Services of limited end-user licence as part of packaged software classifiable as supply of goods

[CA Bimal Jain]

The AAR, Karnataka in the matter of IN RE: M/S. KEYSIGHT TECHNOLOGIES INDIA PVT. LTD [2022 (4) TMI 1290 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA] held that, supply of license of pre-developed or pre-designed software by assessee amounts to supply of goods and said supply is covered under tariff heading 8523 80 20. Further, such supply of computer softwares to a public funded research institution are covered under Serial No. 1 of Notification No.45/ 2017-Central Tax (Rate) dated November 14, 2017 (“NN. 45/2017- CT(R)”).

Facts:

M/s Keysight Technologies India Pvt. Ltd. (“the Applicant”) is a private limited company registered under the Central Goods and Services Act, 2017 (“the CGST Act”) and are engaged in the supply of scientific and technical equipment and time based & perpetual software license(s) to Public Funded Research Institutions registered with Government of India.

The Applicant sources the required products from other Keysight entities outside India and acts as a reseller of Keysight products in India and thus the Applicant does not own the IPRs for the said software supplied.

It was further briefed that in some cases they supply equipment along with software, a single invoice with distinct line items, covering goods and software is raised, meanwhile in some instances they supply standalone software, and a standalone invoice is raised separately.

All the software whether embedded in product or downloaded from website of the Applicant, require a license to be activated through a license key.

The Applicant submitted that they supply software license(s) to their customers for downloading the said software through internet and the usage of the said software is controlled through "encryption keys"; the said software is a packaged software but not tailor made one, to suit individual requirement and these software are "pre-designed" and "pre-developed"; they are charging 18% GST on their supply of software licence to the Public Funded Research Institutions and Institutions registered under Government of India in terms of entry No.17(ii) of Notification 11/2017-Central Tax (Rate) dated June 28, 2017 ("Services Rate Notification”) on treating the said supply as supply of service, classifying the same under SAC 9973, as the supply of software i.e. the right to use a certain intellectual property in the form of software clearly amounts to supply of services in terms of entry 5(c) of Schedule II of the CGST Act.

However, the same was disputed by the customers of the Applicant stating that the supply of software license is covered under 'computer software' as specified in NN. 45/2017- CT(R) and is taxable at the concessional GST rate of 5%, as the said software is purchased and used for research purpose only.

Accordingly, the Applicant contended that their supply of software licence(s) 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.

The Applicant also contends that they are eligible for concessional GST rate of 5% on 'computer software' in terms of NN. 45/2017- CT(R).

Issue:

• Whether software license supplied by the Applicant qualifies to be treated as computer software resulting in supply of goods & therefore to be classified under Chapter Heading 8523 80 20?
• Whether the supply of licenses for internet downloaded software fall under the Serial No. 1 of the NN. 45/2017-CT(R)?

Held:

The AAR, Karnataka in IN RE: M/S. KEYSIGHT TECHNOLOGIES INDIA PVT. LTD [2022 (4) TMI 1290 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA]  held as under:

• Noted that the software supplied by the Applicant is a pre-developed or pre -designed software and made available through the use of encryption keys and hence it satisfies all the conditions that are required to be satisfied to cover them under the definition of ‘goods’.
• Further, the 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 covered under "Application Software".
• Noted that the Explanatory Notes to the Scheme of Classification of Services stipulates that the SAC 997331 covers licensing services for the right to use computer software and databases but excludes the services of limited end-user licence as part of packaged software from the said SAC. Hence, held that the supply made by the Applicant is covered under "Supply of goods" and is covered under tariff heading 8523.
• Observed that NN. 45/2017- CT(R) stipulates the rate of 5%, if the goods of computer software is supplied to public funded research institutions subject to fulfilment of the conditions prescribed under column 4 of the said notification. In the instant case the Applicant is supplying computer software to a public funded research institution, under the administrative control of DRDO, Government of India. Further, the said institute has also furnished a certificate as required to fulfil the required condition.
• Thus, the benefits of the NN. 45/2017- CT(R) are applicable to the Applicant.

Relevant Provision:

Entry 5(c) of Schedule II of the CGST Act:

“5. Supply of services

The following shall be treated as supply of services, namely: -

(c) temporary transfer or permitting the use or enjoyment of any intellectual property right;”

Serial No. 1 of NN. 45/2017-CT(R):

“Concessional GST rate of 2.5% on scientific and technical equipments supplied to public funded research institutions-

S. No.	Name of the Institutions	Description of the goods	Conditions
(1)	(2)	(3)	(4)
1.	Public funded research institution or a university or an Indian Institute of Technology or Indian Institute of Science, Bangalore, or a Regional Engineering College, other than a hospital.	(a) Scientific and technical instruments, apparatus, equipment (Including computers); (b) accessories, parts, consumables and live animals (experimental purpose); (c) computer software, Compact Disc-Read Only Memory (CD-ROM), recorded magnetic tapes, microfilms, microfiches; (d) Prototypes, the aggregate value of prototypes received by an institution does not exceed fifty thousand rupees in financial year.	(i) The goods are supplied to or for – (a) a public funded research institution under the administrative control of the Department of Space or Department of Atomic Energy or the Defence Research Development Organisation of the Government of India and such institution produces a certificate to that effect from an officer not below the rank of the Deputy Secretary to the Government of India or the Deputy Secretary to the State Government or the Deputy Secretary in the Union Territory in the concerned department to the supplier at the time of supply of the specified goods; or (b) an institution registered with the Government of India in the Department of Scientific and Industrial Research and such institution produces a certificate from an officer not below the rank of the Deputy Secretary to the Government of India or the Deputy Secretary to the State Government or the Deputy Secretary in the Union territory in concerned department to the supplier at the time of supply of the specified goods; (ii) The institution produces, at the time of supply, a certificate to the supplier from the Head of the Institution, in each case, certifying that the said goods are required for research purposes only; (iii) In the case of supply of live animals for experimental purposes, the institution produces, at the time of supply, a certificate to the supplier from the Head of the Institution that the live animals are required for research purposes and enclose a no objection certificate issued by the Committee for the Purpose of Control and Supervision of Experiments on Animals.

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