Quick Heal Technologies Limited Vs Commissioner of Service Tax (CESTAT Delhi)
Conclusion: 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 and sold after pasting a sticker bearing the license/ personal key number. Assessee 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. Article 366(29A) of the Constitution elaborates as tax on income includes a tax in the nature of an excess profits tax; tax on the sale or purchase of goods includes, a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration. 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.
FULL TEXT OF THE CESTAT JUDGMENT
This Appeal is directed against the order dated 28 January, 2016 passed by the Additional Director General (Adjudication)1 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. This enables ―Anti-Virus Software” to maintain the computer system ―virus free”.
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 Software2, 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. They were thereafter transferred by the Appellant to various Sales Offices of the Appellants from where the ultimate sale took place on payment of applicable VAT in the respective States. 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., taxguru.in 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 after pasting a sticker bearing the license/ personal key number. The Appellant paid Central Excise Duty on such pre-packaged Antivirus Software. The Jurisdictional Central Excise Authorities at Pune, however formed a view that each of the Sales Offices where the Software was packed had to take separate registration and pay 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 Agreement3 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:-
―16.3. In view of the statutory provisions discussed above, it is clear that M/s QHTPL were required to discharge Service Tax on the services (covered under the category of „ information technology software Service‟ prior to 01.07.2012 under item no. (vi) of clause (zzzze) of sub-section (105) of Section 65 of the Finance Act, 1994 and w.e.f. 01.07.2012, on the services covered under the category of „information technology software service‟ under Section 66E(d) of the Finance Act, 1994 for providing Quick Heal brand Antivirus software license key/code supplied along with CD/DVD replicated with Quick Heal brand Antivirus software through dealers/distributors to the end-customers in India.
17. Investigations conducted against M/s QHTPL has revealed that during the period 01.03.2011 to 31.03.2014, M/s QHTPL had supplied Quick Heal brand Antivirus software key/codes in retail packs to the end-user through dealers/distributors without discharging their Service Tax liability on such transactions. Packaged anti-virus software consists of license code which assists the end-user for receiving future updates of antivirus software electronically direct from the antivirus software owner for a certain period depending on the license to use the antivirus software. The end-user is provided with the temporary (non-exclusive) right to use the antivirus software as per conditions of end-user license agreement entered with M/s QHTPL and the same cannot be treated as deemed sale under Article 366(29A)(d) of the Constitution. In consideration of payment of the License Fee, which is a part of the price, evidenced by the Receipt, Quick Heal grants the Licensee, a non-exclusive and non-transferable right. Quick Heal reserves all rights not expressly granted, and retains the title and ownership of the software, including all subsequent copies in any media. This software and accompanying written materials are the property of Quick Heal and are copyrighted. Copying of the software or the written material is expressly forbidden. Thus, the supply of packaged antivirus software to the end user by charging license fee as per end user license agreement amounts to provision of service and not sale. The dominant nature of such transactions is provision of service and not sale in the light of Hon‘ble Supreme Court‘s decision in the BSNL case reported as 2006 (2) S.T.R. 161 (SC).
17.1.————
17.2. On applying the aforesaid discussed statutory provisions and the judicial pronouncements to the facts of this case, it appears that transaction of M/s QHTPL with the end-customers through distributors and dealers is in the nature of provision of information technology software service as they are providing the end users with the license keys/codes, i.e., temporary (non exclusive) right to use Antivirus software supplied electronically in the form of updates for a limited period in the light of terms and conditions EULA.
17.3. In view of the facts & evidences discussed above, M/s QHTPL is liable to pay Service Tax on their transactions with end-customers for supply of license codes/ keys of Quick Heal Antivirus software in retail packs. However, they did not pay Service Tax on consideration received for supply of Antivirus Software to the end-customers in retail packs during the period 01.03.2011 to 31.03.2014.‖
(emphasis supplied)
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, 19944 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:
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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 Customs5 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 India6 and the decision of the Madras High Court in InfoTech Software Dealers association v/s Union of India7.
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.
14. In the write-up of the process of developing the Antivirus Software, the Appellant, in their communication dated 28 February, 2010 submitted to the Department had explained the software development process as follows:-
“Quick Heal Technologies (P) Ltd is developer of Anti-virus software “Quick Heal”. Antivirus Software Development is a continuous process, which goes for 24/7 a week. This involves R&D; rigorous testing and surveillance. We have a ―Development Centre” in Pune where we develop our Software.
After developing the software we have to continuously provide updates for the same. These updates contain solution for the new viruses. All these updates/ upgrades are provided as new version. These versions are given numbers for proper Identification. The developed software is offered to Customers in CD media, which cannot run or operate without a key password; These CDs are required in big quantity, a third party on job work basis; at his premises does this mass replication, currently from Moser Bear. The job worker dispatches these replicated CDs to all our branches as per the quantity intimated to them.
