6.0 Conclusion :
Considering all the relevant facts, and the law as discussed hereinabove, and relying and based on the same as mentioned above, we reach the conclusion that :
6.01 In case of the manufacturer/developer, he sells the right to use of the software.
However in case of the software dealer the position is slightly different. The software is not developed by him, but he has got the rights to sale/market/deployment of the licence/right to use.
Except this, there is no difference between the two. It is permitted to make only minor modifications to the extent of incorporating the name, etc. as per the specific requirements/parameters of the purchaser, without changing any basic structure of the software.
The vendor is also in some cases, making requirement/GAP analysis study, data migration from all earlier software, and arranging pre- and post-installation system audit, which are either free of cost or included in the software price itself, except in case of system audit. This is normally required to be carried out by an independent third party and is paid separately by the buyer to the third party.
6.02 It is evident that the sale involves both a Sale and a Service.
The grant of licence is a right to use the software, with a legal right of possession and effective control, allowing another person (purchaser) to use the goods (software).
This is done by copying the original software and then given possession and control to the buyer. The moment this is copied for Sale, it becomes goods, as defined by the Supreme Court of India.
Hence, this is a Sale of Goods under Article 366(12) of the Constitution of India, Entry C-39 of Schedules to the MVAT Act, 2002 and consequently MVAT is chargeable on sale price of the same. The position for the developer of the software and the dealer is the same.
This portion being in List-II, i.e., State List of Schedule VII to the Constitution of India, cannot be subjected to Service Tax.
6.03 The items mentioned in Point No. 5.03 may be covered and subjected to Service Tax, if any consideration for the service is received separately in any manner.
Normally the pre-installation, installation, modifications and successful commencement of use of software, etc. are provided free of cost.
As held by the Supreme Court (para 4.06) the dominant intention of parties is to buy and sell. Hence, the sale price cannot be disintegrated for the purpose of Service Tax.
Hence, in my opinion these are not chargeable to Service Tax.
Hence, under the State Vat, the position is now amply clear.
But, there has to be suitable amendment in the Valuation Rules and a basic clarification in the definition and the scope of the service, to tax services part only under the Service Tax and not the goods part, as this is not permitted under the Constitution of India.
Read more: https://www.taxguru.in/service-tax/whether-service-tax-is-applicable-to-the-sale-of-computer-software.html#ixzz0eNefs1BJ
CAclubindia
