Software: Taxable as Service or Goods or Both?

“Software—Computer programs; instructions that make hardware work. Two main types of software are system software (operating systems), which controls the workings of the computer, and applications, such as word processing programs, spreadsheets, and databases, which perform the tasks for which people use computers. Two additional categories, which are neither system nor application software but contain elements of both, are network software, which enables groups of computers to communicate, and language software, which provides programmers with the tools they need to write programs. In addition to these task-based categories, several types of software are described based on their method of distribution. These include packaged software (canned programs), sold primarily through retail outlets; freeware and public domain software, which are distributed free of charge; shareware, which is also distributed free of charge; although users are requested to pay a small registration fee for continued use of the program; and vaporware, software that is announced by a company or individuals but either never makes it to market or is very late. See also application, canned software, freeware, network software, operating system, shareware, system software, vaporware, Compare firmware, hardware, liveware.”

Software under the description Information Technology Software (IT Software) was brought into the net of service tax with effect from 16th May, 2008 by defining the term “Information Technology Software” and introducing clause (zzzze) in section 65(105) of the Finance Act, 1994 (the Act) wherein various items were listed as taxable services in relation to IT software. From 1st July, 2012, under the new regime of negative list based taxation of services, “Development, design programming, customization, adaptation, upgradation, enhancement, implementation of information technology software” is specified in section 66E of the Act as one of the 9 declared services. In turn, the definition of ‘service’ includes a declared service in its purview. Service tax levied on IT software has been a matter of debate as it has been subject to multiple taxes. Under the VAT laws of the States, all types of software are treated as goods. This is because in a landmark ruling of the Supreme Court in Tata Consultancy Services vs. State of Andhra Pradesh’ (2004) 178 ELT 22 (SC) [TCS] where the question before the Court was whether Packaged Software was goods, the proposition argued before the Court was that software was intangible, and therefore not goods. The Court held as under :

“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. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. Thus, a transaction of 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.”

The Central Government under the service tax law treats software as service except packaged or canned software. Section 65B(28) of the Act defines IT software as under:

“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”.

Chargeability to Central Excise Duty
Introduction of levy on Packaged Software

• Extracts from Finance Minister’s Budget Speech on 28.2.2006 :

Para 138 “I propose to impose an 8 per cent excise duty on packaged software sold over the counter. Customized software and software packages downloaded from the internet will be exempt from this levy”.

• Entry 27 – General Exemption Notification 6/06 – CE

“Any customised software (that is to say any custom designed software developed for a specific user or client) other than packaged software or canned software.”

Explanation: For the purpose of this entry packaged software or canned software means software developed to meet the needs of variety of users and it is intended for sale or capable of being sold off the shelf.”

In the TCS case, the Supreme Court has observed as under:

Para 26

“…….. We are in agreement with Mr. Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed etc. Thus even unbranded software, when it is marketed/sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise”

For the purpose of Central excise, so long as software does not fit within the ambit of Packaged Software, which is capable of being sold off the shelf, there would be no question of excise duty.

Can the Concept of “manufacture” apply to Software at all?

Interestingly, even assuming software is considered as goods and packaged software is considered as excisable goods, excise duty can be imposed only if there is an “activity of manufacture” in terms of Section 2(f) of CEA.

The Supreme Court in the case of Seelan Raj and Other vs. Presiding Officer, First Additional Labour Court, Chennai – 2001 AIR SC 1127 was considering the issue under the Industrial Disputes Act. It was the contention of company that it was rendering computer services and developing customised soft-ware application. Dispute arose which was referred to the Labour Court and it was contended by the Company that it was a manufacturer of software and therefore it is not an establishment under the Industrial Disputes Act and much less a factory under the Factories Act and therefore the dispute should not be referred to Labour Court as it is not an industrial dispute under the Industrial Disputes Act. The Labour Court overruled the objection and held that legislation covers the establishment of the company and directed the reinstatement of the workmen back with wages. It was also held that the company was factory and had to comply with the Industrial Disputes Act. After various rounds of litigation, the matter landed before the Supreme Court. The Supreme Court observed that there is a distinction between packaged software and custom-built software. Standard Packaged Software is marketed as a standard product, to meet the requirements of a large number of users whereas customised software is meant to meet the particular requirement of the user. The hybrid form of software also exists whereby the standard package is altered so that it fits the customised needs more clearly adopting a basis of customisation. The Supreme Court, taking into account the debate on various aspects and the questions with reference to software, referred the dispute to the Larger Bench of the Supreme Court.

