Microsoft software licence royalty not taxable as IPR service before 16.05.2008: CESTAT Allahabad

HCL Infosystems Ltd. Vs Principal Commissioner (CESTAT Allahabad)

Summary: The Customs, Excise & Service Tax Appellate Tribunal, Allahabad Regional Bench, allowed the appeal filed by M/s HCL Infosystems Ltd. against Order-in-Original No. 22-COMMR-ST-NOIDA-2018-19 dated 31.10.2018, whereby the Commissioner, CGST & Central Excise, Noida had confirmed service tax demand of Rs. 16,67,01,000/- along with interest under the proviso to Section 73 of the Finance Act, 1994 and imposed penalties under Sections 76, 77 and 78.

The Appellant was engaged in manufacturing Automatic Data Processing Machines, including computers and units thereof. For pre-installation of operating software such as Windows XP and Windows Vista in computers manufactured by it, the Appellant procured licences from Microsoft Corporation and paid royalty. Under the Microsoft Desktop Operating System License Agreement dated 01.08.2006, the Appellant was permitted to pre-install the product software, pre-install a backup copy on the computer hard disk and distribute and sub-license the pre-installed product to the end customer.

The Appellant loaded the operating system onto the hard disk drives at its factory and assembled the computers. The computers were cleared along with external media and manuals, while the Certificate of Authenticity was affixed to the computer chassis. The Appellant paid applicable Central Excise duties on the hardware as well as software. According to the Appellant, the end customer obtained the right to use the software under the applicable End User Software License Terms, while ownership of the software remained with Microsoft.

The Appellant’s position was that no taxable service arose because there was no transfer, temporary transfer, or permitting of the use or enjoyment of an intellectual property right falling within Section 65(55a) of the Finance Act, 1994. It therefore did not pay service tax on the royalty paid to Microsoft.

Following a CERA audit, the Department took the view that service tax was payable under the category of Intellectual Property Service. A show cause notice dated 21.10.2010 alleged, among other things, that the royalty paid to Microsoft related to use of its intellectual property and that the transaction could not be treated as copyright because the Appellant did not possess exclusive rights over the Microsoft Windows operating system. The notice also invoked the extended period on the basis that the Appellant had not obtained registration, paid service tax or filed ST-3 returns and had allegedly suppressed the value of taxable services with intent to evade payment of service tax.

The adjudicating authority dropped the demand for the period up to 16.04.2006 but confirmed the demand for the period from 17.04.2006 to 16.05.2008 by invoking the extended period of limitation. The Appellant challenged the demand, interest and penalties before the Tribunal.

The Appellant contended that the show cause notice and impugned order did not identify the precise intellectual property right involved or establish that the alleged intangible property was protected, registered or recognised under Indian law as required by Section 65(55a). It relied, inter alia, upon Section 65(55a) and the decisions in M/s Fluent India Pvt. Ltd. and Royal Western India Turf Club Ltd. It was further submitted that copyright was expressly excluded from the definition of intellectual property right and that the licence granted by Microsoft concerned copyrighted software.

The Tribunal reproduced Section 65(55a), which defined “intellectual property right” as a right to intangible property, namely trademarks, designs, patents or similar intangible property under any law for the time being in force, while expressly excluding copyright. It also reproduced Section 65(55b), defining “intellectual property service”, and Section 65(105)(zzr), concerning the taxable service provided by the holder of an intellectual property right.

The Tribunal held that not every kind of intangible property fell within the service tax category of Intellectual Property Service. Only intangible property recognised under a law in force in India was covered, while copyright was specifically excluded. The Tribunal found that neither the show cause notice nor the impugned order disclosed or established how the alleged intangible property was protected, registered or recognised under Indian law. It therefore held that the demand was not sustainable.

In support of this conclusion, the Tribunal relied upon M/s Fluent India Pvt. Ltd. vs CCE, Pune-I, where it was held that the Revenue could not simply allege that an activity constituted intellectual property service without specifying the precise intellectual property right involved. The Tribunal also relied upon Royal Western India Turf Club Ltd. vs. Commissioner of Service Tax, Mumbai, which held that an order confirming a demand under the Intellectual Property Rights Services category should clearly identify the intellectual property right involved and establish that it was covered by Indian law.

The Tribunal further held that the impugned order failed to provide cogent reasoning identifying the intellectual property right contemplated by Section 65(55a). On this ground also, the order was liable to be set aside.

The Tribunal then considered the nature of the software rights. It noted that, according to the findings reproduced from the adjudication order, Microsoft remained the owner of the software and had granted the Appellant a licence to use the software without transferring absolute ownership. The Tribunal observed that once Microsoft was accepted as having copyright in the software and the Appellant was merely granted a licence concerning that copyright, the temporary transfer of enjoyment of such copyright could not constitute taxable Intellectual Property Service because copyright was excluded from Section 65(55a).

The Tribunal found the decision in M/s Fluent India Pvt. Ltd. directly applicable. In that case also, a foreign party had granted a non-exclusive, non-transferable licence to an Indian company for use of software and had permitted sublicensing to third parties. The Tribunal observed that the facts were materially similar because HCL’s licence was non-exclusive and non-transferable, permitted pre-installation of the software in computers manufactured by it and permitted sub-licensing to computer buyers. The Tribunal therefore held that the ratio of Fluent India applied to the present case.

On a conjoint reading of Sections 2(o), 13 and 14 of the Copyright Act, 1957, the Tribunal concluded that the alleged intellectual property right was copyright, which was expressly excluded from Section 65(55a), and that exploitation of such copyright under the licence was not a taxable service under the relevant Intellectual Property Service provision.

