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TMI Blog2023 (1) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The only commercial obligation is sale of goods by appellant to customers as and when required. The appellant did not receive any commission in this matter. The appellant is not a facilitator or a service provider to customers, but is a seller to customers. Hence, a pure and simple sale/purchase transaction has been misconstrued to be a service under Section 65(19) of Finance Act 1994 by the Department in this matter - there is force in the argument of the appellant that when there is sale there will be no service. The invoices raised for activation of software indicate that the Appellant has paid VAT /sales tax and as per the provisions of Section 2 (23)(d) of the Gujarat Value Added Tax Act and Section 2 (g) (iv) of the Central Sales Tax Act 1956, the said transaction of appellant covered in definition of sales of goods for the purpose of payment of VAT/CST. Further, Article 366(12) of the Constitution of India defines the expression goods , which include all materials, commodities and articles. It is an inclusive definition. Article 366(29A)(a) deals with a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In pursuance thereto, the impugned order has been passed. The background of the case is that the appellant was dealing in Electronic and Telecom equipment. Software are embedded in such telecom equipment systems of EPABX. On scrutiny of Balance Sheet of the Appellant it was revealed that Appellant has shown certain amount as Software Activation income in Schedule 14. Appellant had collected these charges from their customers in connection with after sales of goods i.e equipment/ software. Accordingly, Appellant were issued three show cause notices as to why the activity of selling of software should not be treated as taxable services under the category of Business Auxiliary Services under Section 65 of the Finance Act, 1994 and the Service tax should not be demanded under Section 73(1) of the Act along with interest. Since the issue involved in all three show cause notices were common these were decided by the Commissioner, Central Excise, Ahmedabad III vide Order-In-Original dated 31.03.2008, wherein the Service tax demand was confirmed holding that Appellant are not only selling the goods of foreign vendor but are also providing after sales services, such as providing right to u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Appellant for activation charges. Accordingly, Appellant had raised invoices for activation as additional charges for RTU features of software. As per the provision of Section 2(23)(d) of the Gujarat Value Added Tax Act and Section 2(g)(iv) of the Central Sales Tax Act 1956 the right to use (RTU) are covered in definition of sale of goods for the purpose of payment of VAT/CST. Hence, Appellant were paying VAT/CST. 5. He further submits that a transaction of sale of software is clearly a sale of goods within the meaning of the term as defined in the CST Act and Gujarat Value Added Tax Act 2003. The term Goods includes 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, delivered, stored, possessed etc. The software programme have all these attributes. Software may be intellectual property but such intellectual property contained in a medium which is bought and sold. It is an article of value. It is sold on activation in various forms as a marketable commodity. 6. He also submits that Goods subjected to Sales Tax cannot be treated as service rendered n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto consideration entire amount of Activation Charges received by Appellant on which CST/VAT has been paid. Had it been activity of Business Auxiliary Service , demand could have been only on the amount retained by Appellant, which was their margin of profit, out of the amount of software activation charges recovered. Hence the computation of Service Tax demand is also incorrect. 8. He also submits that Order is beyond scope of SCN. Demand of Service Tax confirmed by giving findings which are neither specifically mentioned nor proposed in Show Cause Notice. It was necessary for Department to specify how software activation is covered under the clause of Business Auxiliary Service described in Finance Act 1994. Revenue cannot conclude a case which was not made out in show cause notice and; that Department cannot travel beyond show cause notice and that party to whom Show Cause Notice is issued must be made aware of allegations made against which is a mandatory requirement of natural justice. 9. Without prejudice, he further submits that as per Rule 2A of Service Tax (Determination of value) Rules 2006, before or after 01.07.2012, value of goods was not to be included in value of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d perused the records. We find that the issue to be decided before us is whether the appellant is liable to pay Service tax on Software Activation Charges under the taxable services of Business Auxiliary Services . 14. We find that the whole case has been made by the Department on the basis of balance sheet which shows a separate income under head software activation charges. Appellant purchased EPABX from the foreign based vendor and further sales the same to customers. The said system contains two type of software viz. Basic System Software and feature related software. In case of feature related software, we find that the customers were intimating their needs and specific requirements to Appellant for activation of features, accordingly activation of specific function is allowed by overseas suppliers on payment of charges. Appellant collected the said charges thru their Invoices/ bills and paid the CST/Sales Tax on entire amount. After retaining profit, remaining amount is transferred by appellant to overseas vendors. In the said transaction we observed that, there is no service obligation in whole transaction. The only commercial obligation is sale of goods by appellant to cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank v. Tidwell - 538 S.W.2d 405; State of Alabama v. Central Computer Services, Inc., 349 So. 2d 1156; First National Bank of Fort Worth v. Bob Bullock, 584 S.W. 2d 548; First National Bank of Springfield v. Deptt. of Revenue, 421 NE 2d 175; CompuServe, Inc. v. Lindley, 535 N.E. 2D 360 and Northeast Datacom, Inc. v. City of Wallingford, 563 A2d 688 holding that computer software is intangible personal property. The Apex Court also considered many other judgments of the American Courts in South Central Bell Telephone Co. v. Sidney J. Barthelemy, 643 So. 2d 1240; Comptroller of the Treasury v. Equitable Trust Co., 464 A. 2d 248; Chittenden Trust Co. v. Commr. of Taxes, 465 A.2d 1100; University Computing Co. v. Commissioner of Revenue for the State of Tennessee, 677 S.W.2d 445 and Hasbro Industries, Inc. v. John H. Norberg, Tax Administrator, 487 A. 2d 124 taking a different view. In the above cases, it was held that when stored on magnetic tape, disc or computer chip, the software or set of instructions is physically manifested in machine-readable form by arranging electrons, by use of an electric current, to create either a magnetised or unmagnetised space. It was also held in thos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes, and marketed would become goods. We see no difference between a sale of a software program 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 programs have all these attributes. The law on definition of goods enunciated in Tata Consultancy case was quoted with approval by the Apex Court in the judgment in Bhar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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