To register our Software from this CD a special Key number is required. These unique Key Numbers are generated only in our Central Excise Registered premises right from beginning i.e. 1st March 2006; which creates verve in software and allows downloading of latest updates from website enabling the software to function as effective antivirus software. The Antivirus Software without this Key Number the software on our CD is just a free demonstration as it does not receive any of the updates required to run the software, i.e. it cannot function as an effective anti-virus software and hence there is no value of the Software CD or the box without this serial no. Thus process of allotment of “Unique Serial Number” is vital process of manufacture after which our software is marketable and ready for sale.”
(emphasis supplied)
15. To examine the contention, it would be pertinent to refer to the relevant provisions of the Act, both prior to 1 July, 2012 and after 1 July, 2012.
Prior to 1 July, 2012
16. Section 65(53a) of the Act defines ‘information technology software‘ and is as follows:-
“65(53a) “information technology software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.”
17. Section 65(105)(zzzze) of the Act deals with taxable service provided or to be provided to any person by any other person in relation to ‘information technology software‘ and is as follows:-
“65(105) ―Taxable service” means any service provided or to be provided –
(zzzze) to any person, by any other person in relation to information technology software including, —
(i) development of information technology software,
(ii) study, analysis, design and programming of information technology software,
(iii) adaptation, upgradation, enhancement, implementation and other similar services related to information technology software,
(iv) providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the start-up phase of a new system, specifications to secure a database, advice on proprietary information technology software,
(v) 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 and inclusion in other information technology software products,
(vi) providing the right to use information technology software supplied electronically;”
After 1 July 2012
18. ‘Declared service‘ has been defined under section 65B (22) of the Act to mean any activity carried out by any person for another person for consideration and declared as such under section 66E. In terms of section 66E (d) of the Act, the following shall constitute declared service.
“66E (d) development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software;”
19. Section 65B (28) of the Act defines ‘information technology software‘ as follows:-
“ 65B(28) “information technology software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment;”
20. Section 65B (44) of the Act defines ‘service‘ and the relevant portion is reproduced below:-
“65B (44) “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
(a) an activity which constitutes merely,—
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or”
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21. Section 65B (51) defines ‘a taxable service‘ to mean any service on which service tax is leviable under section 66B.
22. Section 66B of the Act provides that there shall be leviable a service tax at the rate of 12 percent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such a manner as may be prescribed.
23. It has, therefore, to be seen whether the meaning assigned to ‘information technology software‘ under section 65(53a) of the Act for a period prior to 1 July, 2012 would cover ―Quick Heal Antivirus Software‖. In regard to the period after 1 July, 2012, it has to be seen whether it would be excluded from the definition of ‘service‘ under section 65B (44) and consequently service tax would not be payable.
24. The definition of ‘information technology software‘ is same under section 65 (53a) of the Act or under section 65B (28) of the Act. ‘Information technology software‘ has been defined to mean any representation of instructions, data, sound or image, including source code, and object code recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data process machine or any other device or equipment.
25. The contention of the Appellant is that the software developed by it can neither be manipulated nor does it provide any interactivity to a user and, therefore, does not satisfy the requirement of ‘information technology software‘. According to the Appellant, once the computer system is booted, the Antivirus Software begins its activity of detecting the virus and continues to do so till the time the computer system remains booted. Thus, there is no interactivity or requirement of giving any commands to the software to perform the function of detecting and removing virus from the computer system. The Appellant further contends that the software developed by it is quite distinct from software like ERP, EXCEL, MS Word, where there is a constant to and fro interaction between the user and the computer system containing the said software. These softwares perform their function only after receipt of input from the user, which is not the case in the Antivirus Software developed by the Appellant.
26. The Appellant has also referred to the meaning of ―interactive software” and the same is as follows:-
A. “In computer science:
“Interactive software‟ refers to software which accepts and responds to input from people – for example, data or commands. Interactive software includes most popular programs, such as word processors or spreadsheet applications. By comparison, non-interactive programs operate without human contact: examples of these include compilers and batch processing applications. If the response is complex enough it is said that the system is conducting social interaction and some systems try to achieve this through the implementation of social interfaces.”
B. McGraw-Hill Dictionary of Scientific and Technical Terms Fifth Edition interactive information system An information system in which the user communicates with the computing facility through a terminal and receives rapid responses which can be used to prepare the next input.
C. Chambers Science and Technology Dictionary Interactive computing – A conversational mode of communication, between computer and user. Input is commonly via a keyboard or a mouse and both input and output may be displayed on a VDU. See prompt, multi-access, log in/out, light pen; teletypewriter.
D. A Dictionary of Computer Science Interactive Describing a system or a mode of working in which there is a response to operator instructions as they are input. The instructions may be presented via an input device such as a keyboard or mouse, and the effect is observable sufficiently rapidly that the operator can work almost continuously. This mode of working is thus sometimes referred to as conversational mode. An interactive system for multiple users will achieve the effect by time sharing.
27. Learned Counsel for the Appellant has also referred to the meaning of manipulated/manipulative and it is as follows:-
The New Oxford Dictionary of English
Manipulate 1 handle or control (a tool, mechanism, etc.), typically in a skillful manner::he manipulated the dials of the set.