The Tribunal separately considered the period beginning 16.05.2008. It held that the right to use information technology software for commercial exploitation, including rights to reproduce, distribute and sell, became taxable for the first time from 16.05.2008 with the introduction of Information Technology Software Services under Section 65(105)(zzzze) of the Finance Act, 1994. The Tribunal noted that the Appellant was undisputedly paying service tax on the same thereafter.

Relying upon the decisions cited in the order, including Suntec Business Solutions Pvt. Ltd., Schulmberger Asia Services Ltd., Commissioner of S.T., Kolkata v. Vikash Construction Company and Board of Control for Cricket in India v. Commissioner of Service Tax, Mumbai, the Tribunal held that where a new taxable entry was introduced covering the activity, the activity was not covered under the earlier entry merely because it subsequently became taxable.

Accordingly, the Tribunal held that the Appellant had rendered Information Technology Software Service, which entered the service tax net only with effect from 16.05.2008, and that the activity was not liable to service tax for the period prior to that date. Demand of service tax for the earlier period under the category of Intellectual Property Service was therefore held legally unsustainable.

The Tribunal also considered limitation. It noted that the demand had been raised for the period from 16.05.2006 onwards, whereas departmental audit had been conducted on 09.03.2007 and 10.03.2007. The first departmental letter raising the issue was issued on 29.03.2007 and correspondence continued thereafter. The Tribunal therefore found that the Department was fully aware of the activities undertaken by the Appellant. In those circumstances, it held that it was illogical to allege suppression of information by the Appellant.

The Tribunal further noted that the due date for filing the relevant return for the period up to 16.05.2008 was 25.10.2008 and the normal one-year limitation period expired on 25.10.2009, whereas the show cause notice was issued only on 21.10.2010. The Tribunal held that the entire demand was beyond the normal limitation period.

The Tribunal also accepted that the Appellant had been disputing its service tax liability on a bona fide basis and had disclosed the relevant information. Merely because the Appellant did not obtain registration, pay service tax or file returns due to its bona fide view regarding taxability, suppression could not be alleged. In this regard, it relied upon Uniworth Textiles Ltd. v. Commissioner of Central Excise, Raipur, along with Anand Nishikawa Co. Ltd., Pahwa Chemicals Private Limited and Collector of Central Excise v. Chemphar Drugs & Liniments.

The Tribunal additionally found that the matter involved a revenue-neutral situation. Since the demand was proposed under reverse charge and the alleged service was used in the manufacture of dutiable goods, the service tax paid would have been available as CENVAT Credit for discharge of Central Excise duty on the computers. The Tribunal therefore held that the entire issue created a revenue-neutral situation. It relied upon Indian Oil Corporation Ltd., Hindalco Industries Ltd. and M/s. McLeod Russel India Limited for the proposition, as recorded in the order, that where revenue neutrality exists because of availability of CENVAT Credit, intention to evade tax may be considered absent and the extended period may not be sustainable.

The Tribunal accordingly held that the demands confirmed by invoking the extended period of limitation were legally unsustainable.

Since the service tax demand itself was not sustained, the Tribunal held that the question of demanding interest or imposing penalties did not arise and set aside the same.

The appeal was consequently disposed of on the above terms. The Tribunal specifically held that Information Technology Software Service came into the service tax net only with effect from 16.05.2008, that the activity was not liable to service tax prior to that date, that the extended-period demand was unsustainable, and that the interest and penalties were consequently liable to be set aside.

