Services related to Information Technology Software - Service Tax Practice Manual / Ready Reckoner - Service Tax

Chapter 4 Services related to Information Technology Software Effective date: 1.7.2012 Scope of Declared Service - Section 66E (d) Development, Design, Programming, Customisation, Adaptation, Upgradation, Enhancement, Implementation of information technology software Meanings and Definitions: Section 65B(28) - information technology software means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment. Analysis: It is important to know here that the same definition of information technology software already exists in Central Excise Tariff Act and excise duty is levied on this item. The intention of the service tax law is not to tax such items which are already liable to tax under excise law. The main distinction is that service tax is applicable on services related to information technology software while excise duty is applicable on sealed packed software which are sold in packed form. Customised software is not liable to excise duty if it is not in a packed or canned form. Same in the case software is developed and it is downloaded through internet on payment of consideration it is held to be taxable under this service. Supply of skilled manpower: Where only skilled personnel including computer engineers were provided to IT companies to work on software projects under their supervision and control a and contracts did not indicate any provision of IT software service, it was held that only supply of skilled manpower was done and it will be taxed under manpower supply. Refer case Future Focus Infotech India P Ltd. [ 2010 (3) TMI 190 - CESTAT, CHENNAI ]. Exemption from duty of Excise and Customs The exemption from Central Excise and Customs is subject to the fulfillment of certain conditions. Thus, the levy of Central Excise duty/CVD and service tax will be mutually exclusive. ( Notification No. 11/2016-CE and 11/2016-Customs, both dated 1st March 2016 refers) Clarification by the Board (Taxation Guide - Guidance Note -6 - Exemptions dated 20.06.2012) 6.4.1 Would sale of pre-packaged or canned software be included in this entry? No. It is a settled position of law that pre-packaged or canned software which is put on a media is in the nature of goods [Supreme Court judgment in case of Tata Consultancy Services vs State of Andhra Pradesh [2004 (11) TMI 11 - Supreme Court refers]. Sale of pre-packaged or canned software is, therefore, in the nature of sale of goods and is not covered in this entry. 6.4.2 Is on site development of software covered under this entry? Yes. On site development of software is covered under the category of development of information technology software. 6.4.3 Would providing advice, consultancy and assistance on matters relating to information technology software be chargeable to service tax? These services may not be covered under the declared list entry relating to information technology software. However, such activities when carried out by a person for another for consideration would fall within the definition of service and hence chargeable to service tax if other requirements of taxability are satisfied. 6.4.4 Would providing a license to use pre-packaged software be a taxable service? The following position of law needs to be appreciated to determine whether a license to use pre-packaged software would be goods- As held by the Hon ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh [2004 (11) TMI 11 - Supreme Court] pre-packaged software or canned software or shrink wrapped software put on a media like is goods. Relevant portion of para 24 of the judgement is reproduced below- A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. 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 booksor 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 programme 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 programmes have all these attributes. Therefore, in case a pre-packaged or canned software or shrink wrapped software is sold then the transaction would be in the nature of sale of goods and no service tax would be leviable. The judgement of the Supreme Court in Tata Consultancy Service case is applicable in case the pre-packaged software is put on a media before sale. In such a case the transaction will go out of the ambit of definition of service as it would be an activity involving only a transfer of title in goods. As per the definition of service as contained in clause (44) of section 65(B) only those transactions are outside the ambit of service which constitute only a transfer of title in goods or such transfers which are deemed to be a sale within the meaning of Clause 29(A) of article 366 of the Constitution . The relevant category of deemed sale is transfer of right to use goods contained in sub-clause (d) of clause (29A) of the Constitution . Transfer of right to use goods is deemed to be a sale under Article 366(29A) of the Constitution of India and transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods is a declared service under clause (f) of section 66E. Transfer of right to use goods is a well-recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. For understanding the concept of transfer of right to use please refer to point no 6.6.1. A license to use software which does not involve the transfer of right to use would neither be a transfer of title in goods nor a deemed sale of goods. Such an activity would fall in the ambit of definition of service and also in the declared service category specified in clause (f) of section 66E. Therefore, if a pre-packaged or canned software is not sold but is transferred under a license to use such software, the terms and conditions of the license to use such software would have to be seen to come to the conclusion as to whether the license to use packaged software involves transfer of right to use such software in the sense the phrase has been used in sub-clause (d) of article 366(29A) of the Constitution. (See point no 5.6.1). In case a license to use pre-packaged software imposes restrictions on the usage of such licenses, which interfere with the free enjoyment of the software, then such license would not result in transfer of right to use the software within the meaning of Clause 29(A) of Article 366 of the Constitution . Every condition imposed in this regard will not make it liable to service tax. The condition should be such as restraints the right to free enjoyment on the same lines as a person who has otherwise purchased goods is able to have. Any restriction of this kind on transfer of software so licensed would tantamount to such a restraint. Whether the license to use software is in the paper form or in electronic form makes no material difference to the transaction. However, the manner in which software is transferred makes material difference to the nature of transaction. If the software is put on the media like computer disks or even embedded on a computer before the sale the same would be treated as goods. If software or any programme contained is delivered online or is down loaded on the internet the same would not be treated as goods as software as the judgement of the Supreme Court in Tata Consultancy Service case is applicable only in case the pre-packaged software is put on a media before sale. Delivery of content online would also not amount to a transaction in goods as the content has not been put on a media before sale. Delivery of content online for consideration would, therefore, amount to provision of service. 6.4.5 In case contract is given for customized development of software and the customized software so developed is delivered to the client on media like a CD then would the transaction fall in this declared entry or would it be covered by the TCS Judgement? In such a case although the software is finally delivered in the form of goods, since the contract is essentially for design and development of software it would fall in the declared list entry. Such a transaction would be in the nature of composite transaction involving an element of provision of service, in as much as the contract is for design and development of software and also an element of transfer of title in goods, in as much as the property in CD containing the developed software is transferred to the client. However, the CD remains only a media to transmit or deliver the outcome of which is essentially and pre-dominantly a contract of service. Therefore, such a transaction would not be excluded from the ambit of the definition of service as the transaction does not involve only transfer of title in goods and dominant nature of the transaction is that of provision of service.