SERVICE TAX Appeal No. 572 of 2012-DB
[Arising out of Order-in-Original/Appeal No AHM-CEX-003-COM-028-030-12 dated
30.08.2012 passed by Commissioner of Central Excise-AHMEDABAD-III]
Black Box Limited
VERSUS
Commissioner of Central Excise & ST, Ahmedabad-iii
APPEARANCE :
Shri P.P. Jadeja, Consultant for the Appellant
Shri Dinesh M. Prithiani, Assistant Commissioner (AR) for the Revenue.
CORAM: HON’BLE MR. RAMESH NAIR, MEMBER (JUDICIAL)
HON’BLE MR. RAJU, MEMBER (TECHNICAL)
DATE OF HEARING : 04.10.2022
DATE OF DECISION: 04.01.2023
FINAL ORDER NO. A/10004 / 2023
RAMESH NAIR :
The appeal is directed against Order-in-Original No. AHM-CEX-003-
COM-028 to 30-12 dated 30.08.2012 passed by the Commissioner of Central
Excise, Ahmedabad –III
- Vide the impugned order, the learned adjudicating authority has
confirmed a Service Tax demand along with interest thereon and imposed
penalties under the Finance Act 1994. Aggrieved of the same the appellant is
before us.
2.1 This is the second round of litigation and the matter had come up
earlier before this Tribunal. The case was examined and the matter was
remanded to the adjudicating authority for de novo consideration vide Order
No. A/1643/WZB/AHD/2010 dated 20-09-2020.
2.2 In pursuance thereto, the impugned order has been passed. The
background of the case is that the appellant was dealing in Electronic and
Telecom equipment. Software are embedded in such telecom equipment
systems of EPABX. On scrutiny of Balance Sheet of the Appellant it was
revealed that Appellant has shown certain amount as “Software Activation”
income in Schedule 14. Appellant had collected these charges from their
customers in connection with after sales of goods i.e equipment/ software.
Accordingly, Appellant were issued three show cause notices as to why the
activity of selling of software should not be treated as taxable services under
the category of “ Business Auxiliary Services” under Section 65 of the
Finance Act, 1994 and the Service tax should not be demanded under
Section 73(1) of the Act along with interest. Since the issue involved in all
three show cause notices were common these were decided by the
Commissioner, Central Excise, Ahmedabad –III vide Order-In-Original dated
31.03.2008, wherein the Service tax demand was confirmed holding that
Appellant are not only selling the goods of foreign vendor but are also
providing after sales services, such as providing right to use certain software
by activating such software so that their customers who had already
purchased equipments from them could use certain additional features by
getting them activated. Thus said activity is covered under business auxiliary
service. Being aggrieved with Order, Appellant had filed appeal before
CESTAT. Vide order dated 29.09.2010 Tribunal remanded the matter for de
novo. The matter was re-adjudicated vide the impugned order and Service
Tax demands were confirmed along with interest and a penalty. Being
aggrieved, appellant is before us.
- Shri P.P. Jadeja, learned counsel appearing for the appellant submits
that There is no dispute that Appellant was dealing in Electronic and Telecom
equipment of various venders based in foreign countries. Software were
embedded in such telecom equipment system of EPABX, thus, such software
for various functions are built in respect of telecom equipment. When the
purchaser/customers of equipment whishes software of specific functions to
be activated, activation of such specific functions is done by Overseas
suppliers on payment of charges, known as “activation charges” for
“software activation”. Appellant used to collect charges from customers
which are shown under schedule in Appellant‟s Balance-Sheet and such
activation charges are partly retained by Appellant and remaining amount is
transferred to Overseas vendors. The transaction involves sale of goods and
Sales Tax/VAT has been paid thereon.
