Software Activation charges are not covered under Business Auxiliary Services

The CESTAT, Ahmedabad in Black Box Limited v. Commissioner of Central Excise & ST, Ahmedabad-iii [Service Tax Appeal No. 572 of 2012-DB dated January 4, 2023] has held that amount collected by the assessee as "activation charges" of equipment/ software features are covered under the activity of sales of goods and not covered under the provisions of "Service" under the Finance Act, 1994 ("the Finance Act").

Facts

Black Box Limited ("the Appellant") was dealing in Electronic and Telecom equipment, and software was embedded in such equipment systems. On scrutiny of the Balance Sheet of the Appellant, it was revealed that the Appellant has shown a certain amount as "Software Activation" income and had collected these charges from their customers in connection with after-sales of goods. The Appellant was issued three Show Cause Notices ("SCNs") as to why the activity of selling software should not be treated as taxable services under the category of "Business Auxiliary Services" under Section 65 of the Finance Act and the Service tax should not be demanded under Section 73(1) of the Finance Act along with interest.

Thereafter, the Commissioner of Central Excise ("the Respondent") passed an Order-in-Original dated March 31, 2008 ("the Order-in-Original") wherein the Service tax demand was confirmed, holding that the Appellant is not only selling the goods of the foreign vendor but are also providing after-sales services. Thus, said activity is covered under Business Auxiliary Service. The Appellant contended that the purchase of goods from the Appellant is not a service and buyer of goods cannot be treated as a recipient of service, and the Appellant is a seller of goods liable to Sales Tax/VAT, which is paid undisputedly. The Appellant further submitted that goods subjected to Sales Tax cannot be treated as service rendered nor can be equated with Service Tax liability.

Therefore, the Appellant filed an appeal before the CESTAT and vide order dated September 29, 2010, the matter was remanded back to the Respondent and vide order dated September 20, 2020 ("the Impugned Order"), the Respondent confirmed the Service tax demands along with interest and penalty.

Being aggrieved, this appeal has been filed.  

Issue

Whether the Appellant is liable to pay Service tax on "Software Activation Charges" under the taxable services of "Business Auxiliary Services"?

Held

The CESTAT, Ahmedabad in Service Tax Appeal No. 572 of 2012-DB, held as under:

• Noted that, a pure and simple sale/purchase transaction has been misconstrued to be a service under Section 65(19) of the Finance Act by the Respondent.
• Noted that, the invoices raised for activation of software indicate that the Appellant has paid Sales tax and as per the provisions of Section 2 (g) (iv) of the Central Sales Tax Act, 1956 ("the Central Sales Tax Act"). 
• Relied on the various judgements of Apex Court wherein it was held that sale of software program, the incorporeal right to the software is not transferred since the copyright of the incorporeal right to software remains with the originator and what is sold is a copy of the software.
• Relied on the definition of goods quoted in the judgement of Apex Court in Bharat Sanchar Nigam Limited and another v. Union of India [2006 (2) S.T.R. 161 (S.C.)], the Tribunal held that for software activation charges, the Appellant is not liable to pay service tax.
• Held that, the amount collected by the Appellant from their customers against as "Activation Charges" of equipment/ software features are covered under the activity of sales of goods and not covered under the provisions of "Service" of the Finance Act.

Relevant Provisions:

Section 65(19) of Finance Act:

"business auxiliary service means any service in relation to, -

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or
(ii) promotion or marketing of service provided by the client; or
(iii) any customer care service provided on behalf of the client; or
(iv) procurement of goods or services, which are inputs for the client; or

Explanation- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, "inputs" means all goods or services intended for use by the client;

(v) production or processing of goods for, or on behalf of, the client;
(vi) provision of service on behalf of the client; or
(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, but does not include any activity that amounts to manufacture of excisable goods.

Explanation. - For the removal of doubts, it is hereby declared that for the purposes of this clause, -

(a) "commission agent" means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person -

(i) deals with goods or services or documents of title to such goods or services; or
(ii) collects payment of sale price of such goods or services; or
(iii) guarantees for collection or payment for such goods or services; or
(iv) undertakes any activities relating to such sale or purchase of such goods or services;

(b) "excisable goods" has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944 (1 of 1944);

(c) "manufacture" has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944);

(19a) "business exhibition" means an exhibition, -
(a) to market; or
(b) to promote; or
(c) to advertise; or
(d) to showcase,

any product or service, intended for the growth in business of the producer or provider of such product or service, as the case may be;

(19b) "business entity" includes an association of persons, body of individuals, company or firm but does not include an individual;"

Section 2 (g) of the Central Sales Tax Act

"sale, with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes,-

(i) a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(iii) a delivery of goods on hire-purchase or any system of payment by installments;
(iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(v) a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(vi) a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods;"