Cases Discussed

• Royal Western India Turf Club Ltd. Vs Commissioner of Service Tax, Mumbai-I, 2015 (38) S.T.R. 811 (Tri.-Mumbai) — relied upon for the requirement that the specific intellectual property right forming the basis of an Intellectual Property Rights Services demand must be identified.
• Uniworth Textiles Ltd. Vs Commissioner of Central Excise, Raipur, 2013 (288) E.L.T. 161 (S.C.) — relied upon while considering invocation of the extended period of limitation and suppression.
• M/s Fluent India Pvt. Ltd. vs CCE, Pune-I, 2016 (42) S.T.R. 340 — considered for the proposition that the Revenue must identify the precise intellectual property right and that the software licence involved was not taxable as Intellectual Property Service.
• Tata Teleservices Ltd. v. Commissioner of S.T., Mumbai-I, 2017 (47) S.T.R. 179 (Tri.-Mumbai) — relied upon by the Appellant in support of its submissions concerning the scope of intellectual property service.
• Asea Brown Boveri Ltd. v. Commr. of C. Ex. & S.T., LTU, Bangalore, 2017 (49) S.T.R. 209 (Tri.-Bang.) — relied upon by the Appellant concerning the applicability of Intellectual Property Service provisions.
• Technova Imaging Systems Pvt. Ltd. v. Commissioner of C. Ex., Mumbai, 2019 (31) G.S.T.L. 472 (Tri.-Mumbai) — relied upon by the Appellant concerning the alleged intellectual property service.
• ABB Ltd. v. Commissioner of C. Ex. & S.T., LTU, Bangalore, 2019 (24) G.S.T.L. 55 (Tri.-Bang.) — relied upon by the Appellant concerning the scope of the relevant intellectual property service provisions.
• Union of India v. Garware Nylons Ltd., 1996 (87) E.L.T. 12 (S.C.) — relied upon by the Appellant on the burden of proving taxability.
• Phoneix Mills Ltd. v. Union of India, 2004 (168) E.L.T. 310 (Bom.) — relied upon by the Appellant on the burden of establishing taxability.
• Tata Export Ltd. v. Union of India and Others, 1985 (22) E.L.T. 732 (MP) — relied upon by the Appellant on the burden of proving that a transaction is taxable.
• Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise, Meerut, 2005 (188) E.L.T. 149 (S.C.) — relied upon while considering whether the facts supported suppression for invocation of the extended limitation period.
• Pahwa Chemicals Private Limited v. Commissioner of C. Ex., Delhi, 2005 (189) E.L.T. 257 (S.C.) — relied upon while considering suppression and the extended limitation period.
• Collector of Central Excise v. Chemphar Drugs & Liniments, 1989 (40) E.L.T. 276 (S.C.) — relied upon while considering the requirements for invoking the extended limitation period.
• Indian Oil Corporation Ltd. Versus Commissioner of Central Excise, Haldia, (2024) 16 Centax 131 (Tri.-Cal) — relied upon on revenue neutrality and the availability of CENVAT Credit.
• Hindalco Industries Ltd. Versus Commissioner of Central Excise, Bhubaneswar-II, (2023) 8 Centax 302 (Tri.-Cal) — relied upon on revenue neutrality and extended limitation.
• M/s. McLeod Russel India Limited Versus Principal Commissioner of Service Tax-I, Kolkata, Final Order No. 75032/2026 CESTAT Kolkata — relied upon on revenue neutrality and the extended period of limitation.
• M/s. Forum Projects Private Limited Versus Commissioner of Service Tax Audit, Kolkata, Final Order No. 77576/2025 CESTAT Kolkata — relied upon by the Appellant on revenue neutrality.
• M/s. Imperial Fragrance & Flavours Pvt. Ltd. Versus Commissioner of Customs (Port), Kolkata, Final Order No. 75399/2026 CESTAT Kolkata — relied upon by the Appellant on revenue neutrality.
• M/s. Saha Civil Construction Private Limited Versus Commissioner of C.G.S.T. and Central Excise, Kolkata, Final Order No. 75677/2026 CESTAT Kolkata — relied upon by the Appellant on revenue neutrality.
• M/s. Srinath Builders & Housing Company Pvt. Ltd. Versus Principal Commissioner of Central Goods and Service Tax, Guwahati, Final Order No. 75842/2026 CESTAT Kolkata — relied upon by the Appellant on revenue neutrality.
• M/s Maharani Construction Versus Commissioner of CGST & Central Excise, Ranchi, Final Order No. 77514/2023 CESTAT Kolkata — relied upon by the Appellant on revenue neutrality.
• Schulmberger Asia Services Ltd. v. CST, (2024) 15 Centax 238 (Tri.-Del.) — relied upon for the treatment of the activity under the later Information Technology Software Services entry.
• Commissioner of S.T., Kolkata Versus Vikash Construction Company, 2020 (37) G.S.T.L. 344 (Tri.-Kolkata) — relied upon for the proposition concerning the introduction of a new taxable service entry.
• Board of Control for Cricket in India v. Commissioner of S.T., Mumbai, 2007 (7) S.T.R. 384 (Tri.-Mumbai) — relied upon concerning the effect of introducing a new taxable service entry.
• Suntec Business Solutions Pvt. Ltd. v. C.C.E., Cus. & S.T., Thiruvananthapuram, 2017 (51) S.T.R. 446 (Tri.-Bang.) — relied upon for the proposition that the activity covered by the later Information Technology Software Services entry was not taxable under the earlier entry.
• Commissioner of Service Tax vs. Schulmberger Asia Services Ltd., (2024) 15 Centax 239 (S.C.) — referred to in the Tribunal’s discussion as having upheld the decision of the Tribunal in Schulmberger Asia Services Ltd.

FULL TEXT OF THE JUDGMENT/ORDER OF CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL, ALLAHABAD

The present appeal has been filed assailing the Order-In-Original No.22-COMMR-ST-NOIDA-2018-19, dated 31.10.2018 passed by Commissioner, CGST & Central Excise, Noida, wherein the Ld. Commissioner has confirmed the demand of Service Tax of Rs. 16,67,01,000/- along with interest, under proviso to Section 73 of the Finance Act, 1994. He also imposed a penalty of Rs. 16,67,01,000/- under section 78 of the Finance Act. Penalty @Rs. 200/- per day or @2% of the tax per day, whichever is higher, has also been imposed under Section 76 of the Act. Penalty of Rs. 10,000/- has also been imposed under Section 77 of the Act.

2. M/s. HCL Infosystems Ltd. (herein after referred as the Appellant) are engaged in manufacturing of Automatic Data Processing Machines, viz, Computers and units thereof. The Appellant was required to install the Operating Software (OS) in the computer system manufactured or sold by it. In this regard, the Appellant procured license for pre-installation of operating software from Microsoft Corporation against the payment of royalty. For this purpose, for the manufacturing facility at Pondicherry, the Appellant has entered into a Microsoft Desktop Operating System License Agreement for OEM Customers dated 01.08.2006 (hereinafter referred to as “the License Agreement”) with Microsoft Licensing, GP, located in USA. During the period from 2005-2006 to 2008-2009 (upto 15.05.2008), the Appellant had paid royalty to Microsoft Corporation (hereinafter referred to as “Microsoft”) towards such license to install operating software in the computers.

2.1. In terms of the Agreement, the Appellant has been granted a license providing for the following:

(a) the right to Pre-install tile Product Software (Mainly Operating Systems like Windows Vista, XP Professional etc.) on a HCL System;

(b) Pre-install a back up copy of the Product Software on the computer system hard disk.

