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2023 (9) TMI 763 - AAR - GSTLevy of GST - valuation of supply - sub-licensing of the software by the applicant to end-users in India - Market Support fees received by the applicant from Central Hub - taxable value for the operating fees paid to Central Hub by the applicant pursuant to the said arrangement shall be determined as per Rule 28 of the Tax Valuation Rules prescribed in CGST Rules 2017. Whether GST is applicable on sub-licensing of the software by the applicant to end-users in India? If yes, then what shall be the value of supply? - HELD THAT - In pursuant to the said arrangement, Central Hub has appointed the Applicant as a nonexclusive distributor of software products by granting a non-exclusive right to sublicense the software products. Further, they stated that they provide implementation services relating to sub-licensing of software to the End-users, upon specific request. It also promotes and markets the software products to the End-users; Also they provide all the services in its own name and for its own account within the territory and act as an authorized distributor of Central Hub while sub-licensing the software products. Whether the said activity would be supply of goods or services? - HELD THAT - It can be seen that a software is an intellectual property having value. GST law does not recognize or make distinction between tangible and intangible property. Under GST law, the definition of goods makes it clear that all property whether tangible or intangible capable of being moved would fall within the definition of goods. Goods has following attributes (a) utility (b) capable of being bought and sold (c) capable of being sold, transferred, delivered, stored and possessed. If a software whether customised or non-customised satisfies the attributes mentioned above, the same could be treated as Goods . It is very essential for an article to be termed as Goods , it is its marketability. It is important to note that when a person purchases a software programme especially canned software implanted in some tangible medium, he does not become owner of such software programme, but only a license holder, i.e., he cannot use of its own will. Thus, the software supplied by the Applicant is pre-developed and predesigned software and made available through the use of encryption keys and hence it satisfies all condition of the definition goods . Further, it is observed that goods which are supplied by the applicant cannot be used without the aid of the computer and has to be loaded on a computer and then after activation would become usable and hence the goods supplied qualifies to be Computer Software and more specifically cover under Application Software - Supply of software license qualifies to be Supply of Goods on the grounds that as per the explanatory notes to the scheme of classification of services the SAC 997331 excludes the services of limited end-user licence as part of packaged software. Hence, the supply made by the Applicant is covered under Supply of goods and GST shall be applicable on the same in terms of Section 9 of CGST Act, 2017. In the instant case the applicant and end user are not related persons, since the applicant has not furnished any sample tax invoices for the actual transaction between them and the end user, the taxable value will be the actual transaction value which the applicant has charged the end user for sub-licensing the software. Whether GST is applicable on the Market Support fees received by the applicant from Central Hub? - HELD THAT - It is clear that the Market Support fees is nothing but a compensation provided by the Central Hub to the Local Operating Entity, whenever the guaranteed profit margin is not earned by the Local Operating Entity, and therefore, it is nothing but an additional consideration received by the Applicant from the Central Hub for an agreed obligation as per the Operating Agreement. In this connection, the Applicant has claimed that, compensation received is not liable to GST, as clarified in Circular No. 178/2022-GST dated 03.08.2022 - consideration in relation to supply of goods and services includes payment received from any person other the recipient also for the inducement of, the supply of goods or services or both. Therefore, the amount received from the Central Hub in the form of Market support fees by the Local Operating Entity is an additional consideration charged towards the supply in this case which will form part of the value of supply as per the provisions of section 15 of the GST Act. Whether the taxable value for the operating fees paid to Central Hub by the applicant pursuant to the said arrangement shall be determined as per Rule 28 of the Tax Valuation Rules prescribed in CGST Rules 2017? - HELD THAT - In the instant case the Central Hub being the supplier is located outside India, the recipient being the Applicant is located in India and the key factor to be decided is the place of supply - the conditions as envisaged in Section 2(11) of the IGST Act are satisfied, the distribution rights granted by the Central Hub to the Applicant shall qualify as import of services in the hands of the Applicant. If the supplier of service is located in a non-taxable territory, the recipient of services located in the taxable territory is liable to pay GST under reverse charge as per Notification No. 13/2017-CT(Rate) and 10/2017-CT(Rate) dated 28.06.2017. Coming to the Valuation part, the Applicant and the Central Hub qualifies to be related persons in terms of Explanation to Section 15(5) of CGST Act, 2017. Hence, value cannot be determined as per Section 15(1) of the CGST Act and consequently Section 15(4) of the CGST Act read with Chapter IV of CGST Rules, 2017 i.e. Rule 27 to Rule 35 of the CGST Rules will be applicable. In case where the open market value is available, then valuation of the supply shall not be governed by clause (b) or (c) of Rule 28 of CGST Rules. Further, in case, where the recipient of service is eligible to claim the full ITC, the value shall be determined as per the second proviso to Rule 28 of CGST Rules.
Issues Involved:
1. Applicability of GST on sub-licensing of software to end-users in India. 2. Applicability of GST on 'Market Support fees' received from Central Hub. 3. Determination of taxable value for operating fees paid to Central Hub under Rule 28 of CGST Rules 2017. Summary: Issue 1: Applicability of GST on sub-licensing of software to end-users in India The applicant, a subsidiary of AVEVA Plc, entered into an Operating Agreement with Central Hub, granting them non-exclusive rights to sub-license software products in India and other territories. The sub-licensing activity qualifies as a "Supply of Service" under Section 7 of the CGST Act, as it involves the transfer of the right to use software products. The software, being pre-developed and pre-designed, is treated as "goods" under GST law. Therefore, GST is applicable on the sub-licensing of software, and the taxable value will be the actual transaction value charged to the end-user. Issue 2: Applicability of GST on 'Market Support fees' received from Central Hub The Market Support fees are provided by Central Hub to the applicant to ensure a guaranteed profit margin. This payment is considered an additional consideration for the supply of services and falls under the definition of "consideration" in Section 2(31) of the CGST Act. Despite the applicant's claim that this compensation should not attract GST as per Circular No. 178/2022-GST, the ruling determined that the Market Support fees form part of the value of supply and are subject to GST under Section 15 of the GST Act. Issue 3: Determination of taxable value for operating fees paid to Central Hub under Rule 28 of CGST Rules 2017 The operating fees paid by the applicant to Central Hub for distribution rights qualify as an "import of service" under Section 2(11) of the IGST Act. Since the applicant and Central Hub are related persons, the value of the supply cannot be determined as per Section 15(1) of the CGST Act. Instead, Rule 28 of the CGST Rules applies, which states that if the recipient is eligible for full Input Tax Credit (ITC), the value declared in the invoice shall be deemed the open market value. Therefore, the taxable value for the operating fees will be determined as per Rule 28, and the applicant is eligible for full ITC on the tax discharged under Reverse Charge Mechanism (RCM). Ruling: 1. Sub-licensing of software to end-users in India is a "Supply of goods," and GST is applicable based on the actual transaction value charged. 2. Market Support fees received from Central Hub are additional consideration and form part of the value of supply, subject to GST. 3. Taxable value for operating fees paid to Central Hub will be determined as per Rule 28 of CGST Rules 2017, with the applicant eligible for full ITC.
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