In the case of CCE vs. Acer India Ltd. (2004) 172 ELT 289 (SC) the following was observed by the Supreme Court:

We, however, place on record that we have not applied our mind as regards the larger question as to whether the information contained in a software would be a tangible personal property or whether preparation of such software would amount to manufacture under different statutes.”

CETA is aligned to the Customs Tariff and software is identically classified under entry 8523 80 20 as (Information Technology Software) under Chapter Heading 8523. Again, the CETA is only set out for tangible goods, and the software and the media cannot be split. Attention is drawn to Chapter Note 10 to Chapter 85 of CETA which states as under:

“For the purposes of heading 8523 ‘recording’ of sound or other phenomena shall amount to manufacture”.

In other words, the recording of software on a medium could be an activity of manufacture which would attract a charge of Central Excise duty.

CETA Classification for “Software” is entry 8523 80 20 (Information Technology Software). Information Technology software is then carved up into customised software (defined as custom designed software developed for a specific user or client) and packaged or canned software (defined as software designed to meet the need of variety of users and is intended for sale or capable of being sold off the shelf), and separate notifications set out the effec-tive rates of duty in respect of these two.

By Notification No. 6/2006-CE dated 1.3.2006, the effective rate for Customised Software is nil. Ac-cordingly, CVD on imports of Customised Software is also nil.

In this regard, attention is invited to the decision in Steag Encotec India Pvt. Ltd. vs. Commissioner of Customs (2010) 250 ELT 287 (Tri – Mumbai). In the facts of the case, the software, which was imported for use in coal based plants, required to be modified according to the needs to each of the plants on the basis of design and operating conditions which varied from one plant to another. The question before the CESTAT was whether such modification of the software would suffice to give it the character of customised software so as to qualify it for the aforesaid exemption. The CESTAT held that the exemption notification would not apply, as only software which “has to be developed from the basic building blocks, whereby a new software product should emerge as per the specific requirement of the client” would qualify as CS, and that software which has just been modified from PS would not.

Chargeability to Customs Duties

Section 12 of the Customs Act, 1962 [‘CA ’62] provides that customs duty shall be levied on goods imported into India. Section 2(22) of ‘CA ’62 defines goods to include “(a) vessels, aircrafts and vehicles; (b) stores, (c) baggage; (d) currency and negotiable instruments; (e) any other kind of movable property”. Therefore, for customs duties to apply on an import of software, it must answer to this definition of goods.

In Associated Cement Companies Ltd. vs. Commissioner of Customs (2001) 128 ELT 21 (SC), the Supreme Court had occasion to examine the scope of this definition. In the context of import of designs and drawings on paper, it was contended before the Court that the transactions were for a transfer of technology which was intangible, and that the medium was only a vehicle of transmission and incidental to the main transaction. It was accordingly contended that even though the technology was put onto a medium, it would not get converted from an intangible to a tangible thing which could be subject to customs duties. The Court did not accept these contentions, and held that all tangible movable articles would fall within the ambit of the definition of goods u/s. 2(22) (e) of CA ‘62, and that it was immaterial as to what types of goods were imported or what is contained in them or recorded thereon. In other words, if there was an import of tangible movable articles, there would be a levy of customs duty on these articles without any exclusion for an intangible contained in the articles. The Court went on to say, on the related subject of valuation of the imported goods, that once the intellectual property had been incorporated on the medium, the value of the medium would get enhanced, and customs duties would apply on this enhanced value. In the words of the Court:

“It is misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act read with Customs Tariff Act and the Customs Valuation Rules is not the input alone but goods whose value has been enhanced by the said inputs. There is no scope for splitting the engineering drawing or the encyclopedia into intellectual input on the one hand and the paper on which it is scribed on the other.”

The Supreme Court ruling in ACC’s Case seem to imply that, though the definition of “goods” in CA ‘62 is set out in the same terms as the Constitution and various Sales tax/VAT provisions, the goods must be tangible for a levy of customs duty to apply. Such a position appears to be inconsistent with the view taken in TCS and BSNL that the ambit of the term “goods” extends to intangibles. Then, a question arises as to why, the import of intangibles does not attract a levy of customs duty.

