Applicability of TDS on sale of Software
This query is : Resolved
03 November 2009
Your valuable suggestions are invited :
As you may be aware that sale of Software has come under the preview of Service Tax w.e.f Sep 09.Now there has become a common practice in software dealers (even big companies are following this) that TDS has to be deducted u/s 194J (technical fees) for sale of software. My query is whether this practice of deducting TDS is correct or not, because here there is only sale of software but no service is provided , but since service tax is being charged the company are suggesting that TDS be deducted. Kindly clarify on the above
As you may be aware that sale of Software has come under the preview of Service Tax w.e.f Sep 09.Now there has become a common practice in software dealers (even big companies are following this) that TDS has to be deducted u/s 194J (technical fees) for sale of software. My query is whether this practice of deducting TDS is correct or not, because here there is only sale of software but no service is provided , but since service tax is being charged the company are suggesting that TDS be deducted. Kindly clarify on the above
04 November 2009
In my opinion there is no service tax on sale of software, instead VAT is applicable to it. Service tax is applicable for the maintenance contract or support services entered by the software companies with their clients and deduction of tds from such payments is correct. There is no need to deduct tax from payments against sale of software
04 November 2009
PACKAGED SOFTWARE ELECTRONICALLY TRANSFERRED – NEITHER CENTRAL EXCISE NOR SERVICE TAX IS APPLICABLE : By S Sivakumar, CA
November 2, 2009
The Software Industry, as its very name would suggest, is a ’soft’ industry, as contrasted to the ‘hard’ manufacturing industry. Perhaps, this is the reason, why the ’software’ industry has remained a ’soft’ target for levy of indirect taxes, by both the Central Government and the State Governments. This apart, the software industry has its own variants, in terms of packaged software, canned software, shrink wrapped software, customized software, software services, etc. and in the absence of straight jacket definitions, the levy of central indirect taxes on the software industry has tended to be extremely complex and confusing.
Packaged Software vs. Customized Software
The Illustrated Computer Dictionary (Third Edition) by Donald D. Spencer provides the following definitions:
Canned Software : Programs prepared by computer manufacturers or another supplier and provided to a user in ready – to – use form. General enough to be used by many businesses and individuals. Contrast with custom software.
Packaged Software : Software sold by a vendor (hardware manufacturer or a software house) in the form of a prepared package consisting of the program(s), documentation such as flowcharts and users’ manuals, and perhaps test data with which to demonstrate the correct operation of the program after it is installed in the client’s computer.
As per Wikipedia, ‘Customized Software’ is explained as follows:
“Custom software (also known as Bespoke software) is a type of software developed either for a specific organization or function that differs from other already available software (also called off-the-shelf software). It is generally not targeted to the mass market, but usually created for companies, business entities, and organizationsâ€.
The Government’s view of what constitutes packaged or canned software is contained Explanation No. 27 to Notification No. 6/2006, which is reproduced below:
‘Packaged software or canned software’ means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf [Explanation to Sr No. 27 of Notification No. 6/2006-CE dated 1-3-2006].
Customized software has always been defined in a negative manner, to mean software which is not packaged/canned software. Shrink wrapped software can be covered under packaged/canned software.
Levy of Central Excise Duty / Service Tax on Packaged/Canned Software
The Government had issued Notification No. 49/2006-CE dated 30.12.2006 under which 8% duty was imposed on software. Chapter Sub-heading 8524 was deleted and a new entry viz., ‘8523 80 20 – Information Technology software’ was created. The rate of duty was fixed at 8% for the period January 1, 2007 to February 8, 2008. From March 1, 2008, the rate of central excise duty on software has been increased to 12%.
However, exemption was granted to ‘Customized Software’ vide Notification No. 6/2006-CE dated 1.3.2006, as amended from time to time. Information Technology Software (branded as well as tailor made) is ‘excisable goods’ under headings 8523 80 20 [earlier 8524 91 11, 8524 91 12 and 8524 91 13]. As stated above, the tariff rate of duty is 12% w.e.f. 1-3-2008 (earlier it was 8%). However, all software, except canned software i.e. software that can be sold off the shelf, is ‘exempt’ under Sr. No. 27 of notification No. 6/2006-CE dated 1-3-2006.