(c) Distribute and sub-license the pre-installed product to the end customer;

2.2. As per the agreement, the Appellant has been supplied with the OEM Pre-installation Kit (OPK) by Microsoft Corporation. The Appellant has to obtain the copies of the permitted software from the authorized replicators in India. The Appellant also obtains the external media and copies of manual from the authorized replicators in India. Along with the above, the Appellant also procures “Certificate of Authenticity” (COA) from the authorized replicators. COA is a label with advanced anticounterfeiting features to help verify the software’s authenticity. For pre-installed Microsoft Windows Operating systems, as in the present case, the COA label must be affixed by the OEM to the PC chassis. The COA label also includes the product key, which will be needed in the event the operating system needs to be reinstalled. A COA is not a software License, but it is a visual aid that helps in determining whether Microsoft software is genuine.

2.3. At their factory, the Appellant loads the OS, such Windows XP, Windows Vista, etc., in the Hard Disk Drive (HDD) which in turn is assembled with other parts to make a CPU. The CPU is then sold with the external media containing software and manuals [which are collectively called Associate Product Material (APM)]. The COA is also affixed on the chassis of the computer manufactured by the Appellant, as per the terms of the license. At the time of clearance, the Central Excise duties applicable to the hardware as well as the software are paid by the Appellant. In selling the computer system with OEM software, the Appellant also sub-licenses the pre-installed product to the buyer. A buyer or the end user who acquires software is acquiring the right to use that software. End users don’t “own” the software, which is installed, is a property “owned” by Microsoft Corporation. The right to use the software is governed by the End User Software License Terms which, in the case of OEM product, is an agreement between the OEM and the end user. The End User Software License Agreement (EULA) Terms are found within the software product, and an end user must accept the End User Software License Terms before running the software. By accepting the terms of EULA, the end user acquires the right to use the software. The system of licensing software operates in the above manner.

2.4. The Appellant held the view no taxable service occurred and no service tax was payable, as there was no transfer, temporarily, or permitting the use or enjoyment of any of the IPRs as defined under section 65(55a) of the Finance Act, 1994. Accordingly, the Appellant has not paid service tax on the Royalty paid to Microsoft.

2.5. The audit conducted by CERA officers have observed that the Appellant have paid royalty and service tax was liable to be paid, as the activity of affixing Microsoft in Windows could be treated as trademarks, which falls under IPR Service.

2.6. On the basis of the above said allegation, a show cause notice dated 21.10.2010 was issued to the Appellant. The Notice made the following statements and allegations:

(a) that the Appellant paid certain amount as Royalty to Microsoft for using their product:

(b) a simple assertion without providing any basis that the Appellant is liable to pay service tax on reverse charge basis under the category of IPR Service;

(c) that the transaction may not be covered under copyright as claimed by the Appellant in earlier communications.

(d) Even though the appellant has claimed that the Royalty was paid towards copyright to use the MS Desktop operating system, it cannot be classified as copyright. ‘Copyright means the appellant should have exclusive right over MS Desktop operating system as per Section 14 of the Copyright Act, 1957. But the appellant has no exclusive right. Whoever wants to use the MS Desktop Operating System can use it by paying Royalty to Microsoft Licensing GP and use the same after entering into agreement.

(e) The appellant does not have ‘right to make copies of Enterprise Edition based on the license granted in the License Agreement. The Window Product is the Intellectual property of the Microsoft. The Microsoft Company (MSCORP) gave License to use their intellectual property “Window Product” for the payment of Royalty. It is not the Royalty against the copyright

(f) merely reproduced the provisions of Section 65(55a), 65(55b) and 65(105)(zzr) of the Finance Act, 1994

(g) For the purpose of invoking the extended period of limitation, the following is stated:

“11. It further appears that in the Instant case, the assessee has failed to register themselves with the department as contemplated under Section 69 of the Finance Act, 1994 and discharge their service tax liability as contemplated under Section 68 of the Finance Act, 1994 read with Rule 2(1)(d)(iv) of Service Tax Rules, 1994.

12. It also appears that the assessee has failed to file ST-3 returns nor declared the value of the taxable services paid by them during the period as stated in pars 2 supra and thus, suppressed the fact of payment of value of taxable services with intent to evade payment of Service Tax. This act of suppression with intent to evade the payment of Service Tax warrants invoking of extended time limit for demand of Service Tax and hence, the proviso to Section 73(1) of Finance Act 1994 is applicable in this case for demand of Service Tax. The last date for filing the return for the Half Year ending 30-09-2005 is 25-10-2005. Hence the relevant date is reckoned from 25-10-2005 onwards for demanding the tax, in terms of Section 73 (6) (i) (b) of the Finance Act, 1994”

2.7. The Appellant submitted detailed reply and contested the issue on merits as well as on limitation and Revenue Neutrality. Ignoring the submissions made by the Appellant, the Adjudicating Authority partly confirmed the demand proposed in the show cause notice dated 21.10.2010 along with the interest and penalties. The impugned order dated 31.10.2018 dropped the demand for the period up to 16.04.2006. The demand has been confirmed by invoking extended period of limitation for the period from 17.04.2006 to 16.05.2008.

2.8. Aggrieved against the confirmation of the demands of service tax along with interest and various penalties, the Appellant has filed this appeal.

3. The submissions made by the Appellant are summarized as under:

A. In the Show Cause Notice no specific intellectual property right/intangible property identified in respect of which alleged service was provided -show cause notice as well as the impugned order are not sustainable

A1. It is submitted that in the definition of intellectual property rights all and every kind of intangible property is not included and further, only such intangible property as is recognized under any law for the time in force in India are included. Copyright has been specifically excluded.

A2. The Show Cause Notice as well as the impugned Order do not disclose/establish how the alleged intangible property is protected/registered/recognized under Indian Law for the time being in force, therefore, for this reason itself the show cause notice and the impugned order are illegal and not sustainable. Only when a service is provided in respect of an IPR, which is recognized under the definition under Section 65(55a), then service tax is attracted. Due to such failure of the show cause notice and the impugned order, the demand of service tax is not sustainable.