A possible answer could be that though intangibles are goods, as the taxable event of import, i.e. crossing the customs barrier, cannot arise (given the intangible nature of the goods), there cannot be a charge to customs duty. This would be in line with the Geneva Ministerial Declaration on Global Electronic Commerce, 1998 WT/MIN (98)/ DEC/2, according to which member countries are to “continue their current practice of not imposing customs duties on electronic transmission”.

What follows from above is that only software recorded on a tangible medium is liable to customs duty. In this connection, it is relevant to note that software is classified under Tariff Entry 8523 80 20 (Information Technology software) under chapter heading 8523 (Discs, tapes, solid-state non–volatile storage devices, “smart cards” and other media for the recording of sound or of other phenomena, whether or not recorded, including matrices and masters for the production of discs, but excluding products of Chapter 37) of the Customs Tariff. This classification accords with the position set out in TCS that the software and medium cannot be split up, and the implication that follows in respect of valuation of the medium. The classification also provides yet another answer as to why intangibles (like software), though constituting goods, are not liable to customs duty, i.e. the fact that the Customs Tariff Act, 1975 (“CTA”) is only set out for tangible goods. The Customs Tariff rate for entry 8523 80 20 (IT Software) is “Free”

This means that a packaged or a canned software is goods and when it is capable of being used by a large number of users, it also amounts to manufacturing of goods whereas customised software is fully exempt goods. Board’s Instruction F, no.354/189/2009-TRU dated 04-11-2009 also clarified in this regard that so far as excise duty/CVD is concerned, packaged software attracts duty @ 8% while customised software is fully exempted.

The question therefore arises is that if both packaged or canned software and customised software are ‘goods’ for the purpose of CEA, CA, 62, one dutiable and the other ‘exempt’, whether customised software can simultaneously be considered service for the purpose of service tax law?

Packaged/canned software vs. customised software:

So far as packaged or canned software is concerned, time and again, CBEC provided indication that it is considered goods and not exigible to service tax. Education Guide dated 20-06-2012 released along with the introduction of negative list based tax on services at Guidance Note No.6.4.1 & 6.4.4 has referred to the judgment of the Supreme Court in Tata Consultancy Services vs. State of Andhra Pradesh 2004 (178) ELT 22 (SC) and stated that sale of pre-packaged or canned software is in the nature of sale of goods and is not covered by the entry for declared service of development, design etc. of IT software. The Education Guide also states that the judgment of Tata Consultancy Services (supra) 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 the definition of service as it would be an activity involving only a transfer of title in goods.” It is thus not a matter of doubt or debate that packaged or canned software is ‘goods’ both for the purpose of VAT laws of the States and the Central Excise law at least when canned/packaged software is made available on any tangible medium. The question however remains open in regard to customised software. In the Tata Consultancy’s case (supra) the Honourable Supreme Court did not decide as to whether unbranded software is considered ‘goods’ or not. This is mainly because whether uncanned software (unbranded software) were goods or not was not at all an issue before the Supreme Court in that case. However, the Court was in agreement with the submission made by the petitioner in the case that there was no distinction between branded and unbranded software. The majority opinion in the said judgment held that as they did not deal with the unbranded software when it is marketed or sold as goods and therefore did not express opinion on the same. In this regard however, the Supreme Court in Bharat Sanchar Nigam Ltd. & Another vs. UOI 2006 (2) STR 161 (SC) at Para 56 and 57 upheld that software whether customised or non-customised would become goods provided it satisfies the attributes of goods, namely (a) its utility (b) its capability of being bought and sold and (c) capability of being transmitted, transferred, delivered, stored or possessed.