Notification No. 6/2006-CE dated 1.3.2006 (Sl. No. 27) reads as follows:
“Any customized software (that is to say, any custom designed software, developed for a specific user or client), other than packaged software or canned software.
Explanation :- For the purposes of this entry “packaged software or canned software†means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf.â€
It is common knowledge that the most preferred medium for transfer of packaged software is the ‘licensing route. Grant of license for use of software is to be treated as a transaction in goods and not in services. Both the Customs Tariff and the Central Excise Tariff treat documentary evidence as goods and prescribe rate of duty in the tariff. Incidentally, under the Karnataka Value Added Tax Act, 2003, there is a specific tariff entry covering software licenses. Documents of title conveying the right to use Information Technology Software (popularly termed as ‘paper license of software’) falls under 4907 00 30 of Customs Tariff with duty rate of 12.5%. However, it is exempt vide Sr No. 157 of Notification No. 21/2002-Cus dated 1-3-2002. It is also covered under Central Excise Tariff under same heading i.e. 4907 00 30 and excise duty rate is Nil. Thus, on paper license, basic customs duty or CVD is not applicable.
Changes brought about by the Finance Act, 2008
As per Section 65(105)(zzzze), service tax has been levied on Information Technology Software Service, with effect from May 16, 2008.
“As per section 65(105)(zzzze) to the Finance Act, 1994, inserted vide Finance Act, 2008 with effect from May 16, 2008, ‘any service provided or to be provided’ to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, 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) acquiring 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) acquiring the right to use information technology software supplied electronically;’
is a taxable service.â€
‘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 an user, by means of a computer or an automatic data processing machine or any other device or equipment [section 65(53a) inserted vide Finance Act, 2008 with effect from May 16, 2008]
Departmental clarifications
The relevant extract from CBE&C TRU letter F. No. 334/1/2008-TRU, dated 29-2-2008 clarifies as follows -
“4.1-2 Software consists of carrier medium such as CD, Floppy and coded data. Softwares are categorized as ‘normal software’ and ’specific software’. Normalised software is mass market product generally available in packaged form of the shelf in retail outlets. Specific software is tailored to the specific requirement of the customer and is known as customized software.
4.1-3 Packaged software sold off the shelf, being treated as goods, is leviable to excise duty @ 8 per cent. In this Budget, it has been increased from 8 per cent to 12 per cent vide Notification No. 12/2008-CE, dated 1-3-2008.
4.1-4 IT software services provided for use in business or commerce are covered under the scope of the proposed service. Said services provided for use, other than in business or commerce, such as services provided to individuals for personal use, continue to be outside the scope of service tax levy. Service tax paid shall be available as input credit under Cenvat Credit Scheme.
4.1-5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.
4.1-6 With the proposed levy on IT software services, information technology related services will get covered comprehensively.â€
Changes brought about by the Union Budget for 2009-10
The Government has issued Notification No. 22/2009-CE dated July 7, 2009, as per which, the Government has exempted the central excise duty / CVD levy on Packaged/Canned software to the extent of value / consideration paid or payable for the right to use such packaged/canned software.
As is known, central excise duty on packaged software was levied for the first time, thro’ Notification No. 49/2006-CE dated 30.12.2006 under which 8% duty was imposed on software. While Sub-heading 8524 was deleted, a new tariff 8523 80 20 – Information Technology software’ was created. The rate of duty was fixed at 8%. Exemption, however, was granted to ‘Customized Software’ vide Notification No. 6/2006-CE dated 1.3.2006, as amended from time to time. In terms of Notification No. 6/2006-CE dated 1.3.2006 (Sl. No. 27), exemption is given to “any customized software (that is to say, any custom designed software, developed for a specific user or client), other than packaged software or canned software.