A3. In this regard reliance is placed on decision in the matter of (i) M/s Fluent India Pvt. Ltd. vs CCE, Pune-I [2016(42) STR 340] and Royal Western India Turf Club Ltd. vs. Commr. Of S.T., Mumbai, 2015 (38) S.T.R. 811 (Tri.-Mumbai).

A4. Reliance is also placed on the following decisions:

(i) Tata Teleservices Ltd. V Commissioner Of S.T., Mumbai-I, 2017 (47) S.T.R. 179 (Tri. – Mumbai)

(ii) Asea Brown Boveri Ltd V Commr. Of C. Ex. & S.T., Ltu, Bangalore, 2017 (49) S.T.R. 209 (Tri. – Bang.)

(iii) Technova Imaging Systems Pvt. Ltd V Commissioner Of C. Ex., Mumbai, 2019 (31) G.S.T.L. 472 (Tri. – Mumbai)

(iv) ABB LTD v COMMISSIONER OF C. EX. & S.T., LTU, Bangalore, 2019 (24) G.S.T.L. 55 (Tri. – Bang.)

A5. Impugned Order miserably failed to provide any cogent reasoning as to which intellectual property in terms of the definition of intellectual property right provided under Section 65(55a) of the Finance Act applies in the facts of the present case. Therefore, the Impugned Order lacks adequate reasoning which is sine qua non in terms of the principles of natural justice, and thus, the impugned order is liable to be set aside.

A6. Further, the Appellant submits that in the case of taxation, the burden of proving that a transaction is subject to tax is entirely upon the taxing authority. In this regard, the Appellant places reliance on the following judicial pronouncements:

(a) Union of India v. Garware Nylons Ltd., 1996 (87) E.L.T. 12 (S. C.);

(b) Phoneix Mills Ltd. v. Union of India, 2004 (168) E.L.T. 310 (Bom.);

(c) Tata Export Ltd. v. Union of India and Others, 1985 (22) E.L.T. 732 (MP)

A7. In any case, no transfer, temporarily, or permitting the use or enjoyment of any of the IPRs as defined under section 65(55a) of the Finance Act, 1994 took place in the present case. Therefore, no taxable service occurred and no service tax was payable.

B. Demand is completely time barred

➢ The complete facts in the knowledge of the department

B1. The demand has been confirmed for the period from 16.05.2006 onwards and undisputedly audit was conducted on 09.03.2007 and 10.03.2007 and first letter No. 413/2007 dated 29.03.2007 raising the issue was issued and thereafter continuously correspondence took place as stated in the above dates and events Table. So, there was no dearth of knowledge for the department about the alleged transaction to allege that the Appellant was suppressed the information. Once an information is completely in the knowledge of the department during the normal limitation period, it is illogical to allege that the information was suppressed by the Appellant in any manner.

B2. The demand confirmed for the period up to 16th May 2008 for which due date for filing of return was 25th October 2008 and the normal period of limitation of one year period from such date expired on 25th October 2009, however, the Show Cause Notice was issued on 21.10.2010. Therefore, whole of the demand is beyond the normal period of limitation of one year from the date of the show cause notice.

B3. Once the Appellant was disputing in a bona fide manner about the liability of service tax and disclosing all the relevant information, then merely because due to such bona fide reason the Appellant did not take registration, pay service tax and file returns, suppression cannot be alleged against the Appellant.

B4. In this regard, reliance is placed on the following decisions:

(a) Uniworth Textiles Ltd. V Commissioner of Central Excise, Raipur, 2013 (288) E.L.T. 161 (S.C.)

(b) Anand Nishikawa Co. Ltd. V Commissioner of Central Excise, Meerut, 2005 (188) E.L.T. 149 (S.C.)

(c)Pahwa Chemicals Private Limited V Commissioner of C. Ex., Delhi, 2005 (189) E.L.T. 257 (S.C.)

(d) Collector Of Central Excise V Chemphar Drugs & Liniments, 1989 (40) E.L.T. 276 (S.C.)

➢ Revenue Neutral Situation -CENVAT Credit available-demand time barred

B5. The demand has been proposed and confirmed for payment of service tax on reverse charge basis.

B6. Assuming but not admitting that if such service tax was payable, then, such alleged service received was used in manufacture of dutiable goods, so, CENVAT Credit of the service tax so paid would have been available for discharge of Central Excise duty on computers. Accordingly, it was a revenue neutral situation.

B7. It has been held in the following cases that in circumstances where revenue neutral situation exists due to availability of CENVAT Credit, then the intention to evade tax may be considered as absent and accordingly demand for the extended period of limitation is not sustainable:

(a) Indian Oil Corporation Ltd.Versus Commissioner of Central Excise, Haldia [(2024) 16 Centax 131 (Tri.-Cal)] (para 8 & 9)

(b) Hindalco Industries Ltd. Versus Commissioner of Central Excise, Bhubaneswar-II [(2023) 8 Centax 302 (Tri.-Cal)] (para 15 & 16)

(c) M/s. McLeod Russel India Limited Versus Principal Commissioner of Service Tax-I, Kolkata, FINAL ORDER NO. 75032 / 2026 CESTAT KOLKATA (para 8)

(d) M/s. Forum Projects Private Limited Versus Commissioner of Service Tax Audit, Kolkata, FINAL ORDER NO. 77576 / 2025 CESTAT KOLKATA (para 9)

(e) M/s. Imperial Fragrance & Flavours Pvt. Ltd. Versus Commissioner of Customs (Port), Kolkata FINAL ORDER NO. 75399 / 2026 CESTAT KOLKATA (para 11)