He argued that service Tax is levied when taxable service is provided
by service provider to his client(s). The purchase of goods from Appellant is
not a service and such customer/ buyer of goods cannot be treated as
recipient of service. Appellant is not provider of service, but, only seller of
goods liable to Sales Tax/VAT which is paid undisputedly. The said system
sold had two types of software viz. Basic System Software & Feature Related
Software. Basic System Software is pre-requisite for basic functioning of the
system. Feature Related Software is additional application loaded. Both
software are loaded on Control Card, but use of Feature Related Software is
additionally allowed on payment of separate charges for activation of
software, on Right to Use (RTU) basis. Right to use is allowed by remote
activation done by the overseas supplier, as per customer‟s choice of
features. Overseas supplier had raised invoices to Appellant for activation
charges. Accordingly, Appellant had raised invoices for activation as
additional charges for RTU features of software. As per the provision of
Section 2(23)(d) of the Gujarat Value Added Tax Act and Section 2(g)(iv) of
the Central Sales Tax Act 1956 the right to use (RTU) are covered in
definition of sale of goods for the purpose of payment of VAT/CST.
Hence, Appellant were paying VAT/CST.
- He further submits that a transaction of sale of software is clearly a sale
of „goods‟ within the meaning of the term as defined in the CST Act and
Gujarat Value Added Tax Act 2003. The term “Goods” includes „all materials,
articles and commodities‟ includes both tangible and intangible/incorporeal
property which is capable of abstraction, consumption and use and which
can be transmitted, delivered, stored, possessed etc. The software
programme have all these attributes. Software may be intellectual property
but such intellectual property contained in a medium which is bought and
sold. It is an article of value. It is sold on activation in various forms as a
marketable commodity.
- He also submits that Goods subjected to Sales Tax cannot be treated as
service rendered nor can be equated with Service Tax liability. The entire
case of Revenue is, thus, clearly erroneous and untenable on merits of the
case. Revenue has demanded Service Tax on the total “Software Activation”
Income shown in the Schedules of their Balance Sheet. All relevant invoices
reflected the sale on payment of Sales Tax/CST. Bifurcation was not shown
in invoices. With such facts, it is crystal clear that Appellant have raised
invoices only for sale of goods on due sales Tax/CST. The appellant have
discharged CST/VAT on total value and not even on composition scheme like
Works Contract Tax (WCT). The appellant have paid VAT to State
Government and CST to Central Government. They have also booked the
transaction in their profit loss account as sale of goods only. Accordingly it is
clear that appellant have sold goods only and no additional consideration
was recovered towards any service. Revenue‟s case is that Appellant has
provided “Business Auxiliary Service” on “Software Activation”, which is not
sustainable in the facts of this case and law applicable in such facts.
Appellant raised invoices for Software Activation and paid VAT on the entire
amount and no extra consideration towards the service was recovered,
entire value recovered by appellant from their client is indeed a sale value.
No amount was recovered towards the service charge. Hence the entire
foundation of the Revenue‟s case is not sustainable in facts and law
applicable in such facts. As per fact and submissions “Software Activation”
on payment of CST/VAT undoubtedly is of sale of goods, which does not
attract Service Tax either before 01.07.2012 and subsequent thereto.
Accordingly, in the present case, activity being of “sale of goods” does not
fall under activity of any “Service”. He placed reliance on the following
decisions
(i)
M/s. Imagic Creative Pvt. Ltd. v. Commissioner of Commercial
Taxes – 2008 (9) S.T.R. 337 (S.C.)
(ii)
Bharat Sanchar Nigam Ltd. v. Union of India – 2006 (2) S.T.R.
161 (S.C.)
(iii) Tribunal‟s Final Order No. A/ 10978-10981 /2022 dt 12-08-2022
(iv) Quick Heal Technologies Ltd vs CST, New Delhi -2020(41) GSTL
467 (Tri-Del). Upheld by Hon‟ble Supreme Court in 2020(41)GSTL
467 (Tri-Del)
(v)
White Cliffs Hair Studio Pvt Ltd. -WP. No. 12198 of 2009 order
dated 08.07.2022.
