COMMISSIONER OF SERVICE TAX DELHI VERSUS QUICK HEAL TECHNOLOGIES LIMITED
COMMISSIONER OF SERVICE TAX DELHI VERSUS QUICK HEAL TECHNOLOGIES LIMITED
Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5167 OF 2022
(DIARY NO. 24399 OF 2020)
COMMISSIONER OF SERVICE TAX DELHI …APPELLANT(S)
VERSUS
QUICK HEAL TECHNOLOGIES LIMITED …RESPONDENT(S)
WITH
CIVIL APPEAL NOS. 51685169 OF 2022
(ARISING OUT OF S.L.P. (CIVIL) NOS. 67156716 OF 2022)
J U D G M E N T
J.B. PARDIWALA, J. :
1. Since the issues raised in both the captioned cases are the
same, those were taken up for hearing analogously and are
being disposed of by this common judgment.
Civil Appeal (Diary No. 24399 of 2020)
2. Delay condoned.
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3. This appeal under Section 35L(b) of the Central Excise Act,
1944 (for short, ‘the Act 1944’), as made applicable to the
service tax by Section 83 of Chapter V of the Finance Act, 1994
(for short, ‘the Act 1994’), is at the instance of the revenue and
is directed against the order No. 50022/2020 dated 09.01.2020
passed by the Customs, Excise and Service Tax Appellate
Tribunal, New Delhi (for short, ‘the Tribunal’) in the Service Tax
Appeal No. 51175 of 2016 by which the Tribunal allowed the
appeal filed by the respondent herein (assessee) thereby set
aside the Order in Original dated 28.01.2016 passed by the
Additional Director General (Adjudication) DGCEI, Delhi.
FACTUAL MATRIX
4. For the sake of convenience, the appellant herein shall be
referred to as the “revenue” and the respondent herein shall be
referred to as the “assessee”.
5. The assessee is registered with the Service Tax
Commissioner, PuneIII for providing taxable services, inter alia,
under the category of “Information Technology Software
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Service”. The assessee is engaged in the development of Quick
Heal brand Antivirus Software which is supplied along with the
license code/product code either online or on the replicated
CDs/DVDs to the endcustomers in India.
6. It appears from the materials on record that it came to the
notice of the Directorate General of Central Excise Intelligence
(Headquarters) that the assessee engaged in the development of
Quick Heal brand Antivirus Software had not been paying
service tax prior to 01.07.2012 on the services covered under
the category of “Information Technology Software Service”
falling under Item No. (vi) of clause (zzzze) of subsection (105)
of Section 65 of the Act 1994 w.e.f 01.07.2012 on the services
covered under the category of “Information Technology Software
Service” under Section 66E(d) of the Act 1994 for providing
Quick Heal brand Antivirus Software license key/code supplied
along with the CD/DVD replicated with the Quick Heal brand
Antivirus Software through the dealers/distributors to the endcustomers in India.
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7. In the aforesaid context, an inquiry was initiated against
the assessee and at the end of the same, the revenue reached to
the conclusion that the assessee is liable to pay service tax on
the transactions with the endcustomers to supply the license
codes/keys of Quick Heal brand Antivirus Software in the retail
packs. The revenue reached to the conclusion that the assessee
had failed to pay the service tax on the consideration received
for the supply of the license codes/keys of Antivirus Software to
the endcustomers in retail packs during the period between
01.03.2011 and 31.03.2014.
8. In such circumstances referred to above, a show cause
notice dated 02.02.2015 came to be issued to the assessee by
the Additional Director General, DGCEI (Hqrs.), New Delhi
proposing a demand/recovery of service tax amounting to Rs.
62,73,05,953.36p. (Rupees Sixty Two Crore Seventy Three Lakh
Five Thousand Nine Hundred Three and paise Thirty Six Only)
on the taxable value of Rs. 5,30,94,66,783/ (Rupees Five Arab
Thirty Crore Ninety Four Lakh Sixty Six Thousand Seven
Hundred Eighty Three Only) for supplying Quick Heal Antivirus
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Software replicated CDs/DVDs in the retail packs (i.e.
