Date of Judgement: 09/01/2020
Quick Heal Antivirus software was held to be ‘goods‘, but whether the transaction would be sale or service, would depend upon the terms of the agreement. Thus, the transaction in the present Appeal resulted in the right to use the software and would amount to ‘deemed sale‘ not liable to service tax.
Held: Assessee was engaged in the business of Research and Development of Antivirus Software under the brand name ―Quick Heal. According to assessee, during the disputed period from 1 March, 2011 to 31 March, 2014, the Antivirus Software was developed in a ready to sell condition mentioning unique Key number (license key) and MRP. Being a Canned Software, it was in the nature of ‘goods‘ and was subject to Sales Tax/ VAT and so no service tax was to be paid. They were thereafter transferred by assessee to various Sales Offices from where the ultimate sale took place on payment of applicable VAT in the respective States. Assessee claimed that this activity was initially undertaken from Pune by sending the Master CD to the Replicators like M/s Sagarika Acoustronics Pvt. Ltd. and M/s Moser Beer India Ltd., who replicated the CD and supplied them to various branches/ sales offices of assessee, where the CDs were packed in boxes bearing MRP. Asses
see paid Central Excise Duty on such pre-packaged Antivirus Software. A show cause notice was issued by the Additional Director General demanding service tax with interest and penalty. It was stated that assessee had supplied ―Quick Heal brand Antivirus Software key/codes to the end users through dealers/distributors without discharging the service tax liability on such transactions. The supply of packed Antivirus Software to the end user by charging license fee would amount to a provision of service and not sale. It was held deemed sales are elaborated as those which are not really “sales” but have been deemed as sales. Software was held to be ‘goods‘, but whether the transaction would be sale or service, would depend upon the terms of the agreement. Thus, the transaction in the present Appeal resulted in the right to use the software and would amount to ‘deemed sale‘. It was, therefore, not possible to accept the contention of the Department that the transaction would not be covered under sub-clause (d) of article 366(29A) of the Constitution. Hence, the transaction was not liable to service tax.
Final Order No. 50022/2020
JUSTICE DILIP GUPTA
This Appeal is directed against the order dated 28 January, 2016 passed by the Additional Director General (Adjudication) by which the demand of service tax amounting to Rs. 56,07,05,595/- on the services alleged to have been provided by the Appellant from 1 March, 2011 to 31 March, 2014 has been confirmed with interest and penalty.
2. The Appellant is engaged in the business of Research and Development of Antivirus Software under the brand name ―Quick Heal”. It contends that the unique selling proposition of all Antivirus Products/ Software is not only to eliminate the existing viruses from the computer system, but also to ensure ―virus free” environment for functioning of the computer system. Thus, all anti-virus developers have to keep continuous surveillance on Viruses, Malware and Spam, and this is achieved by providing continuous updates to virus definitions.
3. According to the Appellant, during the disputed period from 1 March, 2011 to 31 March, 2014, the Antivirus Software was developed by M/s Softtalk Technologies Ltd., M/s Jupiter International Ltd. and M/s IP Softcom (India) Pvt. Ltd. for the Appellant in a ready to sell condition mentioning unique Key number (license key) and MRP. Being a Canned Software, it was in the nature of ‘goods‘ and was subject to Sales Tax/ VAT and so no service tax was to be paid. This Antivirus Software was, therefore, sold by the aforesaid manufactures to the Appellant on payment of VAT. The Appellant claims that this activity was initially undertaken from Pune by sending the Master CD to the Replicators like M/s Sagarika Acoustronics Pvt. Ltd. and M/s Moser Beer India Ltd., who replicated the CD and supplied them to various branches/ sales offices of the Appellant, where the CDs were packed in boxes bearing MRP and sold. Central Excise duty from each of the Sale Offices situated in different parts of the country and not from the main office at Pune. The Appellant, therefore, shifted the aforesaid activity to Baddi (Himachal Pradesh) and Rudrapur (Uttarakhand).
4. A show cause notice dated 2 February, 2015 was issued by the Additional Director General demanding service tax with interest and penalty. It was stated that the Appellant had supplied ―Quick Heal‖ brand Antivirus Software key/codes to the end users through dealers/distributors without discharging the service tax liability on such transactions. It was further stated that the end user was provided with a temporary/ non-exclusive right to use the Antivirus Software as per the conditions contained in the End User License Agreement and would, therefore, not be treated as deemed sale under article 366(29A) of the Constitution. Thus, the supply of packed Antivirus Software to the end user by charging license fee would amount to a provision of service and not sale. The show cause notice, therefore, required the Appellant to show cause why service tax for supplying Quick Heal Antivirus license key/ code with the Antivirus Software replicated CDs/DVDs in retail packs through dealers during the period 1 March, 2011 to 31 March 2014 should not be demanded with interest and penalty. The relevant portion of the show cause notice is reproduced below:-
5. The Appellant filed a detailed reply dated 15 June, 2015 pointing out that providing the Antivirus Software would not mean that the Appellant was providing ‗information technology software‘ service and so service tax was not required to be paid prior to or after 1 July, 2012. It was also pointed out that Quick Heal Antivirus Software supplied in CD form, being a Canned Software, was goods and, therefore, not leviable to service tax and that the Appellant had been paying sales tax/VAT on sale of such Quick Heal Antivirus Software. It was also pointed out that generation of license key/ code was neither a manufacturing activity nor service and that license key was neither software nor could it function or work as Antivirus Software. The updates/ upgrades were free and the activity was without consideration and, therefore, not a service. The Appellant also contended that the extended period of limitation under the proviso to section 73 of the Finance Act, 1994 could not have been invoked.