He, without prejudice, further submits that for calculating alleged
Service Tax demand, Revenue has taken into consideration entire amount of
Activation Charges received by Appellant on which CST/VAT has been paid.
Had it been activity of “Business Auxiliary Service”, demand could have been
only on the amount retained by Appellant, which was their margin of profit,
out of the amount of software activation charges recovered. Hence the
computation of Service Tax demand is also incorrect.
He also submits that Order is beyond scope of SCN. Demand of
Service Tax confirmed by giving findings which are neither specifically
mentioned nor proposed in Show Cause Notice. It was necessary for
Department to specify how software activation is covered under the clause
of Business Auxiliary Service described in Finance Act 1994. Revenue cannot
conclude a case which was not made out in show cause notice and; that
Department cannot travel beyond show cause notice and that party to whom
Show Cause Notice is issued must be made aware of allegations made
against which is a mandatory requirement of natural justice.
Without prejudice, he further submits that as per Rule 2A of Service
Tax (Determination of value) Rules 2006, before or after 01.07.2012, value
of goods was not to be included in value of taxable service. As per Rule 2A of
Rules of 2006, it is clear that in any composite service, value of goods is not
to be included in value of taxable service and in case of appellant, there is
no dispute that entire amount collected by appellant from buyers towards
Software Activation is against sale of goods, which was considered by the
revenue for purpose of demand of Service Tax. Since, entire amount is
towards sale of goods, the same need to be deducted for calculating for
value of Service Tax. Accordingly the receipt of sale proceedings of the
goods from buyer is not taxable. He placed reliance on the decision of
Intercontinental Consultants And Technocrafts Pvt Ltd.- 2018 (10) GSTL 401
(S.C).
- He further submits that the quantum of service tax by not allowing
“Cum-tax-value” is incorrect, even if it is held to be payable under the law.
This will be in consonance of provisions under section 67(2) of Finance Act
1994 and taxable value and service tax thereon requires to be considered
accordingly. Appellant is not likely to receive any other amounts from Buyers
who have made payments long back and Appellant have closed books of
accounts. Therefore “Cum-tax-value”, may be allowed, even if service tax is
held to be payable.
- He also submits that the demand is barred by limitation. Revenue has
to prove that there is a deliberate attempt on the part of the assessee to
suppress the facts from department with an intention to evade payment of
service tax which is absent in present case. In the present case appellant
was of bonafide belief that activity “Software Activation” is of sale on
payment of CST/VAT and hence it was not liable for any service tax. Thus,
this case is only of interpretation and in such case of interpretational issue,
extended period can not be applied for demand of duty /tax. He placed
reliance on the following Judgments:
(i) Cosmic Dye Chemical Vs. CCE, Mumbai – 1995(75)ELT -721(SC)
(ii) Tamil Nadu Housing Board – 1994(74)ELT 9(SC)
(iii) Nizam Sugar Factory – 2006(197) ELT 465(SC)
- Shri Dinesh M. Prithiani, learned Assistant Commissioner (AR)
appearing for the revenue while reiterating the findings of the adjudicating
authority submits that the activity of Appellant would amount to service and
liable to Service Tax and, therefore, the impugned order is sustainable in
law.
- We have carefully considered the submissions of both sides and
perused the records. We find that the issue to be decided before us is
whether the appellant is liable to pay Service tax on “Software Activation
Charges” under the taxable services of “Business Auxiliary Services”.
- We find that the whole case has been made by the Department on the
basis of balance sheet which shows a separate income under head software
activation charges. Appellant purchased EPABX from the foreign based
vendor and further sales the same to customers. The said system contains
two type of software viz. Basic System Software and feature related
software. In case of feature related software, we find that the customers
were intimating their needs and specific requirements to Appellant for
activation of features, accordingly activation of specific function is allowed by
overseas suppliers on payment of charges. Appellant collected the said
charges thru their Invoices/ bills and paid the CST/Sales Tax on entire
amount. After retaining profit, remaining amount is transferred by appellant
to overseas vendors. In the said transaction we observed that, there is no
service obligation in whole transaction. The only commercial obligation is
sale of goods by appellant to customers as and when required. The appellant
did not receive any commission in this matter. The appellant is not a
facilitator or a service provider to customers, but is a seller to customers.