(f) M/s. Saha Civil Construction Private Limited Versus Commissioner of C.G.S.T. and Central Excise, Kolkata, FINAL ORDER NO. 75677/ 2026 CESTAT KOLKATA (para 11)

(g) M/s. Srinath Builders & Housing Company Pvt. Ltd. Versus Principal Commissioner of Central Goods and Service Tax, Guwahati, FINAL ORDER NO. 75842 / 2026 CESTAT KOLKATA (para 17)

(h) M/s Maharani Construction Versus Commissioner of CGST & Central Excise, Ranchi FINAL ORDER No. 77514/2023 CESTAT KOLKATA (para 12)

C. The Alleged IPR was not covered by definition of Section 65(55a) of the Finance Act

C1. Without prejudice to the above submissions, it is further submitted that the alleged IPR was specifically excluded from the definition of IPR as provided under Section 65(55a) of the Finance Act.

C2. It has been the submission of the Appellant that the owner of copyright in the software Windows product was Microsoft and Microsoft by license granted permission to the Appellant to pre-install such software in computers manufactured by the Appellant. So, the Appellant was given an interest in such copyrighted software. It was never claimed that the Appellant was having exclusive copyright in the software. It was also not a claim of the Appellant that the absolute right in the copyright is assigned by Microsoft to the Appellant, therefore, the Appellant is not liable to pay service tax.

C3. It was claimed that as the copyright is not an IPR under the definition under Section 65(55a), therefore, the interest assigned by way of license is also not an IPR Service under Section 65(55b) [transfer temporarily or permitting enjoyment of such IPR], and accordingly, the same activity is not a taxable Service under Section 65(10)(zzr).

D. Information Technology Software Services (“ITSS”) definition alongwith taxable service in relation to Information Technology Software under Section 65(105)(zzzze) of the Finance Act, 1995 was introduced w.e.f. 16.05.2008

D.1 From 16.05.2008, the right to use information technology software for commercial exploitation including the right to reproduce, distribute and sell became taxable for the first time in the Finance Act with the introduction of levy on Information Technology Software Services (“ITSS”) alongwith the taxable service in relation to Information Technology Software is defined under Section 65(105)(zzzze) of the Finance Act, 1995 and the Appellant was paying service tax on the same undisputedly.

D.2 As the old entry was not modified and the new entry was created covering in its scope, the transaction/activity, which is in question, therefore, such transaction/activity was not covered under the earlier entry as held in the following decisions:

(a) Schulmberger Asia Services Ltd. v. CST (2024) 15 Centax 238 (Tri. – Del.) upheld in Commissioner of Service Tax vs. Schulmberger Asia Services Ltd (2024) 15 Centax 239 (S.C.)

(b) Commissioner of S.T., Kolkata Versus Vikash Construction Company 2020 (37) G.S.T.L. 344 (Tri. – Kolkata)

(c) BOARD OF CONTROL FOR CRICKET IN INDIA V COMMR. OF S.T., MUMBAI 2007 (7) S.T.R. 384 (Tri.- Mumbai)

(d) Suntec Business Solutions Pvt. Ltd. V. C.C.E., Cus. & S.T., Thiruvananthapuram, 2017 (51) S.T.R. 446 (Tri. – Bang.)

4. The Ld. A.R. reiterated the findings in the impugned order. It is his submission that the Appellant has rendered IPR service and paid Royalty. Thus, they are liable to pay service tax under RCM basis.

5. Head both sides and perused the appeal documents.

6. We find that the demands have been raised and confirmed in the impugned order under the category of ‘Intellectual property service’. For ready reference, the relevant provisions from the Finance Act, 1994 containing the definitions are extracted below:

“Section 65(55a): – “intellectual property right” means any right to intangible property, namely, trademarks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright”

“Section 65(55b) – “Intellectual property service” means,-

(a) transferring, temporarily; or

(b) permitting the use or enjoyment of, any intellectual property right.”

“Section 65 (10) (zzr): the Taxable Service means service provided to any person, by the holder of intellectual property right, in relation to intellectual property service”

6.1. From the definition of ‘intellectual property rights’ extracted above, we find that all and every kind of intangible property are not liable to service tax under the said category. Only such intangible property as is recognized under any law for the time in force in India are included as taxable service in the service tax net. Copyright has been specifically excluded from service tax.

6.2. In this regard, we observe that only when a service is provided in respect of an IPR, which is recognized under the definition under Section 65(55a), then service tax is attracted. We find that the Show Cause Notice as well as the impugned Order do not disclose/establish how the alleged intangible property is protected/registered/recognized under Indian Law for the time being in force, for demanding service tax under the category of IPR Service. Due to such failure in the show cause notice and the impugned order, the demand of service tax is not sustainable.

6.3. In this regard reliance is placed on decision in the matter of M/s Fluent India Pvt. Ltd. vs CCE, Pune-I [2016(42) STR 340], in which it has been held as follows:

“5.2 The learned Advocate has referred to Black’s Law Dictionary of English as well as Cambridge International Dictionary of English to show that the word “namely” refers to specific matters. In our view it is not even necessary to refer to the dictionary for understanding the word “namely”. We see that, apart from three specific property rights, i.e., trade marks, designs and patents, the last category is any property under any law. It does not require much intelligence to appreciate that the intellectual property referred to in the section has to be an intellectual property under a law. Even otherwise, it is well known that intellectual property rights are defined under specific Acts such as The Trade Mark Act, The Geographical Indications Act, etc. Revenue cannot simply allege that the activity of the appellant is an intellectual property service without specifying the precise intellectual property right. This is the basic flaw in the entire proceedings and shows complete lack of appreciation of the statutory provisions. Therefore, the order deserves to be set aside on this ground alone.”

