2020 (2) TMI 1207 - AT - Service Tax

Taxability - sale of canned software produced by third parties and their own software deployed in the banking industry - taxable service or not - information technology service or not - HELD THAT - It is an admitted fact that the appellant is in the business of perpetual licensing and software licence, sale of third-party software, customization of software as per requirement of customers and implementation and maintenance of software. The taxability of information technology software service has had its own share of teething problems with various clarifications having been issued pursuant to representation from the trade. The software that is sold on physical media comprises the inherent contents therein along with right to use and the incorporation of the above activity in the enumeration of taxable service appears to have been intended to levy tax on the intellectual property right component as is evident from the two notifications, issued under Central Excise Act, 1944 and Customs Act, 1962, to provide for abatement to the extent of taxability under Finance Act, 1994 on certain portion of the consideration - It is the claim of the appellant that they are not in the business of customizing software and that their developed software is directly utilized by the banking industry which may or may not make adjustments for their own use. There is no doubt that the appellant is in the business of developing software and that such software is used by the banking industry. There are no evidence of such software being designed according to the requirements of, or standards prescribed by, customers. There is no doubt that the licence, provided along with the media containing the software, represents the right to use; however, this is a general industry wide practice that is not alien to canned software . In the absence of facts that establish otherwise or of any evidence that such was the transaction between the appellant and the customers, it was not appropriate for the adjudicating authority to conclude that sale of banking software to a bank is commercial exploitation merely because the bank deploys the software in its normal business activities. The specific connotation of right to use and the intellectual property rights enshrined within it mandates commercial exploitation to be ascertained in an entirely different context, viz., that of reproduction or distribution. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Classification of the appellant's activities under the definition of 'taxable service' in section 65(105)(zzzze) of Finance Act, 1994.
2. Validity of the show cause notices and adherence to principles of natural justice.
3. Applicability of the concept of 'commercial exploitation' in the context of the appellant's software.
4. Determination of whether the appellant's software constitutes 'canned software' or 'customized software'.
5. Taxability of the appellant's activities under the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Classification of the appellant's activities under the definition of 'taxable service' in section 65(105)(zzzze) of Finance Act, 1994:
The appellant, M/s Infrasoft Tech India Ltd, challenged the recovery of ?3,11,95,070/- along with interest and penalty, contending that their activities do not conform to the description of taxable service under section 65(105)(zzzze) of the Finance Act, 1994. The appellant argued that their software, marketed as 'core banking' software, was not liable under the sub-clause (v) of the said section. The Tribunal noted that the appellant's software was used by the banking industry without evidence of customization according to specific customer requirements. The software was deemed 'canned software,' which the Supreme Court in Tata Consultancy Services v. State of Andhra Pradesh held to be goods and precluded from service tax under the Finance Act, 1994.

2. Validity of the show cause notices and adherence to principles of natural justice:
The appellant argued that the show cause notices dated 3rd October 2011 and 6th March 2012 were not in consonance with the principles of natural justice as they failed to invoke the specific sub-clause within the definition of 'taxable service.' The Tribunal observed that the failure to crystallize the sub-clause was not fatal to the proceedings, referencing the Supreme Court decision in Collector of Central Excise, Calcutta v. Pradyumna Steel Ltd.

3. Applicability of the concept of 'commercial exploitation' in the context of the appellant's software:
The appellant contended that there was no commercial exploitation of their software, as it was merely made available to customers for their own use. The Tribunal referred to the decision in Director of Income Tax v. Infrasoft Ltd, which distinguished between a copyrighted article and a copyright right. The Tribunal concluded that the appellant's software did not involve commercial exploitation as defined in the context of the Finance Act, 1994.

4. Determination of whether the appellant's software constitutes 'canned software' or 'customized software':
The Tribunal found no evidence that the appellant's software was designed according to specific customer requirements or standards. The software was provided along with a license to use, which is a common industry practice for 'canned software.' The Tribunal held that the appellant's software was 'canned software,' which is considered goods and not subject to service tax under the Finance Act, 1994.

5. Taxability of the appellant's activities under the Finance Act, 1994:
The Tribunal examined the scope of 'commercial exploitation' as elaborated in the circular dated 4th November 2009 by the Central Board of Excise & Customs. The Tribunal concluded that the commercial exploitation of the competencies of the customers supplemented by the appellant's software did not constitute commercial exploitation of the software itself. The agreement did not provide for the reproduction or distribution of the software, which is essential for the 'right to use' to be taxable under section 65(105)(zzzze) of the Finance Act, 1994.

Conclusion:
The Tribunal found no merit in the impugned order and set it aside, allowing the appeal. The appellant's software was deemed 'canned software,' not subject to service tax under the Finance Act, 1994. The order was pronounced in the open court on 26/02/2020.