The explanation to Notification 6/2006-CE which has now been reproduced in Notification No. 22/2009-CE reads as follows:
NOTIFICATION NO 22/2009-CX., Dated: July 7, 2009
In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts packaged software or canned software, falling under Chapter 85 of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), from so much of the duty of excise leviable thereon as is equivalent to the excise duty payable on the portion of the value determined under section 4 of the said Central Excise Act, which represents the consideration paid or payable for transfer of the right to use such goods:
Provided that the transfer of the 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:
Provided further that the person providing the right to use shall make a declaration to this effect to the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, in respect of such transfer of the right to use for commercial exploitation:
Provided also that the person providing the right to use shall be registered under section 69 of the Finance Act, 1994 read with rule 4 of the Service Tax Rules, 1994.
Explanation. – For the purposes of this exemption, “packaged software or canned software†means software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold off the shelf.
F. No. 334/13/2009-TRU
(Prashant Kumar) Under Secretary to the Government of India
Explanation :
“For the purposes of this entry “packaged software or canned software†means software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf.â€
In Tata Consultancy Services v. State of Andhra Pradesh [2005] 141 Taxman 132 (SC) (SC 5-member Constitution Bench), it has been held that canned software (i.e., computer software packages sold off the shelf) like Oracle, Lotus, Master-Key, etc., are ‘goods’. We also have the Apex Court’s decision in respect of what is called as packaged software which are sold through retail outlets and held as goods, in Commissioner of Customs v. Hewlett Packard India (Sales) (P.) Ltd. 2007 (215) ELT 484 (SC). Earlier also, in Associated Cement Companies Ltd. v. Commissioner of Customs AIR 2001 SC 862 (SC 3 – Member Bench), the Supreme Court had held that computer software is ‘goods’ even if it is copyrightable as intellectual property. In a recent case, viz. Infosys Technologies Ltd v. The Special Commissioner of Commercial Taxes reported in 2008-TIOL-509-HC-MD-CT, it has been held that software, whether customized or packaged , is to be considered as goods for purposes of levy of sales tax, so long as it satisfies the criterion of being ‘goods’.
The Notification 22/2009-CE dated July 7, 2009 states that the exemption contemplated by the Notification is applicable only to the transfer of the right to use the packaged software 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. What do the words ‘commercial exploitation’ means, in the context of software? The Supreme Court has handled this very important question in State Bank of India vs. Collector of Customs 2000 (115) E.L.T. 597 (S.C.) and has held that use of an imported software and manual by the SBI under terms of strict confidentiality did not amount to ‘commercial exploitation’ of the imported software. It is well know that, the right to use packaged software, in most cases, is restricted to the use of the software by the licensees, to be used only for authorized internal purposes and for internal use. Consequently, it is clear that purchase of the license of packaged software for internal use, does not amount to ‘commercial exploitation’ of the packaged software and would consequently, continue to be charged to central excise duty, as confirmed by Notification No. 22/2009. No company can be considered as importing packaged software licenses for ‘commercial exploitation’, even if these packages are internally used for the commercial development of other software packages or services.
No Service tax on packaged software
We can now look at the provisions contained in Section 65(105)(zzzze) of the Finance Act, 1994.
The term used in definition of ITSS in the aforesaid Section is ‘including’. It is well-settled that the term ‘including’ expands the scope of definition. What is not covered in main part of the definition can get covered in inclusive part of the definition. As regards clauses (ii), (iii) and (iv) of the definition, there is no ambiguity that these are ’services’. The ambiguity is in interpretation of clauses (i), (v) and (vi).
The question that arises is, whether ‘acquiring the right to use information technology software supplied electronically’ itself is a taxable service or ’service in relation to acquiring the right to use information technology software supplied electronically’ is a taxable service. If the first interpretation is taken, then even issuing ‘paper license’ would be a taxable service, which is clearly not in consonance with the other statutory provisions. In my view, therefore, service tax cannot be levied on the electronic transfer of licenses for packaged software, whether it is for commercial exploitation or not.
Many STP Units import software licenses both in the physical form as well as, in the electronic form. As a rule, we have found that, imports of software licenses in the physical form, are considered as imports under the bonding regulations and are shown in the bonding register, while electronic imports are subjected to the levy of service tax under the “Reverse Charge Mechanism†under Section 66A of the Finance Act, 1994. In our view, this is incorrect, given the fact that the Notification No. 22/2009-CE clearly states that, packaged software meant for ‘commercial exploitation’ can only be exempted from the levy of central excise duty and be subjected to the levy of service tax. Most of the imports of packaged software are happening in the electronic mode, these days. There is no case for levy of service tax under Section 66A of the Finance Act, 1994 on these imports.