Hence, a pure and simple sale/purchase transaction has been misconstrued
to be a service under Section 65(19) of Finance Act 1994 by the Department
in this matter. We find force in the argument of the appellant that when
there is sale there will be no service.
- We also note that the invoices raised for activation of software indicate
that the Appellant has paid VAT /sales tax and as per the provisions of
Section 2 (23)(d) of the Gujarat Value Added Tax Act and Section 2 (g) (iv)
of the Central Sales Tax Act 1956, the said transaction of appellant covered
in definition of sales of goods for the purpose of payment of VAT/CST.
Further, Article 366(12) of the Constitution of India defines the expression
“goods”, which include all materials, commodities and articles. It is an
inclusive definition. Article 366(29A)(a) deals with a tax on the transfer,
otherwise than in pursuance of a contract, of property in any goods for cash,
deferred payment or other valuable consideration. On the other hand, Article
366(29A)(d) deals with a tax on the 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. The question as to whether the
software is goods or not came up for consideration before the Apex Court in
the decision in Tata Consultancy Services case (supra). In that case, the
Apex Court was considering the provisions of the Andhra Pradesh General
Sales Tax Act, 1957. Section 2(h) of the said Act which defines “goods” as
meaning, all kinds of movable property other than actionable claims, stocks,
shares and securities and including all materials, articles and commodities
including the goods involved in works contract etc. Section 2(n) of that Act
defines a sale with all its grammatical variations and cognate expressions as
meaning, every transfer of the property in goods, whether as such goods or
in any other form in pursuance of a contract or otherwise by one person to
another in the course of trade or business, for cash, or for deferred
payment, or for any other valuable consideration etc. The Apex Court
referred to the judgments of the American Courts in the cases of Commerce
Union Bank v. Tidwell – 538 S.W.2d 405; State of Alabama v. Central
Computer Services, Inc., 349 So. 2d 1156; First National Bank of Fort Worth
- Bob Bullock, 584 S.W. 2d 548; First National Bank of Springfield v. Deptt.
of Revenue, 421 NE 2d 175; CompuServe, Inc. v. Lindley, 535 N.E. 2D 360
and Northeast Datacom, Inc. v. City of Wallingford, 563 A2d 688 holding
that computer software is intangible personal property. The Apex Court also
considered many other judgments of the American Courts in South Central
Bell Telephone Co. v. Sidney J. Barthelemy, 643 So. 2d 1240; Comptroller of
the Treasury v. Equitable Trust Co., 464 A. 2d 248; Chittenden Trust Co. v.
Commr. of Taxes, 465 A.2d 1100; University Computing Co. v.
Commissioner of Revenue for the State of Tennessee, 677 S.W.2d 445 and
Hasbro Industries, Inc. v. John H. Norberg, Tax Administrator, 487 A. 2d
124 taking a different view. In the above cases, it was held that when stored
on magnetic tape, disc or computer chip, the software or set of instructions
is physically manifested in machine-readable form by arranging electrons, by
use of an electric current, to create either a magnetised or unmagnetised
space. It was also held in those cases that by sale of the 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. It was further held that the original copyright
version is not the one which operates the computer of the customer but the
physical copy of that software which has been transferred to the buyer.
Having referred to the above judgments, the Apex Court in paragraph-19
held as follows :-
“19. Thus this Court has held that the term ‘goods’, for the purposes of sales tax,
cannot be given a narrow meaning. It has been held that properties which are capable of
being abstracted, consumed and used and/or transmitted, transferred, delivered, stored
or possessed, etc. are ‘goods’ for the purposes of sales tax. The submission of Mr.
