MAY 16, 2016

By Rahul Jain, CA

THE article makes an earnest attempt to understand the implication of the judgment delivered by the Maharashtra Sales Tax Tribunal in the case of M/s. Reliable Software Systems Pvt. Ltd [2016-TIOL-01-Trib-MUM-VAT-LB] vis-à-vis the Service Tax law.

Facts of the case:

++ The Company is engaged in the business of “online information and database access services”. The Company procures information from various stock exchanges including Bombay Stock Exchange, National Stock Exchange, MCX on payment of charges and disseminates the same to various customers with the help of “mechanism” which is installed on the computers of the customers. The data provided by the Company allows the traders and investors to know the statistics on the latest bid price, offer price, last traded price, volume of trading and current trends of the market in respect of “equities”, “derivatives” and “currencies”.

++ The Company uses in-house developed internet based client server solution to provide the aforesaid information to the customers. The information supplied by the Company is time sensitive. It can be used only through the mechanism provided by the Company which is loosely described by the Company as “client side software”. The “client side software” can be procured by downloading it on their computers from the servers of theCompany through internet orthe same can be installed by them with the help of Compact Disc free of cost. Itbecomes functional only with the active data subscription.

++ As soon as the subscription is over, the software automatically becomes ineffective, until the subscription is renewed. The customer can use the data only for the purpose of selecting the stocks for his own use.The said mechanism provided by the Company is primarily intended to safeguard the interest of the Company. Itprevents its customers from copying the data supplied and its resale or transfer to any other person. The mechanism restricts the customers from making any commercial use of the data, as the data provided by the Company remains the property of the stock exchanges.

Issue:

The Department considered the transaction of the Company as sale of software and levied VAT on the same.

Assessee's contention:

++ The main ingredient of the product offered by the Company is the 'information' which is provided on a daily basis to the customers who have subscribed. There is no sale of software or grant of right to use any software.

++ The mechanism provided by the Company is only for the purpose of simplicity and convenience. Though, it is described as a software on the website of the Company, it is contended that this mechanism provided by the Company do not have any properties of independent software. It is contended that if the data is not timely supplied, it is not useful for the customers for any purpose.

++ The mechanism provided by the Company is primarily intended to safeguard the interest of the Company. It prevents its customers from copying the data supplied and its resale or transfer to any other person.

++ It is contended that the Company has ownership of the mechanism, which is called “Trend & Falcon”. There is no license which is transferred in favour of the customers, and therefore, right to use the software is not transferred in any case to the customers.

++ Service tax and Sales tax are mutually exclusive and both cannot be levied simultaneously on one and the same item/ head. It was argued that the other competitors in the market, who are rendering similar services are not assessed for payment of VAT. There has to be parity in the policy of the State while imposing tax under any tax legislation.

Department's contention:

++ The Company has admitted that the product dealt by it is a software.

++ It was argued that what is “software” is described by the Supreme Court in Tata Consultancy Services vs. State of Andhra Pradesh [ 2004-TIOL-87-SC-CT-LB ]. In the said judgement, it is held that a software programme may consist of various commands; which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme, but the moment copies are made and marketed, it becomes goods, which are susceptible to VAT/Sales tax.

++ As far as “test of dominant intention” is concerned, it was argued that it is well settled principle of law that it is the substance, and not form of contract that should be looked into to determine the nature of transaction.

++ In respect of parity for taxing the transaction of the Company, it was argued that the question of parity will arise when the decision is taken by the Tribunal. When there is no such decision in existence, there is no question of applying the principle of parity.

Decision:

++ The agreement entered by the Company, website mentions the product of the Company as “software”. Relying on the judgement of the Hon'ble Supreme Court in case of Tata Consultancy Services (supra), the Tribunal held that the product dealt by the Company is goods and liable to VAT .

++ Merely because a software is used for specific purpose (providing information in the present facts) or for a particular time limit cannot convert software (being goods) in the nature of service.

++ On the issue of parity, the Department's contention was accepted.

Author'sview

++ The dealer was owner of a software which contained various information about the prices in the stock market. The said software was marketed by the dealer for the sales promotion purposes. This fact has heavily impressed the bench while delivering the judgement. However, the essence of the transaction under consideration was to provide real time based information to the subscribers of the Company. The deliverable was in the form of providing information. The said information was provided by means of internet and software.

++ Further, there was restriction that the said information can be used by the customer only for his own purpose and cannot be shared with any other person.

++ It was also not in doubt that the consideration was primarily received for providing the information to the subscribers. The software was used to provide such information. The fact that software, if any in the present case is supplied free of cost to the subscriber is also not disputed by the Bench.

++ If the analogy of the judgement is applied, then in every case where the information is supplied by means of a software (whether web based or otherwise, whether free or for consideration), then every such service is 'Sale' of software under Sales tax / VAT legislation. In my view, the judgement delivered by the Tribunal needs a fresh relook.

++ It is needless to say that the aforesaid judgement indicates again that ambiguity in the Sales tax /VAT laws need to be removed and elaborative &specific provisions for software should be included.

++ Lets examine the above facts from a Service tax angle also.

++ The term 'online information and database access or retrieval services' ('OID')is defined under Place of Provision of Services Rules, 2012 ('PPOS Rules') as follows:-

++ 'Online information and database access or retrieval services' means providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network.

++ The Finance Act and PPOS Rules make distinction between the OID services and software services. In case of OID services, the place of provision of services is location of the service provider. In case of software services, there is no specific mention in the PPOS Rules and one has to look into the various rules to determine place of provision of services.

++ It is possible that to provide OID services, service provider uses software. The computer network used to provide OID invariably uses one or the other kind of software. This fact does not change the nature of services of OID. However, one need to examine in each of OID services that, is there any component of software which is also part of provision of services and for which separate consideration is charged. It could significantly change the place of provision of services in certain cases.

++ To conclude, if the ratio of the above judgement is applied then, in almost every case where OID services is provided by use of software at the service receiver's end, it invariably involves transfer of right to use software/sale of software and consequently liable to VAT/Sales tax. Further, the same transaction will also be liable to Service tax as OID services, leading to double taxation.

(The author can be reached at hrahuljain@yahoo.com )