Constitutional Provisions
Even from a Constitutional point of view also, service tax cannot be levied on purchase of goods.
Service tax is imposed under Entry 97 of List I which is a residual entry. Thus, if a transaction is covered in list II, i.e., State List or in any other Entry in List I, it cannot again get covered in Entry 97 of List I.
Entry No. 92A of List I (Union List) – Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. Entry No. 54 of List II (State List) – Tax on sale or purchase of goods other than newspapers except tax on inter-State sale or purchase.
In Imagic Creative (P.) Ltd. v. Commissioner of Commercial Taxes [2008] 12 STT 392 (SC), it has been held that service tax and Vat (sales tax) are mutually exclusive.
Even the Department would seem to agree that service tax cannot be levied on a transaction of sale. Reference can be drawn to Ref Code 036.03/23-8-2007 of CBE&C Circular No. 96/7/2007-ST, dated 23-8-2007, in this regard. Though the clarification is in respect of services of authorized service station, the principle should equally apply to all transactions.
Central Excise cannot be levied on packaged software transferred thro’ electronic mode
Having stated that service tax is not applicable to transactions involving packaged software, we can now proceed to discuss the central excise implications on this sector. As we have seen, on ‘paper licenses’ are exempted from the levy of customs duty and central excise duty/CVD. In the case of transfer of right to use packaged software in an ‘electronic mode’, we have seen that, the Government’s view is that, so long as the license is granted for ‘commercial exploitation’ purposes, service tax would get attracted. It is impossible for a ‘manufacturer’ of ‘packaged software’ to decide on the levy of central excise, on the basis of whether the buyer is buying the software for ‘commercial exploitation’. This is an impossible condition to be met.
Moreover, under the current central excise law, there are no rules or procedures which have been laid down, for handling electronic transfer of packaged software licenses. The same is the case, with regard to the electronic import of packaged software licenses, under the customs rules and regulations. The basic customs duty and counterveiling duty (’CVD’) are levied in terms of the provisions of the Customs Act. While the basis customs duty is levied under Section 12, CVD is levied under Section 3(1) of the Customs Act. Talking specifically of CVD, it may be mentioned here that CVD is equal to the excise duty levied on a like product manufactured or produced in India. According to Section 3(1) of the Customs Tariff Act, any article imported will be liable to excise duty for the time being leviable on like article if produced or manufactured in India. In Hyderabad Industries Ltd v. Union of India 1999 108 ELT 321, the five member Bench of the Supreme Court had held that CVD can be levied only if manufactured goods are imported into India. As per Section 2(23) of the Customs Act, ‘import’ with its grammatical variations and cognate expressions, means bringing into India from a place outside India. As Section 2(27) of the Customs Act, India is defined as inclusive of its territorial waters. As was held in Kiran Shipping Mills v. CC 1999 (113) ELT 753, ‘import’ is completed only the goods cross the customs barrier. As per the substantive provisions of the Customs law, the rate of duty and tariff valuation as on the date of presentation of the bill of entry or date of entry inward of the vessel, whichever is later, is relevant for determining the customs duty payable. The constitutional validity of these provisions has been upheld by the Constitution Bench in M Jhangir Bhatisha v. Union of India 1989 42 ELT 344.
In terms of import of the software license through downloading from the website, etc., it cannot be said that an ‘import’ within the meaning of the Customs Act happens. Moreover, there are no provisions in the Customs Act or in the Rules, Notifications, etc. to handle issues related to import of software licenses in a medium other than the physical medium, i.e. CDs, etc. In other words, no methodology for arriving at the computation’ in respect of the levy of CVD, if at all, on import of licenses thro’the electronic medium has been prescribed. This would then be a case which would lead us to the discussion involving the charge and its computation. In several cases, the Courts have held that a charge and its method of computation have to be read together and that, if the computation fails, so does the charge. For instance, in CIT v. B.C. Srinivasa Setty, [1981] 128 ITR 294, the Supreme Court reiterated the principle that the charge and its computation were two parts of an integral whole and concluded therefore, that if the computation could not be done, the charge was not intended to apply.
