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Mohan R Lavi
There are some issues in taxation that refuse to go away from the case-law circuit.
Deciphering whether a contract is a sale or a service is one such issue. After travelling
through most Courts and Tribunals in India, in the case of Union of India v. State of Uttar
Pradesh, the Apex Court held that there could be elements of sale as well as service in a
single contract. The information technology industry was disappointed with the levy of
service tax on their services, but a recent decision of the Madras High Court attempts to
throw some light on this vexing issue.
The author is a qualified Chartered Accountant with over 18 years of post-qualification experience. He is
the author of books on Service Tax, IFRS, US GAAP, Sarbanes Oxley and Minimum Alternate Tax.
The IP owner retained the IP in the software and contained to remain the
owner of the software in that regard.
The licence could not sell, license or distribute copies of the software.
The licence did not acquire any right to transfer or licence or distribute the
software and only obtained a limited right to use the software in question.
Furthermore, the Court observed that the owner of the software retained the
copyright regardless of the nature of the software. In the particular licencing
agreements under scrutiny, the Court noted that the master end-use licensing
agreements enabled the licensors to market the software to individual end-users,
under the end-use licensing agreements in question. Hence, the Court held that in a
situation as above, no transfer of the software took place at all and hence the
provisions of Article 366(29A)(d) of the Constitution, in terms of deemed sales of
goods were also not attracted to the cases under its gaze. Radically, the Court
observed that just because software was held to be goods, it cannot be held that
they are out of the purview of service tax. There could be situations where a
particular licencing agreement would not meet the test of either a sale or a deemed
sale and would obviously fall under the service category. The Court held that the
particular licensing agreement that it had scrutinised was a pure-play service
contract. While agreeing with the decision of the Apex Court, the Madras High Court
held that actual facts and circumstances would have to be taken into account to
decide whether the licencing agreement was a sale, service or both. The Court
therefore concluded that the provisions in the service tax law introducing the taxable
service of information technology services were constitutionally valid and it could not
be held that the Centre had no Constitutional powers to tax transactions relating to
software. The Court said that it was always open for the petitioners to argue their
case regarding the dominant intention of the parties and they could hence resist the
imposition of service tax by demonstrating that the transaction was a sale and not a
service.
Typical Licencing Agreements: Normal licensing agreements use the word use
to signify the action needed on the part of the user to apply the software, which
would imply a fee which would come under the net of service tax. The software could
be supplied in physical form or electronically. Since it is now legal to break up a
contract artificially into its various elements, it appears that this could be the path
that could be chosen to lessen the impact of the tax on the end-user. In many
instances, both VAT and service tax are levied on software which increases the cost
to the customer. For instance, if one purchases a multi-user version of Tally for Rs
20,000, the Vendor could break this up into:
Supply of Tally Initialising Disk + Lock etc. = Rs 12,500 + VAT at say 4%.
Multi-user Licence fee for Tally = Rs 7,500 + Service Tax at 10.3%.
GST: Though GST still appears to be 18 months away, the Government could use
this period to set to rest such controversies. With dual-GST and multiple rates, in the
present form, it appears that the confusion present now would prevail if nothing is
done in the intervening period.
Endnotes