JULY 06, 2009

Exemption from levy of Excise duty on 'right to use' software - CBEC to clarify

By Santosh Hatwar

THE Notification 22/2009-CE dated July 7, 2009 provides exemption for packaged or canned software falling under Chapter 85 of Central Excise Tariff Act, 1985 from excise duty on that portion of the value as determined under Section 4 of the Central Excise Act, 1944 which represents consideration paid or payable for transfer of the right to use provided that the transfer of right to use shall be for commercial exploitation including the right to reproduce, distribute and sell such software and the right to use the software components for the creation of and inclusion in other information technology software products.

This exemption is available subject to the condition that the person providing the right to use shall make a declaration to the jurisdictional Assistant/Deputy Commissioner of Central Excise in respect of such transfer of right to use for commercial exploitation and such person shall be registered with the service tax authorities.

However, the DO letter from JS (TRU) clarifies that partial exemption from excise duty has been provided to packaged or canned software so that the duty payable on that portion of the value which represents the consideration for the transfer of the right to use such software, is exempted. The benefit of the exemption is available to the manufacturer of such software when he declares to the Central Excise authorities that the right to use is transferred for commercial exploitation and fulfilment of some other conditions the details of which are contained in notification no.22/2009-Central Excise dated 7th July, 2009. It is further clarified that on the portion of the value which is exempted from excise duty, service tax will be leviable under the ‘Information Technology Software Service’.

The DO letter of JS (TRU) is under the assumption that the manufacturer of packaged or canned software and the person who transfers the right to use are one and the same. But what if they are different persons? Because it is quite possible that those who have the license to a software product whether or not canned or packaged may provide the transfer of right to use to another person for commercial exploitation which includes right to reproduction and such other person may be engaged in reproduction of such software as canned or packaged product or may be engaged in usage of such software as a component for the creation of and inclusion in other information technology software products.

In such instances, it is bound to create problems with regard to valuation because it may be noted that 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 being a taxable service under the category of Information Technology Software Service, the valuation of such taxable service would be arrived at in terms of the provisions Section 67 of the Finance Act, 1994.

But in the excise notification 22/2009-CE, it is stipulated that the value of such element of consideration paid or payable for transfer of right to use shall be in terms of Section 4 of Central Excise Act, 1944. Now it is to be seen as to whether the taxable value declared in terms of Section 67 of the Finance Act, 1994 by the service provider would be accepted as the value for the purpose of Section 4 at the recipients end i.e. those who acquire the right to use and engage in the manufacture of canned or packaged software or use it further as components for the creation of and inclusion in other software products.

Further, in such instances, the exemption from levy of excise duty on that portion of the value which is equivalent to the consideration paid or payable for transfer of right to use will create more problems for those who are engaged in commercial exploitation of such right to use i.e. those who are engaged in manufacture of canned or packaged software after acquiring such right to use for reproduction of such software or right to use the software components for the creation of or inclusion in other information technology software products which are further sold as canned or packaged software, because, the availability of service tax paid on the taxable service of providing the right to use information technology software for such commercial exploitation, as CENVAT credit would be questioned by the central excise authorities in view of the said exemption from levy of excise duty at the recipients end.

In view of these anomalies, it is requested that the CBEC will come out with suitable clarifications immediately, to dispel the doubts and if need be come up with suitable amendments in the excise notification 22/2009-CE. Board should not forget that the levy of service tax on the right to use information technology software itself is mired in controversy due to overlapping levy of VAT on such right to use by the State Governments. The last thing the IT sector requires at this stage is further confusion.