TO CONCLUDE….
IN MY STRONG VIEW, NEITHER CENTRAL EXCISE DUTY NOR SERVICE TAX IS APPLICABLE ON ELECTRONIC TRANSFER OF PACKAGED SOFTWARE / LICENSES, INCLUDING, IN RESPECT OF IMPORT OF LICENSES RELATED TO PACKAGED SOFTWARE.
November 2, 2009
The Software Industry, as its very name would suggest, is a ’soft’ industry, as contrasted to the ‘hard’ manufacturing industry. Perhaps, this is the reason, why the ’software’ industry has remained a ’soft’ target for levy of indirect taxes, by both the Central Government and the State Governments. This apart, the software industry has its own variants, in terms of packaged software, canned software, shrink wrapped software, customized software, software services, etc. and in the absence of straight jacket definitions, the levy of central indirect taxes on the software industry has tended to be extremely complex and confusing.
Packaged Software vs. Customized Software
The Illustrated Computer Dictionary (Third Edition) by Donald D. Spencer provides the following definitions:
Canned Software : Programs prepared by computer manufacturers or another supplier and provided to a user in ready – to – use form. General enough to be used by many businesses and individuals. Contrast with custom software.
Packaged Software : Software sold by a vendor (hardware manufacturer or a software house) in the form of a prepared package consisting of the program(s), documentation such as flowcharts and users’ manuals, and perhaps test data with which to demonstrate the correct operation of the program after it is installed in the client’s computer.
As per Wikipedia, ‘Customized Software’ is explained as follows:
“Custom software (also known as Bespoke software) is a type of software developed either for a specific organization or function that differs from other already available software (also called off-the-shelf software). It is generally not targeted to the mass market, but usually created for companies, business entities, and organizationsâ€.
The Government’s view of what constitutes packaged or canned software is contained Explanation No. 27 to Notification No. 6/2006, which is reproduced below:
‘Packaged software or canned software’ means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf [Explanation to Sr No. 27 of Notification No. 6/2006-CE dated 1-3-2006].
Customized software has always been defined in a negative manner, to mean software which is not packaged/canned software. Shrink wrapped software can be covered under packaged/canned software.
Levy of Central Excise Duty / Service Tax on Packaged/Canned Software
The Government had issued Notification No. 49/2006-CE dated 30.12.2006 under which 8% duty was imposed on software. Chapter Sub-heading 8524 was deleted and a new entry viz., ‘8523 80 20 – Information Technology software’ was created. The rate of duty was fixed at 8% for the period January 1, 2007 to February 8, 2008. From March 1, 2008, the rate of central excise duty on software has been increased to 12%.
However, exemption was granted to ‘Customized Software’ vide Notification No. 6/2006-CE dated 1.3.2006, as amended from time to time. Information Technology Software (branded as well as tailor made) is ‘excisable goods’ under headings 8523 80 20 [earlier 8524 91 11, 8524 91 12 and 8524 91 13]. As stated above, the tariff rate of duty is 12% w.e.f. 1-3-2008 (earlier it was 8%). However, all software, except canned software i.e. software that can be sold off the shelf, is ‘exempt’ under Sr. No. 27 of notification No. 6/2006-CE dated 1-3-2006.
Notification No. 6/2006-CE dated 1.3.2006 (Sl. No. 27) reads as follows:
“Any customized software (that is to say, any custom designed software, developed for a specific user or client), other than packaged software or canned software.