Considering all the above, the issue that arises is:

When an item is specifically exempted under an exemption notification of the Central Excise Tariff Act, could it not mean that it is primarily ‘goods’ though exempted. Without having characteristic of goods, why would it find place as exempted item under the Central Excise law? Viewing this from another angle, we find similar inconsistencies in the service tax law also. For instance, process amounting to manufacture and trading in goods are listed along with other non-taxable services in section 66D when the activities per se do not have characteristic of a ‘service’, whether they can find place in the “negative list” of services. Under the earlier dispensation of law, notifying the value of goods and material sold by the service provider to the recipient of service as exempt under Notifica-tion No.12/2003-ST dated 20-06-2003 was also along the same lines. Nevertheless, this does not whittle down the fact that even customised software is more akin to being goods than a service as it can be utilised, transmitted, transferred, delivered and stored and possessed. As a matter of fact, it can be used only when it is stored on a tangible medium of the hardware. The Madras High Court in the case of Infosys Technologies Ltd. vs. Commissioner of Commercial Taxes 2009 (233) ELT 56 (Mad) relying on the decision in the case of TCS (supra) held that unbranded/customised software developed and sold by the petitioner, with or without obligation for system upgradation, repairs and maintenance or employee training, satisfies the Rules as ‘goods’, it will also be ‘goods’ for the purpose of sales tax. However amidst controversy, service tax is levied on customised software considering it as ‘service’.

Software: Can it be goods as well as service at the same time?

The question therefore arises is whether an activity or a transaction can be considered ‘goods’ as well as ‘service’ under different statutes and therefore exigible to tax more than once. Since the Central Excise law and Service Tax law are under a com-mon administration, dual levy generally here would not be attracted, yet by interpreting a transaction to be either ‘service’ or ‘goods’ and offering tax accordingly, one may have to face litigation from the administration of the other levy. In Yokogowa India Ltd. vs. Commissioner of Customs, Bangalore 2008 (226) ELT 474 (Tri.-Bang), the Indian company imported a software and claimed that it was a customised software, unique to only their usage and claimed exemption under Notification No. 6/2006-CE (referred above) for countervailing duty. The appellant in this case made a number of submissions in support of its claims that the software that it imported was not capable of being bought off the shelf and that this software was designed on the basis of their unique requirement. However, it was held that the software imported by the as-sessee consisted of several standard packages and only after further modification, it would acquire characteristic of custom designed software. What was imported was packaged software and therefore benefit of Notification No. 6/2006-CE was not available.

Later, however the Government issued Notification No. 53/2010-ST dated 21/12/2010 whereby packaged/ canned software was exempted subject to the condition that the value of such packaged/canned software had suffered excise duty when domestically produced or additional customs duty along with appropriate customs duty in case of imported packaged/canned and that the service provider made a declaration on the invoice that no amount in ex-cess of retail sale price declared on the said goods (packaged/canned software) is recovered from the customer. Similarly, the tug of war between the State law relating to VAT and service tax law of the Central Government being more intense, it makes tax compliant software businesses go through a rough bet of interpretation as to whether the transaction is of sale or of a service and have to bear consequent litigation cost for no fault of theirs. In the case of Sasken Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes (Appeals), Bangalore (2011) 16 taxmann.com 7 (Kar.), VAT was demanded from the assessee who entered into an agreement for development of software for a client as per client’s specification & expressly agreed that software when brought into existence would be absolute property of the client. The Court observed that the assessee gave up their rights before software was developed. The agreement did not have any indication for purchase of software. It was provided in the agreement that all ideas, inventions, patentable or otherwise, as a result of programming or other services would be exclusive property of the client as it would be considered as work made on hire. The deliverable was entirely related to development. In short, software prior to being embedded on a material object, belonged to the client and the entire work was done through capable employees of the assessee & no indication existed in the agreement as to purchase of software even from the market and improvement thereon by the assessee. The court, therefore, held that the contract was for a service simplicitor.

The principle that a transaction cannot simultaneously be both for goods and services is recognised at various levels. The Supreme Court in All India Federation of Tax Practitioners 2007 (7) STR 625 (SC) observed that the word ‘goods’ has to be understood in contradistinction to the word ‘services’. In BSNL’s case (supra) it was categorically held that a transaction cannot be both for goods and services. Nevertheless, there being a thin line of divide between the two or both intertwined in many situations, there lacks clarity on the subject until a common code by way of Goods and Services Tax (GST) is implemented.

Software downloaded electronically:

The following is extracted from the Finance Minister’s Budget Speech on 28-02-06:

“Para 138

I propose to impose an 8% excise duty on packaged software sold over the counter. Customised Software and Software Packages downloaded from the internet will be exempt from this levy.”