Information Technology Software Service) through its
dealers/distributors to the endcustomers in India for the
period between 01.03.2011 and 31.03.2014 under the proviso
to Section 73(1) of the Act 1994 by invoking the extended period
of limitation with interest and penalty.
9. The show cause notice referred to above was adjudicated
by the Additional Director General (Adjudication), DGCEI, Delhi,
who, in turn, confirmed the demand of service tax amount to
Rs. 56,07,05,595/ (Rupees Fifty Six Crore Seven Lakh Five
Thousand Five Hundred Ninety Five Only) alleged to have been
not paid by the assessee on the service of Information
Technology Software Service vide its Order in Original dated
28.01.2016.
10. The assessee, being aggrieved with the order passed by the
Additional Director General (Adjudication), DGCEI, preferred
the Service Tax Appeal No. 51175 of 2016 before the Tribunal.
11. The Tribunal allowed the appeal filed by the assessee
herein essentially on the following three grounds:
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i. The antivirus software did not have an element
of interactivity.
ii. As per the decision of the Supreme Court in the
case of Tata Consultancy Services v. State of
Andhra Pradesh, (2005) 1 SCC 308, (“TCS”), the prepackaged/canned software would be treated as goods.
Once the software is put on a medium like a CD and
then sold, such software would be treated as goods.
iii. The Central Board of Excise & Customs (CBEC)
issued guidelines when the negative regime was
issued on 1.7.2012. The guidelines clarified that the
prepackaged/canned software would not be goods
even if there was a licence.
12. The revenue, being dissatisfied with the order passed by
the Tribunal, has come up before this Court with the present
appeal under Section 35L(b) of the Act 1944.
13. The revenue has in its memorandum of appeal formulated
the following questions of law for consideration of this Court:
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“(i) Whether the Tribunal is right in holding that the
transaction in the present case results in the right to
use the software and would amount deemed sale?
(ii) Whether the Antivirus Software license key/code
supplied by the respondent along with CD/DVD
replicated with Quick Heal Brand Antivirus Software
through dealers/distributors to the EndCustomers is
liable to Service Tax?
(iii) Whether the service provided by the respondent is
classifiable under Information Technology Service
liable to service tax under Section 65(105)(zzzze) of the
Finance Act, 1994 prior to 01.07.2012 and under
Section 66E(f) of the Finance Act, 1994 w.e.f.
01.07.2012?
(iv) Whether the transfer of goods by way of hiring,
leasing, licensing or any such manner without transfer
of right of use such goods, is a declared service under
clause (1) of Section 66E of the Finance Act, 1994?”
SUBMISSIONS ON BEHALF OF THE REVENUE :
14. The learned counsel appearing for the revenue vehemently
submitted that the Tribunal committed a serious error in
passing the impugned order by relying upon the decision of this
Court in TATA Consultancy Services (supra). He would
submit that the question before this Court in the case of the
TATA Consultancy Services (supra) was whether the canned
software sold by the appellants therein could be termed to be
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“goods” under the Andhra Pradesh General Sales Tax Act, 1957
and hence, assessable to the sales tax? He submitted that the
principal contention of the appellants before this Court in the
case of the TATA Consultancy Services (supra) was that the
canned software was “intangible property” and hence would not
come within the definition of the “goods”. He would submit that
the issue was clearly not whether the canned software was
“goods” or “service”. He laid much stress on the fact that no
argument was canvassed on the canned software being a
service. Since the question did not pertain to the canned
software being a “service”, this Court did not make any
comment on whether the canned software could be a “service”.
He would submit that in such circumstances, the Tribunal
committed an error in relying on the ratio of the decision of this
Court in the case of TATA Consultancy Services (supra).
15. The learned counsel would further submit that the entire
transaction of selling or trading of the software can be divided
into two stages:
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(a) Up to the replication of the Master CD by the
replicators under the terms of agreement. This is
covered by this Court’s judgment in the case of TATA
Consultancy Services (supra). There rises no dispute
of paying duty at this stage, since, the recording of the
software on their CDs and making them marketable
makes it ‘Goods’ which is chargeable to the Central
Excise Duty;
(b) The supply to the endusers under a separate
End User Licensing Agreement, consists of 2 parts:
(i) Supply of Antivirus software in the CD.