Explanation :- For the purposes of this entry “packaged software or canned software†means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf.â€
It is common knowledge that the most preferred medium for transfer of packaged software is the ‘licensing route. Grant of license for use of software is to be treated as a transaction in goods and not in services. Both the Customs Tariff and the Central Excise Tariff treat documentary evidence as goods and prescribe rate of duty in the tariff. Incidentally, under the Karnataka Value Added Tax Act, 2003, there is a specific tariff entry covering software licenses. Documents of title conveying the right to use Information Technology Software (popularly termed as ‘paper license of software’) falls under 4907 00 30 of Customs Tariff with duty rate of 12.5%. However, it is exempt vide Sr No. 157 of Notification No. 21/2002-Cus dated 1-3-2002. It is also covered under Central Excise Tariff under same heading i.e. 4907 00 30 and excise duty rate is Nil. Thus, on paper license, basic customs duty or CVD is not applicable.
Changes brought about by the Finance Act, 2008
As per Section 65(105)(zzzze), service tax has been levied on Information Technology Software Service, with effect from May 16, 2008.
“As per section 65(105)(zzzze) to the Finance Act, 1994, inserted vide Finance Act, 2008 with effect from May 16, 2008, ‘any service provided or to be provided’ to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, 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) acquiring 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) acquiring the right to use information technology software supplied electronically;’
is a taxable service.â€
‘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 an user, by means of a computer or an automatic data processing machine or any other device or equipment [section 65(53a) inserted vide Finance Act, 2008 with effect from May 16, 2008]
Departmental clarifications
The relevant extract from CBE&C TRU letter F. No. 334/1/2008-TRU, dated 29-2-2008 clarifies as follows -
“4.1-2 Software consists of carrier medium such as CD, Floppy and coded data. Softwares are categorized as ‘normal software’ and ’specific software’. Normalised software is mass market product generally available in packaged form of the shelf in retail outlets. Specific software is tailored to the specific requirement of the customer and is known as customized software.
4.1-3 Packaged software sold off the shelf, being treated as goods, is leviable to excise duty @ 8 per cent. In this Budget, it has been increased from 8 per cent to 12 per cent vide Notification No. 12/2008-CE, dated 1-3-2008.
4.1-4 IT software services provided for use in business or commerce are covered under the scope of the proposed service. Said services provided for use, other than in business or commerce, such as services provided to individuals for personal use, continue to be outside the scope of service tax levy. Service tax paid shall be available as input credit under Cenvat Credit Scheme.
4.1-5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.
4.1-6 With the proposed levy on IT software services, information technology related services will get covered comprehensively.â€
Changes brought about by the Union Budget for 2009-10
The Government has issued Notification No. 22/2009-CE dated July 7, 2009, as per which, the Government has exempted the central excise duty / CVD levy on Packaged/Canned software to the extent of value / consideration paid or payable for the right to use such packaged/canned software.
As is known, central excise duty on packaged software was levied for the first time, thro’ Notification No. 49/2006-CE dated 30.12.2006 under which 8% duty was imposed on software. While Sub-heading 8524 was deleted, a new tariff 8523 80 20 – Information Technology software’ was created. The rate of duty was fixed at 8%. Exemption, however, was granted to ‘Customized Software’ vide Notification No. 6/2006-CE dated 1.3.2006, as amended from time to time. In terms of Notification No. 6/2006-CE dated 1.3.2006 (Sl. No. 27), exemption is given to “any customized software (that is to say, any custom designed software, developed for a specific user or client), other than packaged software or canned software.
The explanation to Notification 6/2006-CE which has now been reproduced in Notification No. 22/2009-CE reads as follows:
NOTIFICATION NO 22/2009-CX., Dated: July 7, 2009
In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts packaged software or canned software, falling under Chapter 85 of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), from so much of the duty of excise leviable thereon as is equivalent to the excise duty payable on the portion of the value determined under section 4 of the said Central Excise Act, which represents the consideration paid or payable for transfer of the right to use such goods:
Provided that the transfer of the 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:
Provided further that the person providing the right to use shall make a declaration to this effect to the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, in respect of such transfer of the right to use for commercial exploitation:
Provided also that the person providing the right to use shall be registered under section 69 of the Finance Act, 1994 read with rule 4 of the Service Tax Rules, 1994.
Explanation. – For the purposes of this exemption, “packaged software or canned software†means software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold off the shelf.