In cases where the software is made available only through the medium of internet there is no express exclusion in Entry 27 stated above. However, the Explanatory Notes, which forms part of the Budget Papers read as under:

“Excise duty of 8% is being imposed on packaged software, is also known canned software on electronic media (software downloaded from the internet and customised software will not attract duty). [Serial 27 of Notification No. 6/2006)”]

The Central Excise Rules, 2002 contemplate payment of excise duty at the time of removal of excisable goods from the factory and at the rates prevalent on the date of removal from the factory. Where a customised software solution is sold to the customer through the medium of internet, the transaction can be considered as an e-commerce transaction and there is no physical removal of goods in a tangible form from the factory gate which is the requirement of levy of excise duty. Further, the software is not available in any medium for it to be considered as goods as per the rationale of the Supreme Court in TCS case.

The following judicial considerations need to be noted:

The Supreme Court in the case of Associated Cement Company vs. CC (2001) 128 ELT 21 held that where any drawings or designs or technical materials are put in any media or paper, it becomes goods. Hence, only if an intellectual property is put in a media, it is to be regarded as an article or goods.

In Digital Equipment (India) Ltd. vs. CC (2001) 135 ELT 962 Tribunal held that information transmitted via e-mail cannot be akin to import of record media in 85.23. In an e-mail transfer, no media as a movable article is crossing the international boundaries and there is no movable property movement involved. Therefore, transfer of information or idea or knowledge on e-mail transfer would not be covered within the ambit of goods under the Customs Act. If they are not goods, then they cannot be subject to any duty.

In Multi Media Frontiers vs. CCE (2003) 156 ELT 272 the Tribunal has observed that a software cannot exist by itself and for it to be put to use it has to necessarily exist on some suitable media such has floppy disc, tape or CD.

In Pantex Geebee Fluid Power Ltd vs. CC (2003) 160 ELT 514 (Tri), it was held that, a transfer of intellectual property by intangible means like email would not be liable to customs duty.

The Geneva Ministerial Declaration on Global Electronic Commerce Document WT/MIN (98) DEC/2 dated 25-05-1998 which is a declaration of an intent by members of WTO that they would continue their current practice of not imposing customs duty on electronic declaration.

Annual maintenance contract for electronically downloaded software:

When a software is bought and sold, annual or ongoing maintenance service is important for the user. Generally, under an Annual Maintenance Contract (AMC), upgradation or updation is done by way of installation of upgraded version of the software already sold or available with the user. It is common to provide license to such versions electronically vide internet or through paper licenses. Since this is part of the obligation of the AMC along with other maintenance services like debugging, troubleshooting etc. agreed to be provided during the currency of the AMC, the value of the licensed updation is also contained in the AMC and because it is difficult to determine the said value at the time of signing of AMC, it remains inseparable. Therefore, liability under both the laws is attracted, viz., VAT law of the State and the Service Tax law’], as the sale of license to use software is goods under deemed sale concept and providing upgradation, enhancement etc. is a ‘service’ with effect from 16-05-2008 as well as “declared service” with effect from 01-07-2012. In this context, Education Guide comments at para 6.4.4 are extracted for easy reference:

“6.4.4 Would providing a license to use pre-packaged software be a taxable service?

•    ‘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.

•    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.” [emphasis supplied].

It is noted here that although in the Education Guide the Ministry of Finance has placed reliance on the TCS decision (supra), it has made it applicable in the manner it suits its own interpretation that mode of delivery of the software would determine whether it is ‘goods’ or the ‘service’. Thus, service tax is certainly made applicable as the license to use software is considered service. The ‘rationale’ as explained by the Education Guide that the manner of delivery of a software or a programme determines the character of the transaction is hard to digest.

Whether intangible nature of the ‘goods’ capable of being bought and sold, utilised, transmitted & transferred (electronically) and stored and possessed by the user ultimately loses its characteristic of being ‘goods’ and becomes ‘services’? The issue is certainly disputable. In practice, it can be observed that most of the AMCs entered into by IT sector carry both VAT and service tax at applicable rates.

Further, introduction of repairs and maintenance contracts in the execution of works contract vide Notification No. 24/2012-ST has added further confusion. Most contractors of AMCs treat AMCs as works contracts, given the fact that value of license or goods which is deemed sale as per VAT laws is inseparable. Accordingly, in many cases it is observed that persons entering into AMC charge and recover VAT at applicable rate (depending on whichever option under the VAT law is exercised) and service tax of 12.36% is charged and recovered on 70% value (effective rate of 8.652%) in terms of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 introduced with effect from 1st July, 2012. Whether this practice is correct in terms of discussion here is an issue by itself as the service tax administration considers license to use software acquired electronically as pure service. In this sce-nario, would service tax be not demanded on full value of AMC considering it a service contract?

