2023 (12) TMI 175 - AT - Service Tax

Nature of transaction - sale of excisable goods or service - imported software, customized and sold/cleared by the Appellant along with DCS - goods classified under Chapter sub-heading 85238090 of CETA, 1985 (by availing exemption under Notification No. 6/2006CE dt.01.3.2006 and No. 12/2012-CE dt. 17/03/2012 as amended, as the case may be) - sale or service under the taxable category of Information Technology Software Services (ITSS)? HELD THAT - There is no dispute on the clearance/sale of customized software under separate excise invoices along with DCS classifying the same under Chapter sub-heading 85238090 of CETA, 1985 and availing benefit of exemption Notification No. 6/2006-CE dt. 01/03/2006 prior to 16/05/2008. It is also not is dispute that Canned software/Customized software as goods being held in a series judgments accepted by both sides. But, the dispute arose only after introduction of the service tax on Information Technology Software Service w.e.f. 16/05/2008. It is to be noted that even after introduction of the service tax on the Information Technology software Service more or less on similar line of definition of Information Technology software already present under supplementary note of Chapter 85 of CETA, 1985 and the classification of the said software under Chapter Heading 8523 of CETA, 1985 continued in the Central Excise Tariff Act without any amendment or alteration to the same. In other words, the intention of the Legislature was continuation of levy of excise duty on the activity of manufacture and sale of Information Technology software and also levy service tax for providing Information Technology Software service. Whether the same activity of supply/sale of customized software by the Appellant could be chargeable to Excise duty and/or also service tax post 16.5.2008 as admittedly there is no change in the facts and circumstances of the case? - HELD THAT - It is found that more or less similar question has come up before the Hon ble Supreme Court in the case of BHARAT SANCHAR NIGAM LTD. (BSNL) VERSUS UNION OF INDIA 2006 (3) TMI 1 - SUPREME COURT . The question raised was whether supply of sim cards in rendition of telephone service by Telegraph authority to a subscriber resulted in sale and leviable to State VAT/Sales tax or a pure service chargeable to service tax under the relevant entry of Finance Act, 1994. Their Lordships analysing the Constitutional provisions of levy of service tax and the scope of deemed sale , observed In the present case, as no goods element are involved, the transaction is purely one of service. There is no transfer of right to use the goods at all. Thus, what is necessary in a given case is to examine the true nature of transaction between the parties to the contract to ascertain whether the transaction is a sale or service. The learned senior counsel for the appellant argued by referring to various Purchase Orders enclosed with the appeal paper book that the intention of the parties to the transaction is that of a sale of the software as goods before and after 16.5.2008. The appellant has not retained any title to the software after it is customized and sold by putting the same in the form of CD along with DCS. The software imported by the appellant was customized according to the need of the individual DCS, supplied the same along with hardware being a condition of the of sale of said DCS. The said software cannot be used by anybody else other than the customer to whom the same are supplied along with the hardware. This clearly indicate that the intention of the appellant in supplying the software to their customers, is for its use along with the hardware; it does not indicate that the ownership of the software is retained by the Appellant. On the contrary, it is transferred to the customers in a media i.e. CD and the price of the said software separately indicated in the Appendix B to the purchase Order. Hence, the presence of an element of pure service as alleged by the Revenue and confirmed by the Commissioner is not the intention of the parties to the transaction. Thus, the sale of customized software by the Appellant is excisable goods and classifiable under Chapter subheading 85238090; hence leviable to excise duty, and subject to the exemption notification No. 6/2006-CE dt. 1.3.2006 and 12/2012-CE dt. 17.03.2012, as the case may be, on fulfilment of laid down conditions as claimed by the appellant. In the present case, the Purchase Orders placed by the customers on the appellant reveal that the transaction between the appellant and their customers are not for supply of software as that of a service , but it is sale of the customized software on a CD as part of the DCS; accordingly, the same should be considered as excisable goods and not as service , precisely, ITSS. The impugned orders are set aside - Appeal allowed.

Summary

Issues Involved:
1. Classification of customized software as 'goods' or 'service'
2. Applicability of excise duty and/or service tax on customized software
3. Interpretation of legislative provisions and relevant case laws

Summary:

Issue 1: Classification of customized software as 'goods' or 'service'
The core issue is whether the customized software sold/cleared by the Appellant along with Distributed Control Systems (DCS) should be classified as 'excisable goods' under Chapter sub-heading 85238090 of CETA, 1985, or as a 'service' leviable to service tax under the category of 'Information Technology Software Services' (ITSS) introduced w.e.f. 16/05/2008. The Tribunal noted that the software was customized and sold in a recorded media (CD) along with DCS, and the intention of the parties was to treat it as 'goods' rather than 'service'. The Tribunal emphasized that the true nature of the transaction, as evidenced by purchase orders and invoices, indicated a sale of goods rather than a provision of service.

Issue 2: Applicability of excise duty and/or service tax on customized software
The Tribunal examined whether the same activity could attract both excise duty and service tax simultaneously. It was found that the customized software, when sold in a recorded media, should be treated as 'excisable goods' and not subject to service tax under ITSS. The Tribunal referred to various case laws, including Bharat Sanchar Nigam Ltd. and Infotech Software Dealers Association, which supported the view that the nature of the transaction should determine the applicable tax. The Tribunal concluded that the sale of customized software in recorded media is subject to excise duty and not service tax, provided the conditions of the relevant exemption notifications are met.

Issue 3: Interpretation of legislative provisions and relevant case laws
The Tribunal analyzed the relevant entries under the Central Excise Tariff Act, 1985, and the Finance Act, 1994, along with various judicial precedents. It was noted that the legislative intent was to continue the levy of excise duty on the manufacture and sale of Information Technology software and to levy service tax on ITSS. The Tribunal distinguished the present case from the Suzlon Energy Ltd. case, emphasizing that the intention of the parties and the nature of the transaction should determine the tax liability. The Tribunal concluded that the customized software sold along with DCS should be classified as 'excisable goods' and not as 'service'.

Conclusion:
The impugned orders were set aside, and the appeals were allowed with consequential relief, if any, as per law. The Tribunal held that the customized software sold in recorded media along with DCS should be treated as 'excisable goods' and not subject to service tax under ITSS.