F. No. 334/13/2009-TRU
(Prashant Kumar) Under Secretary to the Government of India
Explanation :
“For the purposes of this entry “packaged software or canned software†means software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf.â€
In Tata Consultancy Services v. State of Andhra Pradesh [2005] 141 Taxman 132 (SC) (SC 5-member Constitution Bench), it has been held that canned software (i.e., computer software packages sold off the shelf) like Oracle, Lotus, Master-Key, etc., are ‘goods’. We also have the Apex Court’s decision in respect of what is called as packaged software which are sold through retail outlets and held as goods, in Commissioner of Customs v. Hewlett Packard India (Sales) (P.) Ltd. 2007 (215) ELT 484 (SC). Earlier also, in Associated Cement Companies Ltd. v. Commissioner of Customs AIR 2001 SC 862 (SC 3 – Member Bench), the Supreme Court had held that computer software is ‘goods’ even if it is copyrightable as intellectual property. In a recent case, viz. Infosys Technologies Ltd v. The Special Commissioner of Commercial Taxes reported in 2008-TIOL-509-HC-MD-CT, it has been held that software, whether customized or packaged , is to be considered as goods for purposes of levy of sales tax, so long as it satisfies the criterion of being ‘goods’.
The Notification 22/2009-CE dated July 7, 2009 states that the exemption contemplated by the Notification is applicable only to the transfer of the right to use the packaged software 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. What do the words ‘commercial exploitation’ means, in the context of software? The Supreme Court has handled this very important question in State Bank of India vs. Collector of Customs 2000 (115) E.L.T. 597 (S.C.) and has held that use of an imported software and manual by the SBI under terms of strict confidentiality did not amount to ‘commercial exploitation’ of the imported software. It is well know that, the right to use packaged software, in most cases, is restricted to the use of the software by the licensees, to be used only for authorized internal purposes and for internal use. Consequently, it is clear that purchase of the license of packaged software for internal use, does not amount to ‘commercial exploitation’ of the packaged software and would consequently, continue to be charged to central excise duty, as confirmed by Notification No. 22/2009. No company can be considered as importing packaged software licenses for ‘commercial exploitation’, even if these packages are internally used for the commercial development of other software packages or services.
No Service tax on packaged software
We can now look at the provisions contained in Section 65(105)(zzzze) of the Finance Act, 1994.
The term used in definition of ITSS in the aforesaid Section is ‘including’. It is well-settled that the term ‘including’ expands the scope of definition. What is not covered in main part of the definition can get covered in inclusive part of the definition. As regards clauses (ii), (iii) and (iv) of the definition, there is no ambiguity that these are ’services’. The ambiguity is in interpretation of clauses (i), (v) and (vi).
The question that arises is, whether ‘acquiring the right to use information technology software supplied electronically’ itself is a taxable service or ’service in relation to acquiring the right to use information technology software supplied electronically’ is a taxable service. If the first interpretation is taken, then even issuing ‘paper license’ would be a taxable service, which is clearly not in consonance with the other statutory provisions. In my view, therefore, service tax cannot be levied on the electronic transfer of licenses for packaged software, whether it is for commercial exploitation or not.
Many STP Units import software licenses both in the physical form as well as, in the electronic form. As a rule, we have found that, imports of software licenses in the physical form, are considered as imports under the bonding regulations and are shown in the bonding register, while electronic imports are subjected to the levy of service tax under the “Reverse Charge Mechanism†under Section 66A of the Finance Act, 1994. In our view, this is incorrect, given the fact that the Notification No. 22/2009-CE clearly states that, packaged software meant for ‘commercial exploitation’ can only be exempted from the levy of central excise duty and be subjected to the levy of service tax. Most of the imports of packaged software are happening in the electronic mode, these days. There is no case for levy of service tax under Section 66A of the Finance Act, 1994 on these imports.
Constitutional Provisions
Even from a Constitutional point of view also, service tax cannot be levied on purchase of goods.
Service tax is imposed under Entry 97 of List I which is a residual entry. Thus, if a transaction is covered in list II, i.e., State List or in any other Entry in List I, it cannot again get covered in Entry 97 of List I.