6. The Adjudicating Authority, however, did not accept the contentions of the Appellant and confirmed the demand of service tax with interest and penalty. The Adjudicating Authority noticed that the whole transaction could be divided in two stages, namely (a) up to the replication of the Master CD by the replicators under the terms of agreement; and (b) Supply of Antivirus Software in CD to End-Users under a separate End User Licensing Agreement. It also noticed that the second part (i.e. b) consisted of two parts, namely (i) Supply of Antivirus Software in CD and (ii) Providing electronic updates to the software originally provided. The Adjudicating Authority observed that the first stage of the transaction relating to recording of the software on the CDs and making them marketable makes them ‗goods‘ chargeable to Central Excise Duty and so there was no dispute about duty payment at this stage. However, the second part of the transaction i.e. providing the CD containing the software to the end customer under the license agreement, was the subject matter of dispute, for which the position prior to 01 July, 2012 and subsequent to 01 July, 2012 was required to be examined.
7. In regard to the period prior to 1 July, 2012, the Adjudicating Authority observed as follows:-
Pre 01 July, 2012 period:
i) Supply of software in the CD:
As narrated above the period 01 July, 2012 onwards the facts of the case don‘t amount to a transfer of right to use. As clarified by the Education Guide the transaction will amount to a transaction in service. It is classifiable as a service accordingly.
ii) Electronic updates:
The updates transfer the software, which are the subject matter of the license. As the transaction is in electronic form it is not a transaction in goods. Therefore, it is a transaction in service.
It is thus observed that for the period prior to 01 July, 2012 also both components of the transaction are transactions in the nature of service. The definition of IT software service provided in section 65(zzzze) is an inclusive definition. It is not therefore necessary for the service to fall in any of the inclusive categories provided in the section. It will suffice if the transaction conforms to the definition of IT Software service laid down under section. As narrated above the transactions are in the nature of services which qualify as information Technology Services and liable to payment of duty.
8. In regard to the period after 1 July, 2012, the Adjudicating Authority divided it into two parts and the observations in regard to both the parts are as follows:
i) Initial supply of the software in the CD form:
A glance at these terms indicate that M/s Quick Heal retain the ownership of the software. The buyer cannot sublet the software. Copying the software is also prohibited. Residuary rights are with M/s Quick Heal. The buyer can enjoy the software for a specified period only. Therefore, it appears that the receiver of the software does not enjoy the same rights in the arrangement as a buyer of goods in general. As a result, the transaction is in the nature of a service and chargeable to service tax.
ii) Subsequent supply as electronic updates
It is not disputed that electronic updates are provided to the end customers under the license. Such electronic supply is an activity for a consideration. As such, it is clearly in the nature of supply of services. Hence, it is taxable.
9. The Adjudicating Authority also held that the extended period of limitation was correctly invoked and that the Appellant was also required to pay penalty and interest amount.
10. Shri M H Patil, learned Counsel for the Appellant submitted that:-
i. “Quick Heal” Antivirus Software supplied in CD is not covered under “information technology software” service either prior to 1 July, 2012 under section 65(53a) taxguru.in of the Act or after 1 July, 2012 under section 65B (28) of the Act;
ii. Even otherwise, Quick Heal Antivirus Software supplied in CD form is a Canned Software which would be “goods” and, therefore, not leviable to Service Tax;
iii. Service does not include any activity where “sale of goods” or “deemed sale” under article 366 (29A) of the Constitution takes place and in support of this contention reliance has been placed on the Circular dated 29 February, 2008 issued by the Central Board of Excise and Customs and the Education Guide for Service Tax issued by CBEC;
iv. A license key/code is not a trigger point for manufacture of excisable goods nor is it manufacture or sale of software, nor can it function or work as Antivirus Software; and
v. As there was no suppression of facts, with any intent to avoid tax, the extended period of limitation could not have been invoked.
11. Shri Vivek Pandey, learned Authorized Representative of the Department, has however supported the impugned order and contended that:-
i. The supply of ―Ouick Heal” Antivirus Software under the EULA is a service classifiable under ―information technology software”;
ii. “Quick Heal” Software that is supplied under EULA is not a pure sale because ―Quick Heal” grants the licensee a nonexclusive and non-transferable right. The software and the accompanying written materials are the property of ―Quick Heal”;
iii. The dominant nature of EULA is only a grant of license to use the ―Quick Heal” software; and
iv. In support of the aforesaid contentions reliance has been placed upon the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. v/s Union of India and the decision of the Madras High Court in InfoTech Software Dealers association v/s Union of India.
12. The submissions advanced by learned Counsel for the Appellant and the learned Authorized Representative of the Department have been considered.
13. The first issue that needs to be examined is whether the Antivirus Software provided by the Appellant to the users in packed CDs is a provision of service under ―information technology software” and hence leviable to Service Tax prior to 1 July, 2012 as also after 1 July, 2012.