By Vinay Kumar Jain and Jay Chheda, Advocates

1. Whether Service Tax is leviable on the sale of pre-packaged software?

Facts and Pleadings: Quick Heal Technologies Ltd. (‘Quick Heal’) rendered taxable services, inter alia, under the category of “Information Technology Software Service” and was also engaged in the development and sale of Quick Heal brand Antivirus Software which is sold along with the license code/product code on the replicated CDs/DVDs to the end-customers in India.

The assessee did not discharge service tax during the period prior to 01.07.2012 on the above-mentioned activity of sale of software through the dealers/distributors to the end-customers in India. The department alleged that assessee was liable to pay service tax under the category Information Technology Software Services on the consideration received for the supply of license codes/keys in retail packs to the end-customers.

The CESTAT decided the case in favour of the assessee and held that the Antivirus Software did not have an element of interactivity. A software can only be said to be interactive only when the user has exchange of information or when there is action and communication between the software and the user. No manual input is required to operate an antivirus software as it acts automatically upon detecting a virus. Therefore, it does not satisfy the requirement of ‘information technology software’. The Tribunal also relied on the Hon’ble Supreme Court’s decision in the case of Tata Consultancy Services v. State of Andhra Pradesh, wherein it was stated that pre-packaged/canned software would be treated as goods. Moreover, once the software is put on a medium like a CD/DVD and then sold, such software would be treated as goods. The Supreme Court further held that canned software supplied in CDs would be “goods” chargeable to sales tax/VAT and no service tax can be levied.

The Department challenged the CESTAT order before Supreme Court and contended that the principal contention in TCS judgment was different from that in the present case. In TCS, the question before the Court was whether canned software sold by the assessee be categorized as “Goods” under the Andhra Pradesh General Sales Act, 1957 and hence, assessable to sales tax? The question in the present case is whether canned software can be considered a service or not. The Department contended that the entire transaction could be split in two parts: the replication of the software on CD/DVDs from the Master CD and, the supply to end-users under End User Licensing Agreement. It is the contention of the department that second part of the transaction is the issue at hand.

Supreme Court Judgement: The Hon’ble Supreme Court observed that under Section 65B(44) of the Finance Act, 1994, the new definition of the term ‘service’ makes it clear that service will not include those activities which include transfer, delivery of supply of any goods which is deemed to be sale within the meaning of Article 366(29A) of the Constitution. In the case of Tata Consultancy Services, the Supreme Court observed that the correct test to determine whether a property was “goods” is whether the item is question is capable of abstraction, consumption, and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. It was held that the same was possible in the case of canned and uncanned software when stored on a CD/DVD or any medium and therefore, they would be classified as goods. 

The Supreme Court further observed that as held in the case of Bharat Sanchar Nigam Ltd. v. Union of India, a contract cannot be vivisected or split into two. Once a lumpsum amount has been charged for the sale of CD along with software and sales tax has been paid for the same, the Revenue cannot levy service tax on the very same amount. Accordingly, the Hon’ble Supreme Court dismissed the appeal filed by the department and settled the issue in favor of the assessee.

Commissioner of Service Tax Delhi Vs. Quick Heal Technologies Limited – Order dated 5.8.2022 in Civil Appeal No. 5167 of 2022

2. Whether service tax could be levied on service portion in a Composite Works Contracts prior to 1.6.2007 and whether the Supreme Court decision in the case of Larsen & Toubro Ltd be referred to Larger Bench?

Facts and Pleadings: A batch of Civil Appeals were filed before the Hon’ble Supreme Court and Revenue prayed to the Court to review/reconsider its judgement in the case of Commissioner, Central Excise and Customs Kerala Vs Larsen and Toubro Ltd. 2015 – TIOL-187-SC and pleaded to refer the same to a Larger bench of Supreme Court.

The issue involved was whether service tax could be imposed on the service portion of a Composite Works Contract prior to the 2007 amendment to the Finance Act, 1994 which introduced Section 65(105)(zzzza) pertaining to Works Contract Services.

While Revenue did not dispute the fact that the issue abovementioned has already been squarely covered by the Supreme Court decision in the case of Larsen & Toubro, it was still their contention that the issue of service tax being leviable or not on Works Contracts prior to the 2007 amendment needs to be revisited. In support of their prayer, the Revenue argued that even prior to the Finance Act, 2007 an elaborate mechanism existed to segregate the value of goods component from the service component in a composite contract of supply of goods and services. It cannot be said that there was no machinery provision to charge service component in a Composite Works Contracts.

The assessee in their counter arguments contended that, in the case of Larsen & Toubro, it was specifically observed that a taxable service covers only service simpliciter contracts prior to 2007 and not the Composite Works Contracts. It was further contended that seven years have passed since the Supreme Court rendered its decision in Larsen & Toubro, and thereby Courts and Tribunals all over the country have placed reliance on this Court’s decision and decided the cases. The reference would upset the decisions already taken by Tribunals and lower courts. 

The assessee also stressed on the Principle of Stare Decisis and the need to maintain consistency and stability in the legal system, especially when the decision already rendered follows the rules of logic and is not contrary to any settled principles of law. Further assessee contended that Revenue made no efforts to file a review application in the past seven years since the judgement in L&T was rendered.

Supreme Court’s Judgement:

The Supreme Court held that if Revenue was so serious in their view that the decision of this Court in the case of Larsen & Toubro requires reconsideration, then Revenue should have filed a review application at that stage or even later, but no such attempt was made. Merely because in the later cases the amount of service tax levied might be higher, cannot be a ground to pray for reconsideration of the earlier binding decision.  

The Court, while placing reliance on prior judgements, further observed that the Doctrine of precedents and stare decisis are the core values of a legal system. They allow us to bring certainty, stability, and continuity in our legal system. The Court further stated that Judges owe a duty to the concept of certainty of law, therefore they often justify their holdings by relying upon the established tenets of law. When a decision is rendered by the Court, it acquires a reliance interest and society reorganizes itself based on the present legal order.

It was also observed that, before the Court revises a judgement, the Court must be able to satisfy itself that the same is necessary in the interest of public good. It is only when a proposition is contradicted by a subsequent judgement of the same Bench, or it is apparent that the proposition held is no longer workable with present times or is contrary to a well-established principle, only then a reference can be made to a Larger bench.

Based on the precedents of this Court on the Principle of Stare Decisis, the Court concluded that as the case of Larsen & Toubro has stood the test of time and has never been doubted before. In the past seven years, the said decision has been relied upon by lower courts and Tribunals all over the country, and if the prayer of the Revenue is to be accepted, then it will affect many other cases wherein the courts have placed reliance on Larsen & Toubro and moreover, may unsettle law that is being consistently followed since 2015.

In conclusion, the prayer of the Revenue to refer the issue to Larger Bench was dismissed.

Total Environment Building Systems Pvt Ltd & Ors Vs. Deputy Commissioner of Commercial Taxes and Ors. – 2022-TIOL-62-SC-ST