Entry No. 92A of List I (Union List) – Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. Entry No. 54 of List II (State List) – Tax on sale or purchase of goods other than newspapers except tax on inter-State sale or purchase.
In Imagic Creative (P.) Ltd. v. Commissioner of Commercial Taxes [2008] 12 STT 392 (SC), it has been held that service tax and Vat (sales tax) are mutually exclusive.
Even the Department would seem to agree that service tax cannot be levied on a transaction of sale. Reference can be drawn to Ref Code 036.03/23-8-2007 of CBE&C Circular No. 96/7/2007-ST, dated 23-8-2007, in this regard. Though the clarification is in respect of services of authorized service station, the principle should equally apply to all transactions.
Central Excise cannot be levied on packaged software transferred thro’ electronic mode
Having stated that service tax is not applicable to transactions involving packaged software, we can now proceed to discuss the central excise implications on this sector. As we have seen, on ‘paper licenses’ are exempted from the levy of customs duty and central excise duty/CVD. In the case of transfer of right to use packaged software in an ‘electronic mode’, we have seen that, the Government’s view is that, so long as the license is granted for ‘commercial exploitation’ purposes, service tax would get attracted. It is impossible for a ‘manufacturer’ of ‘packaged software’ to decide on the levy of central excise, on the basis of whether the buyer is buying the software for ‘commercial exploitation’. This is an impossible condition to be met.
Moreover, under the current central excise law, there are no rules or procedures which have been laid down, for handling electronic transfer of packaged software licenses. The same is the case, with regard to the electronic import of packaged software licenses, under the customs rules and regulations. The basic customs duty and counterveiling duty (’CVD’) are levied in terms of the provisions of the Customs Act. While the basis customs duty is levied under Section 12, CVD is levied under Section 3(1) of the Customs Act. Talking specifically of CVD, it may be mentioned here that CVD is equal to the excise duty levied on a like product manufactured or produced in India. According to Section 3(1) of the Customs Tariff Act, any article imported will be liable to excise duty for the time being leviable on like article if produced or manufactured in India. In Hyderabad Industries Ltd v. Union of India 1999 108 ELT 321, the five member Bench of the Supreme Court had held that CVD can be levied only if manufactured goods are imported into India. As per Section 2(23) of the Customs Act, ‘import’ with its grammatical variations and cognate expressions, means bringing into India from a place outside India. As Section 2(27) of the Customs Act, India is defined as inclusive of its territorial waters. As was held in Kiran Shipping Mills v. CC 1999 (113) ELT 753, ‘import’ is completed only the goods cross the customs barrier. As per the substantive provisions of the Customs law, the rate of duty and tariff valuation as on the date of presentation of the bill of entry or date of entry inward of the vessel, whichever is later, is relevant for determining the customs duty payable. The constitutional validity of these provisions has been upheld by the Constitution Bench in M Jhangir Bhatisha v. Union of India 1989 42 ELT 344.
In terms of import of the software license through downloading from the website, etc., it cannot be said that an ‘import’ within the meaning of the Customs Act happens. Moreover, there are no provisions in the Customs Act or in the Rules, Notifications, etc. to handle issues related to import of software licenses in a medium other than the physical medium, i.e. CDs, etc. In other words, no methodology for arriving at the computation’ in respect of the levy of CVD, if at all, on import of licenses thro’the electronic medium has been prescribed. This would then be a case which would lead us to the discussion involving the charge and its computation. In several cases, the Courts have held that a charge and its method of computation have to be read together and that, if the computation fails, so does the charge. For instance, in CIT v. B.C. Srinivasa Setty, [1981] 128 ITR 294, the Supreme Court reiterated the principle that the charge and its computation were two parts of an integral whole and concluded therefore, that if the computation could not be done, the charge was not intended to apply.
TO CONCLUDE….
IN MY STRONG VIEW, NEITHER CENTRAL EXCISE DUTY NOR SERVICE TAX IS APPLICABLE ON ELECTRONIC TRANSFER OF PACKAGED SOFTWARE / LICENSES, INCLUDING, IN RESPECT OF IMPORT OF LICENSES RELATED TO PACKAGED SOFTWARE.
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