th October 2009 is barred by limitation as they were under bonafide belief that the amount received by them under these Acts were not leviable to service tax. The said argument with regards to bonafide belief cannot be allowed. During the entire period, noticee was aware about leviability of service tax on the said products and in case they had any doubt they could have sought clarification from the concerned authorities. Without seeking such clarification and on his own deciding not to pay the tax cannot be a bonafide reason. Even Column in the ST-3 returns whether the appellant was required to declare the gross amount for which they have issued bills/invoice, challan in respect of service provided / to be provided that they have not declared anything. Out of that in the column for claiming the amounts under exempted / not leviable to service tax have been left blank. Thus they are only suppressed the information in respect of 76 Appeal No. ST/85707/14 these amounts being calculated by them. When under no statute and obligation has been passed to disclose the entire amounts recovery and thereafter bifurcation in respect of exempted goods not taxable and taxable amounts not declaring of the same shall amount to suppression with intention to evade the taxes. Since the entire demand raised by the show cause notice prior to 16.05.2008 is not maintainable as no notice has been issued under the category in which this demand is sought to be made and confirmed, this ground loses relevance both for the appellant and respondents.
10.20 As the demand of taxes is liable to be confirmed for the period after 16.05.2008 appellant are required to pay the interest also. It is settled law that interest liability flow from the liability to pay tax if not paid in time as per the decision of the Hon'ble Supreme Court in the case of Commissioner of Trade Tax, Lucknow v. Kanhai Ram Thekedar - 2005 (185) ELT 3 (S.C.).
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Appeal No. ST/85707/14 10.19 Now coming to the question of penalty that have been imposed. For contesting the penalty, the appellant has relied upon the decision of the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa - 1972 (83) ITR 26 (SC). Then various other decisions to hold that for a penalty to be imposed there should be quasi criminal proceedings and it has to be shown that party has acted deliberately in defiance of law. Case of discharging the tax liability which is confirmed later on by way of notice and adjudication. In the present case the penalty imposed are mandatory penalties provided in law, they are to be held as civil liability accordingly. Reliance on Section 80 would be of no held in this case. Hon'ble Kerala High Court in the case of Commissioner of Central Excise vs. Krishna Poduval - 2006 (1) STR 185 (Ker.) has held as reproduced below:-
11. The penalty imposable under S. 76 is for failure to pay service tax by the person liable to pay the same in accordance with the provisions of S. 68 and the Rules made thereunder, whereas S. 78 relates to penalty for suppression 78 Appeal No. ST/85707/14 of the value of taxable service. Of course these two offences may arise in the course of the same transaction, or from the same act of the person concerned. But we are of opinion that the incidents of imposition of penalty are distinct and separate and even if the offences are committed in the course of same transaction or arises out of the same act, the penalty is imposable for ingredients of both the offences. There can be a situation where even without suppressing value of taxable service, the person liable to pay service tax fails to pay. Therefore, penalty can certainly be imposed on erring persons under both the above Sections, especially since the ingredients of the two offences are distinct and separate. Perhaps invoking powers under S. 80 of the Finance Act, the appropriate authority could have decided not to impose penalty on the assessee if the assessee proved that there was reasonable cause for the said failure in respect of one or both of the offences. However, no circumstances are either pleaded or proved for invocation of the said Section also. In any event we are not satisfied that an assessee who is guilty of suppression deserves such sympathy. As such, we are of opinion that the learned Single Judge was not correct in directing the 1st appellant to modify the demand withdrawing penalty under S. 76. Therefore, the judgment of the learned Single Judge, to the 79 Appeal No. ST/85707/14 extent it directs the first appellant to modify Ext. P1 by withdrawing penalty levied under S. 76, is liable to be set aside and we do so. The cumulative result of the above findings would be that the Writ Petitions are liable to be dismissed and we do so. However, we do not make any order as to costs.
10.20 In view of the said judgment, imposition of penalties cannot be disputed. Appellant had contended that simultaneously under Section 76 and 78 cannot be imposed. If penalty under Section 78 is imposed, no penalty under Section 76 should have been imposed. For the said proposition, they have relied upon the decision of the Tribunal in the case of Commissioner of Central Excise v Pendharkar Constructions - 2011 (23) STR 75 (Tri. Mumbai). Commissioner should reconsider the issue of penalty afresh and determine whether the same can be imposed under section 78, in light of our observations in par 10.14 and 10.19.
11.0 Thus the appeals of the appellant are allowed and matter remanded back to the adjudicating authority for 80 Appeal No. ST/85707/14 reconsideration of the matter for the period post 16.05.2008 in light of the observations made in para 10 above.
(Order pronounced in Court on 18.9.2018) (S.K.Mohanty) (Sanjiv Srivastava) Member (Judicial) Member (Technical)