6.4. In Royal Western India Turf Club Ltd. vs. Commr. Of S.T., Mumbai, 2015 (38) S.T.R. 811 (Tri.-Mumbai), it has been held as follows:

“Further where the demand for Service Tax has been made under the category of ‘Intellectual Property Right Services’, neither the show cause notices nor the orders relating thereto give a clear proposal or finding as to what is the intellectual property rights involved in the transactions, i.e., whether it is a patent, copy rights, trade mark or design or any other category of intellectual property rights. When Service Tax is confirmed under the taxable service category of ‘Intellectual Property Right Services’, the order confirming the demand should clearly classify the transaction under one or more of the ‘Intellectual Property Rights’ which are covered under ‘Intellectual Property Right Services’ law. The Board’s Circular issued on 17-9-2004 in this regard makes it abundantly clear that the ‘Intellectual Property Right Services’ covered under the Service Tax laws should be in respect of such services in respect of which laws have been made in India and such laws should cover the ‘Intellectual Property Right Services’ involved and only in such a situation, demand for Service Tax can be raised whenever there is a transfer of ‘Intellectual Property Rights’ by the holder of the ‘Intellectual Property Right’ to the person who receives or uses the Intellectual Property Rights. In the impugned orders we do not find any such findings by the authorities.”

6.5. We find that the Impugned Order failed to provide any cogent reasoning as to which intellectual property in terms of the definition of intellectual property right provided under Section 65(55a) of the Finance Act applies in the facts of the present case. Therefore, we observe that the Impugned Order is liable to be set aside on this ground itself.

6.6. From the definition of IPR extracted above, we find that the alleged IPR was specifically excluded from the definition of IPR as provided under Section 65(55a) of the Finance Act. It has been the submission of the Appellant that the owner of copyright in the software Windows product was Microsoft and Microsoft by license granted permission to the Appellant to pre-install such software in computers manufactured by the Appellant. So, the Appellant was given an interest in such copyrighted software. It was never claimed that the Appellant was having exclusive copyright in the software. It was also not a claim of the Appellant that the absolute right in the copyright is assigned by Microsoft to the Appellant, therefore, the Appellant is not liable to pay service tax.

6.7. It was claimed that as the copyright is not an IPR under the definition under Section 65(55a), therefore, the interest assigned by way of license is also not an IPR Service under Section 65(55b) [transfer temporarily or permitting enjoyment of such IPR], and accordingly, the same activity is not a taxable Service under Section 65(10)(zzr). In the Show Cause Notice as well as in the impugned order, the following statements have been made to conclude that:

“That the Assessee (the Appellant) was not having absolute right over the software, I find that whoever wants to use the MS Desktop Operating System can use by paying Royalty to Microsoft in accordance with Microsoft Licensing GP and use the same after entering into agreement. Thus, I find that the assessee has no exclusive right on Window products and the procurement of the said products cannot be classified as copyright. The Window Product is admittedly the Intellectual property of M/S Microsoft. M/S Microsoft gave license to use their intellectual property “Window Product” on payment of Royalty. I also find that the party has neither claimed nor has adduced any evidence to the effect that Microsoft has granted the copyright of their software. In the common trade parlance, the copyright is understood to be as absolute authorisation to have ownership. Juxtaposition to this in the instant case the party has just been granted license to use the computer-software without having absolute control over the same.

Xxxxxxx

I find that this necessarily means that the party does not have exclusive hold over the soft-ware and the same, even after the grant of license, remains the sole property of Microsoft. The party was licensed to use the software but was not the holder of the copy-right. I find that it is the true appreciation of the fact that the party is not the holder of the copy-right”.

6.8. Once the above finding is accepted, then it is axiomatic that Microsoft was having copyright and Microsoft transferred temporarily enjoyment of such copyright to the Appellant and as such copyright is excluded from an IPR under Section 65(55a), such temporary transfer is also not a taxable service. We find that the Ld. Adjudicating Authority has attempted to distinguish the ratio of the decision in the matter of M/s Fluent India Pvt. Ltd. vs CCE, Pune-I [2016(42) STR 340]. In that case also the India Company “Fluent India Pvt. Ltd.” was that:

(a) The Foreign party granted to Fluent India a non-exclusive, non-transferable license to use the software Products provided hereunder and related documentation solely for Fluent India’s own use. Fluent India will not sell, transfer, disclose, or otherwise make available any software Product or copies thereof to others.

(b) The foreign party granted to Fluent India non-exclusive, non-transferable “unsupported” license to grant sublicense to third parties to use the software Products. All sublicense require a fully executed Software License Agreement, attached as Schedule C. This Software License Agreement, or one modeled upon it which is translated or modified to conform to local laws or customs, must be executed for each sublicense, and each such sublicensee must be bound to said agreement.

6.9. We find that the facts are exactly similar to present case, the license, which was non-exclusive, non-transferable for use for pre-installation by the Appellant in the computers manufactured by it and then sub-license to the buyers of computer for use in running the computers. In that case, it was held that such grant of license is not subjected to service tax. Thus, we observe that the ratio of such decision is directly applicable to the present case.

6.10. From the above findings as reproduced above, it is undisputed fact that Microsoft was having copyright in software, license for preinstallation in computer was granted by Microsoft to the Appellant; the Appellant stored such software by way of pre-installation in computers and sub-licensed for use to play and run the computer. However, a conjoint reading of Section 2(o), Section 13 and Section 14 of the Copyright Act establish that the alleged IPR was of copyright, which was specifically excluded in definition under Section 65(55a), and the license for exploitation of such copyright was not a taxable service.

