Unreported Decisions – ST – February 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether supply of packaged Antivirus Software with licence key to the end user by charging licence fee as per End User Licence Agreement amounts to provision of service or sale?

Facts and Pleading: M/s. Quick Heal Technologies Ltd. (hereinafter referred to as the ‘Appellant’) is inter alia engaged in the business of Research and Development of Antivirus Software under the brand name ‘Quick Heal’. The Software eliminates existing viruses and provides continuous updates as a virus surveillance measure. Appellant gets Master CD replicated by replicators and then undertakes supply of Antivirus Software in CD to end users with a Licence key. The software is supplied in CD form as a Canned Software. End user is provided with a temporary/non-exclusive right to use the Antivirus Software as per the conditions contained in the End User Licence Agreement (hereinafter referred to as EULA). Appellants are paying Sales Tax/VAT on sale of the software.

The Department alleged that Appellant has supplied Antivirus Software with Licence key to the end users through dealers/ distributors without discharging the service tax liability on such transactions. It alleged that the dominant nature of EULA is only grant of licence to use the software and not sale of the software. It further alleged that appellant providing end users with CD along with the licence key (i.e., temporary/ non-exclusive right to use the software supplied electronically in the form of updates) is in nature of service and should not be treated as deemed sale. It alleged that appellant is providing ‘information technology software’ service to the customers as the software is interactive in nature. Department further alleged that appellant is liable to discharge service tax under item no. (vi) of clause (zzzze) of subsection (105) of Section 65 of the Finance Act, 1994 (Prior to 01-07-2012) and w.e.f. 01-07-2012, under Section 66E(d) of the Finance Act, 1994.

The appellant submitted that providing software to customers would not mean that appellant is providing ‘information technology software’ service. It further submitted that for providing ‘information technology software’ service, such software must be capable of being manipulated for providing interactivity and Appellant’s software provides none of these features. Appellant further submitted that Quick Heal Antivirus Software, supplied in CD form is goods and, therefore, not leviable to service tax. Appellant claims that they had been discharging sales tax/VAT on sale of such software. Appellant submitted that license Key which is supplied along with the Antivirus Software CD to End users is not a software in itself and generation of such License key is neither manufacturing activity nor service. It further submitted that end user is entitled for the updates and updates were for free, therefore, not a service. It also submitted that retention of title and ownership over the software does not mean that it interferes with the right of the licensee to use the software and would not be transfer of ‘right to use’ merely for this reason. It submitted that providing software with licence key to the end user is deemed sale.

Judgment: The Hon’ble CESTAT observed that to fall under the definition of “Information Technology Software” service, Antivirus software needs to be capable of being manipulated for providing interactivity to a user. The Hon’ble CESTAT agreed with the appellant’ submission that antivirus software developed by the appellant is not interactive as the software does not involve the user in the exchange of information and is complete in itself to prevent virus. The Hon’ble CESTAT held that such software is not covered under the definition information technology software and therefore no service tax is leviable. The Hon’ble CESTAT examined the issue from another angle and noted that to conclude that whether licence to use the packaged software is sale or service, the terms and conditions of the licence to use such software has to be seen. It noted that in case a licence to use pre-packaged software imposes restrictions on the usage of such licences and the conditions are such as to restrain the right to free enjoyment, then a licence would not result in transfer of ‘Right to Use’. The Hon’ble CESTAT perused EULA and held that free enjoyment of the software by the end user is not affected merely because appellant retains title and ownership of the software. It noted that the agreement provides licence with right to use the software during the activation period provides for updates and technical support. It observed that transfer is of the ‘Right to Use’ an identified and identifiable version of the software and through the purchase of the license, user has ‘purchased’ only the ‘Right to Use’ the software but, it will still be a ‘Sale’. The Hon’ble CESTAT held that the transaction in question is right to use the software and would amount to ‘deemed sale’.

Quick Heal Technologies Limited vs. Commissioner of Service Tax, Delhi, decided on 09-1-2020 in the Final Order No. 50022/2020.

Quick Heal Technologies Limited.

2. Whether VSAT (Very Small Aperture Terminal) fee (both one-time fee for supply of goods and actual usage charges) charged for supply of VSAT equipment is liable for service tax under “franchise service’ under Sections 65(105)(zze) read with Sections 65(47) & (48) of the Finance Act, 1994?

Facts and Pleading: M/s. Manipal University Learning Pvt. Limited (hereinafter referred to as the ‘appellant’) is inter alia engaged in the activity of providing education through distance education program for Universities. The appellant entered into an Memorandum of Agreement (MOA) with Sikkim Manipal University of Health, Medical and Technological Sciences (SMU), for (i) promotion of distance education program of SMU and (ii) to provide infrastructure and services. The appellant has inturn entered into an agreement called Learning Centre Agreement (LCA) with various parties granting licence to set up an authorised Learning Centre of the appellant with respect to distance education programmes of universities with whom the appellant has entered into contracts. In terms of this LCA, the party has agreed to provide infrastructure and facilities for the purpose of providing distance education programme of SMU/other universities. Since the entire activity was a “distance education programme”, the appellant supplied VSAT (Very Small Aperture Terminal) equipment to the contracting party. In terms of LCA, the appellant received one-time VSAT Management Fee and actual VSAT user costs/reimbursements.

The department alleged that the Appellant is liable to pay service tax on the VSAT charges received (both onetime fee and usage charges), under “franchise service” for the period July 2003 to August 2007.

The appellant submitted that both agreements with SMU and the parties running Learning Centres did not involve any kind of “franchise” but were in the nature of “auxiliary education services”. The appellant submitted that VSAT equipment hire charges related to chattel hire and the same was a transfer of property and right to use falling within the ambit of the definition of sale in terms of Article 366 of the Constitution and not a service as contemplated by law during the relevant period.

Judgment: The Hon’ble CESTAT observed that nothing in the agreement indicated that the learning centres were given a franchise by providing the VSAT at the learning Centres. The Hon’ble CESTAT held that nothing was forthcoming from the contracts that appellant gave permission to use their name by providing the VSAT facility. The Hon’ble CESTAT held that as the Appellant was not receiving any royalty towards the alleged franchise, it was incorrect to classify the same as ‘Franchise’ service. The Hon’ble CESTAT relied upon IMA Mental Arithmetic Academy Pvt. Ltd. vs. CST, 2019 (22) GSTL 234 (Tri-Che.) wherein it was held that only those amounts directly relatable to ‘representational right’ granted by the franchisor to franchisee and royalty/franchise fee towards that right alone be part of taxable value under ‘franchise’ service; admission fee, tuition fee, competition fee and course instructor fee was not liable for service tax under “franchise service”. Accordingly, the demand was set aside.

M/s. Manipal University Learning Pvt. Limited vs. CCE, Karnataka, CESTAT, Bangalore decided on 20-12-2020 in the Final Order No. 21295/2019.

M/s. Manipal University Learning Pvt. Limited