Applicability of VAT indeed would not be influenced by this interpretation as it independently treats the subject matter as sale of goods and therefore VAT is attracted at applicable rate. Thus, uncertainty and diverse practices would continue to persist till the issue is settled judicially as tremendous litigation would be generated on account of overlap. One such attempt made in Infotech Software Dealers Association vs. UOI 2010 (20) STR 289 (Mad) hardly provided any definite direction. In this case, the petitioner challenged legislative competency of the Parliament to levy service tax under the relevant clause section 65(105)(zzzze). The High Court in this case considered the incidental question that the transaction of the software in all cases amounted to sale or in some transactions, it could be considered ‘service’. The member of the Association in this case, supplied software to their customers pursuant to end user license agreements. To this, the High Court held that it is not sale of software but only the contents of the data stored in the software were provided and this amounted to service. It was further observed that to bring the “deemed sale” concept, there must be transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale does not arise and in that sense, transaction would be of service and not a sale.

The High Court further observed that the challenge to the amended provisions was only on the ground that software is goods and all transactions would amount to sale whereas the transactions may not amount to sale in all cases and it may vary depending upon the end user license agreement Therefore, competence of Parliament to levy service tax cannot be challenged so long as the residuary power is available under Entry 97 of the List-I and finally held “the question as to whether a transaction would amount to sale or service depends upon the individual transaction and on that ground, the vires of provision cannot be questioned”. The issue therefore remains open for interpretation when a dealer in software merely passes on license to the end user without any value addition to the license, whether it would still be treated as service.

Paradoxically, in spite of the fact that software sold electronically is notified as service, in case of Microworld Software Services P. Ltd. vs. CCE, MUM-I 2012-TIOL-1044-CESTAT-MUM, the company engaged into manufacturing software cleared packaged soft-ware on payment of appropriate duty. They also effected sale of software through internet. Central Excise authorities demanded and confirmed the duty and imposed penalties. At the lower appellate stage, 25% pre-deposit on duty and penalty was directed to be paid to hear the appeal. The pre-deposit of duty was paid and for the pre-deposit on the penalty portion, modification application was filed. Both modification application and appeal were dismissed for non-compliance of the order.

Appellant’s plea to CESTAT was that from F. Y. 2008-09, they had started paying service tax considering software cleared in tangible form attracted excise duty whereas Board’s Circular dated 29- 02-2008 clarified that service tax was payable on electronically supplied software. Further, they had informed revenue that they claimed exemption under Notification No. 6/06-CE for electronic supply of software. The revenue argued that Tariff heading 8524 covers software on floppy, disc/media/ CD Rom and also covers software on other media and the term “other media” covers electronically supplied internet. Based on the above submissions of the Appellant and considering their service tax payment and letter informing revenue about claim of the exemption under Notification No. 06/2006, the Bench found 25% pre-deposit of duty amount sufficient to hear the appeal and also found the case arguable and directed the Commissioner (Appeals) to hear the appeal on merits as the same was dismissed for non-compliance of section 35F without going into merits.

Considering the above process undergone by the Appellant, the following extract of TRU letter F. No. 334/1/2008 dated 29-02-2008 may be noted:

“4.1.3 Packaged software sold off the shelf, being treated as goods, is leviable to excise duty @ 8%. In this budget, it has been increased from 8% to 12% vide notification No. 12/2008-CE dated 01-03 -2008. Number of IT services and IT enabled services (ITES) are already leviable to service tax under various taxable services.

4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.”

Relying on the above and taking action thereon and given the fact that both excise duty and service tax are administered by CBEC, it can be observed that litigation cannot be avoided by law-compliant assesses as well.

Conclusion:

Given various contradictions in interpretations by different agencies of the Government machineryas regards software, IT sector as a whole and consequently the economy is imparted by not only multiplicity of taxation but also by increasing frivolous and lengthy litigation process. This could be minimised if single Government agency deals with the concept of deemed sale, intangible goods and services for implementing fair tax system in the matter at different levels and avoid hardship of the tax payers considering that the tax payer is an important part of the system of revenue collection.