7. We find that w.e.f 16.05.2008, the right to use information technology software for commercial exploitation including the right to reproduce, distribute and sell became taxable for the first time in the Finance Act with the introduction of levy on Information Technology Software Services (“ITSS”) along with the taxable service in relation to Information Technology Software is defined under Section 65(105) (zzzze) of the Finance Act, 1995 and the Appellant was paying service tax on the same undisputedly. As the old entry was not modified and the new entry was created covering in its scope, the transaction/activity, which is in question, therefore, such transaction/activity was not covered under the earlier entry as held in the case of Suntec Business Solutions Pvt. Ltd. V. C.C.E., Cus. & S.T., Thiruvananthapuram, 2017 (51) S.T.R. 446 (Tri. – Bang.) The relevant portion of the said decision is reproduced below:

7.1. We find that the same view has been taken in the following decisions:

(e) Schulmberger Asia Services Ltd. v. CST (2024) 15 Centax 238 (Tri. – Del.) upheld in Commissioner of Service Tax vs. Schulmberger Asia Services Ltd (2024) 15 Centax 239 (S.C.)

(f) Commissioner of S.T., Kolkata Versus Vikash Construction Company 2020 (37) G.S.T.L. 344 (Tri. – Kolkata)

(g) BOARD OF CONTROL FOR CRICKET IN INDIA V COMMR. OF S.T., MUMBAI 2007 (7) S.T.R. 384 (Tri.-Mumbai)

7.2. By relying on the ratio of the decisions cited supra, we hold that the Appellant has rendered Information Technology Software Service, which came into effect only w.e.f. 16.05.2008 and the said activity was not liable to service tax for the period prior to that. Accordingly, demanding service tax on the same service for the period prior to 16.05.2008 under the category of IPR Service is legally not sustainable and hence we set aside the same.

8. The Appellant has also contested the demand confirmed on the ground of limitation. In this regard, we find that the demand in this case has been raised and confirmed for the period from 16.05.2006 onwards, on the basis of audit conducted on 09.03.2007 and 10.03.2007. We find that the first letter No. 413/2007 raising the issue was issued on 29.03.2007 and thereafter continuously correspondence took place. So, we find that the department was fully aware of the activities under taken by the Appellant. Once an information is completely in the knowledge of the department during the normal limitation period, it is illogical to allege that the information was suppressed by the Appellant in any manner. The demand confirmed for the period up to 16th May 2008 for which due date for filing of return was 25th October 2008 and the normal period of limitation of one year period from such date expired on 25th October 2009, however, the Show Cause Notice was issued only on 21.10.2010. Therefore, we find that whole of the demand is beyond the normal period of limitation of one year from the date of the show cause notice. Once the Appellant was disputing in a bona fide manner about the liability of service tax and disclosing all the relevant information, then merely because due to such bona fide reason the Appellant did not take registration, pay service tax and file returns, suppression cannot be alleged against the Appellant. In this regard, reliance is placed on the following decisions:

(h) Uniworth Textiles Ltd. V Commissioner of Central Excise, Raipur, 2013 (288) E.L.T. 161 (S.C.)

(i) Anand Nishikawa Co. Ltd. V Commissioner of Central Excise, Meerut, 2005 (188) E.L.T. 149 (S.C.)

(j) Pahwa Chemicals Private Limited V Commissioner of C. Ex., Delhi, 2005 (189) E.L.T. 257 (S.C.)

(k) Collector Of Central Excise V Chemphar Drugs & Liniments, 1989 (40) E.L.T. 276 (S.C.)

9. We find that the issue involved in this case results in a Revenue Neutral Situation. The demand has been proposed and confirmed for payment of service tax on reverse charge basis. If such service tax was payable, then, such alleged service received was used in manufacture of dutiable goods, so, CENVAT Credit of the service tax so paid would have been available for discharge of Central Excise duty on computers. Accordingly, we find that he entire issue creates a revenue neutral situation. It has been held in the following cases that in circumstances where revenue neutral situation exists due to availability of CENVAT Credit, then the intention to evade tax may be considered as absent and accordingly demand for the extended period of limitation is not sustainable:

(i) Indian Oil Corporation Ltd.Versus Commissioner of Central Excise, Haldia [(2024) 16 Centax 131 (Tri.-Cal)] (para 8 & 9)

(ii) Hindalco Industries Ltd. Versus Commissioner of Central Excise, Bhubaneswar-II [(2023) 8 Centax 302 (Tri.-Cal)] (para 15 & 16)

(iii) M/s. McLeod Russel India Limited Versus Principal Commissioner of Service Tax-I, Kolkata, FINAL ORDER NO. 75032 / 2026 CESTAT KOLKATA (para 8)

9.1. Thus, we hold that the demands confirmed in the impugned order by invoking the extended period of limitation is legally not sustainable.

10. As the demand of service tax is no sustained, the question of demanding interest or imposing penalty does not arise and hence we set aside the same.

11. In view of the above findings, we pass the following order:

(i) We hold that the Appellant has rendered Information Technology Software Service, which came into service tax net only w.e.f. 16.05.2008 and the said activity was not liable to service tax for the period prior to 16.05.2008. Accordingly, demanding service tax on the said service for the period prior to 16.05.2008 under the category of IPR Service, is legally not sustainable and hence we set aside the same.

(ii) The demands confirmed in the impugned order by invoking the extended period of limitation is legally not sustainable.

(iii) As the demand of service tax is not sustained, the question of demanding interest or imposing penalty does not arise and hence we set aside the same.

(iv)The appeal is disposed of on the above terms

(Pronounced in open court on12.08.2026)