Sorabjee that this authority is not of any assistance as a software is different from
electricity and that software is intellectual incorporeal property whereas electricity is
not, cannot be accepted. In India the test to determine whether a property is □ goods,
for purposes of sales tax, is not whether the property is tangible or intangible or
incorporeal. The test is whether the item concerned is capable of abstraction,
consumption and use and whether it can be transmitted, transferred, delivered, stored,
possessed, etc. Admittedly in the case of software, both canned and uncanned, all of
these are possible.”
While considering the expression “goods” as used in Article 366(12) of the
Constitution of India, the Apex Court has further observed as follows :
“27. In our view, the term goods as used in Article 366(12) of the Constitution and as
defined under the said Act is very wide and includes all types of movable properties,
whether those properties be tangible or intangible. We are in complete agreement with
the observations made by this Court in Associated Cement Companies Ltd. (supra). A
software program may consist of various commands which enable the computer to
perform a designated task. The copyright in that program may remain with the
originator of the program. But the moment copies are made and marketed, it becomes
goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a
media, whether it be in the form of books or canvas (in case of painting) or computer
discs or cassettes, and marketed would become goods. We see no difference between a
sale of a software program on a CD/floppy disc from a sale of music on a cassette/CD or
a sale of a film on a video cassette/CD. In all such cases, the intellectual property has
been incorporated on a media for purposes of transfer. Sale is not just of the media
which by itself has very little value. The software and the media cannot be split up. What
the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or
books or music or films the buyer is purchasing the intellectual property and not the
media i.e. the paper or cassette or disc or CD. Thus a transaction/sale of computer
software is clearly a sale of goods within the meaning of the term as defined in the said
Act. The term all materials, articles and commodities includes both tangible and
intangible/incorporeal property which is capable of abstraction, consumption and use
and which can be transmitted, transferred, delivered, stored, possessed, etc. The
software programs have all these attributes.”
The law on definition of goods enunciated in Tata Consultancy case was
quoted with approval by the Apex Court in the judgment in Bharat Sanchar
Nigam Limited and another v. Union of India and others, 2006 (2) S.T.R.
161 (S.C.). The law as to whether the software is goods or not is no longer
res integra in view of the above dictum of the Apex Court. Hence, in the
impugned matter on software activation charges Appellant is not liable to
pay service tax.
- The word “software” used in the said Apex court judgment is
important; software can have many forms and can be sold by way of many
modes. Further, the contention of department is also not acceptable in view
of the Judgment of Infosys Technologies v. C.T.O. – 2009 (233) E.L.T. 56
(Mad.) in the said matter the Hon‟ble High Court has held that “if the
software whether customised or non-customised satisfies the Rules as a
„goods‟, it will also be „goods‟ for the purpose of Sales tax. Goods may be a
tangible property or an intangible one. It would become goods provided it
has the attributes thereof having regard to (a) its utility; (b) capable of
being bought and sold; and (c) capable of being transmitted, transferred,
delivered, stored and possessed.
From the above it is clear 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” as defined in the Act. Therefore, we don‟t
find any merits in impugned order.
- The appellant also made submissions on time-bar. We find that the
appellant admittedly paid the Sales Tax/ VAT duty on the entire transaction
and also issued invoice/bills to customer for the above disputed transactions.
Therefore, the entire activity of appellant is very much on record. Appellant
also disclosed the said transaction in their Balance Sheet. Accordingly, no
suppression or mis-declaration can be attributed to the appellant for
invoking extended period of demand. Accordingly, the demand for longer
period is not sustainable on the ground of limitation also.
- As per our above discussion and findings, the impugned order is set
aside, appeal is allowed with consequential relief, if any, in accordance with
law.
(Pronounced in the open court on 04.01.2023)
(Ramesh Nair)
Member (Judicial)
(Ramesh Nair)
Member (Judicial)
(Raju)
Member (Technical)
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