Service Tax cannot be levied on antivirus software sold in CD

The Hon'ble Supreme Court of India in the matter ofCommissioner of Service Tax Delhi v Quick Heal Technologies Limited [Civil Appeal No. 5167 of 2022 dated August 5, 2022] has held that Service Tax cannot be levied again on antivirus software sold in Compact Disc ("CD") even if free updates provided later on and also, artificial segregation of the transaction, into two parts is not tenable in law.

Facts:

The Quick Heal Technologies Limited ("the Respondent") has registered with the Service Tax under the category of Information Technology Software Service ("ITSS") and has engaged in the development of Quick Heal brand Antivirus Software which is supplied along with the license code either online or on the replicated CDs to the end customer in India. The Directorate General of Central Excise Intelligence ("the Appellant") found that the Respondent had not been paying Service Tax prior to July 01, 2012 on the services covered under the category of the ITSS falling under Item no (iv) of Clause (zzzze) of Sub- Section (105) of Section 65 of the Finance Act, 1944 ("the Finance Act"), accordingly a Show Cause Notice ("the SCN") was issued proposing a demand of INR 62,73,05,953.36 on the taxable value of INR 5,30,94,66,783. The SCN was adjudicated by the Additional Director General, DGCEI, Delhi, who, in turn, set aside the demand of Service Tax vide its Order-In-Original ("the Impugned Order"). Being aggrieved by the Impugned Order, present appeal has been filed by the Appellant.

Appellant's Contention:

• The test for deciding whether a contract falls into one category or the other is as to what is the substance of the contract. Further, relied on the decision of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. v Union of India [Writ Petition (Civil) No. 183 of 2003, dated March 02, 2006] ("the BSNL Case") wherein, it was held that what amounts to being "goods" in the sale transaction remains primarily a matter of contract and intentions.

Respondent's Contention:

• No error have been committed in passing the Impugned order and it has been rightly held that a programme could be said to be interactive only when it involves the user to have exchange of information or when there is action and communication between the user and the software.

Issues:

• Whether the Antivirus Software Licence key supplied by the Respondent along with the CD replicated with Quick Heal Brand to the end Customer is liable to Service Tax?
• Whether the service provided by the Respondent is classifiable under the ITSS liable to Service Tax under Section 65(015)(zzzze) of the Finance Act prior to July 01, 2012 and under Section 66E(f) of the Finance Act w.e.f July 01,2012?
• Whether any error has been committed in passing the Impugned order?

Held:

The Hon'ble Supreme Court of India in [Civil Appeal No. 5167 of 2022 dated August 5, 2022] has held as under:

• Relied upon the Judgement of Hon'ble Supreme Court in the BSNL Case wherein it was held that that the contract cannot be vivisected or split into two.
• Held that, once a lumpsum has been charged for the sale of CD and Sales Tax has been paid thereon, the Appellant thereafter cannot levy Service Tax on the entire sale consideration once again on the ground that the updates are being provided. The artificial segregation of the transaction, as in the case on hand, into two parts is not tenable in law.
• Further, it is in substance, one transaction of sale of software and once it is accepted that the software put in the CD is "goods", then there cannot be any separate service element in the transaction. It is so because even otherwise the user is put in possession and full control of the software. It amounts to "deemed sale" which would not attract Service Tax.