By TIOL News Service

MUMBAI, DEC 08, 2014: THE applicant is a distributor of hardware, software etc. and is engaged in the business of trading in the aforesaid items on a principal to principal basis. They sell goods to resellers who in turn sell the goods to retailers/end users.

The CERA observed that the applicant has made certain payments to M/s. Microsoft Licensing GP, USA on account of royalty and on which Service Tax is required to be paid under the category of "Intellectual Property Right Services" as per Section 65(105)(zzr) of the Finance Act, 1994 for the period prior to 16.5.2008 and post 16.5.2008 the service tax liability arose under the category of "Information Technology Software Service".

The CST, Mumbai-II confirmed the demands and, therefore, the applicant is before the CESTAT.

It is submitted -

+ They are importing packaged software from the replicator or the foreign supplier. Since March 2006 Central Excise duty was levied on the package software and hence on imported goods CVD was paid. Royalty was being to Microsoft directly on which they were not paying duty. DRI pointed out that they are required to pay duty on whole of the transaction. Therefore, they were paying duty on the imported packaged software (on royalty + cost of the software) since March 2006.

+ Theadjudicating authority has observed that Microsoft has kept the copyright of the software and only right to use the software was transferred to the end user by way of license agreement with copyright protection; that Intellectual Property Right Service exempts levy of service tax on copyright portion and, therefore, they are not liable to pay service tax under Intellectual Property Right Services for the period prior to 16.5.2008.

+ Post 16.5.2008, they are paying CVD on this package software as "goods" and as held by the Apex Court in the case of Tata Consultancy Service - 2004-TIOL-87-SC-CT-LB they are not required to pay service tax for right to use the software under the category of Information Technology Software Service; that as per the agreement, right to use software is to the end user and the applicant is only intermediary, therefore, they are not liable to pay service tax at all.

The AR submitted that prior to 16.5.2008 right to use software was leviable to Service Tax under the category IPR Service; that copyright given by the Microsoft to the applicant does not qualify as copyright as per Indian Copyright Act, 1957; hence they are liable to pay service tax for the period prior to 16.5.2008 and for post 16.5.2008, the right to use software is a service as per the decision of the Madras High Court in Infotech Software Dealers Association - 2010-TIOL-620-HC-MAD-ST.

The Bench adverted to the decision in 3i Infotech Ltd. - 2014-TIOL-1424-CESTAT-MUM, wherein the Tribunal held that since the appellant has discharged the sales tax/VAT liability on software, there is merit in the contention that liability to pay service tax does not arise on a sale transaction. Noting that the applicant is covered as a copyright holder and not required to pay service tax under the category of Intellectual Property Right Services, it is held that for the period prior to 16.5.2008 applicant is not required to pay service tax.

For the period post 16.5.2008 the CESTAT observed that in the case of Infotech Software Dealers Association and in the case of Tata Consultancy Services the transaction of sale of computer software is held to be a sale of goods. Moreover, in the case of Suzlon Energy Ltd. - 2014-TIOL-1397-CESTAT-MUM the Tribunal had observed that since the transaction was treated as supply of goods for the purpose of Customs duty, therefore, transaction cannot be treated as supply of service and levy of service cannot be made on the entire value of transaction once again, the Bench observed.

Taking a view that the sale of software is only a sale of goods and the service tax cannot be levied, the Bench held that the applicant had made out a case for complete waiver of pre-deposit of entire amount of service tax, interest and penalties.

In fine, Stay was granted from recovery of adjudged dues.

(See 2014-TIOL-2468-CESTAT-MUM)