(ii) Providing electronic updates to the software
originally provided.
16. He would submit that the present dispute is one
relating to part (b) as above of the transaction.
17. Referring to the decision of this Court in the case of
Bharat Sanchar Nigam Ltd. v. Union of India, (2006) 3 SCC
1, (for short, ‘BSNL’), he would submit that the same deals with
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the “composite transaction” of giving telephone connection that
involves service and sale. It was held therein by the majority
that it is possible for the State to tax the sale element provided
there is a discernible sale and the “dominant intention” test is
satisfied. To put it in other words, the learned counsel would
submit that the test for a composite contract other than those
mentioned in the Article 366(29A) of the Constitution continues
to be “did the parties have in mind or intend separate rights
arising out of the sale of goods?”. If there was no such
intention, there is no sale even if the contract could be
disintegrated. According to the learned counsel, the test for
deciding whether a contract falls into one category or the other
is as to what is 'the substance of the contract’. He pointed out
that in the case of BSNL (supra) it was held that what amounts
to being “goods” in the sale transaction remains primarily a
matter of contract and intentions.
18. He placed strong reliance on the decision of the Madras
High Court in the case of M/s Infotech Software Dealers
Association v. Union of India, 2010 (20) S.T.R. 289 (Mad.),
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wherein the High Court took the view that the supply of
packaged antivirus software to the end user by charging license
fee as per the end user license agreement amounts service and
not sale. The Madras High Court held that for the purpose of
imposition of tax, the nature of transaction should be looked
into.
19. In such circumstances referred to above, the learned
counsel appearing for the revenue, prays that there being merit
in his appeal, the same may be allowed by answering the
proposed questions of law in favour of the revenue and against
the assessee.
SUBMISSIONS ON BEHALF OF THE ASSESSEE :
20. On the other hand, Mr. Arvind P. Datar, the learned senior
counsel appearing for the assessee, vehemently opposed this
appeal by submitting that no error, not to speak of any error of
law, could be said to have been committed by the Tribunal in
passing the impugned order. He would submit that in para 29
of the impugned order the Tribunal rightly rejected the
contention of the revenue that the antivirus software was
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interactive. Mr. Datar would submit that the Tribunal rightly
held that a programme could be said to be interactive only
when it involves the user to have exchange of information or
when there is action and communication between the user and
the software. The learned senior counsel gave an example by
pointing that the MS Word, Excel, etc. are interactive softwares
which can be run only after the receipt of the instructions from
the user. On the other hand, there is no interactivity in an
antivirus software as there is no requirement of giving any
command for detecting and removing the virus. In other words,
no manual input is required to operate an antivirus software as
it acts automatically upon detecting any virus. He would submit
that the antivirus software which is installed in a computer
system cannot be treated as an interactive software.
21. The learned senior counsel thereafter took this Court
through the decision rendered by this Court in the case of
TATA Consultancy Services (supra). The learned senior
counsel offered the following comments on the impact of the
decision in the case of TATA Consultancy Services (supra) :
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“4.1 The question as to whether software can be
treated as goods was referred to a bench of five judges
in the aforesaid TCS case.
4.2 The State of Andhra Pradesh had levied
VAT/sales tax on software CDs, which were packed
and sold to customers. This Hon’ble Court, after
extensive consideration of India and U.S. decisions,
held that even though the copyright in a software
program may remain with the originator of the
program, the moment the software is loaded onto a CD
and copies are made and marketed, they become
goods, “which are susceptible to sales tax”.
4.3 There is no difference between sale of a software
program on a CD/floppy disc or the sale of music or
film CD. It categorically held that the software and the
medium cannot be split up in a sale of a computer
software, which is a sale of goods. Apart from the
judgment of Justice Variava, Justice S.B. Sinha gave a
concurring opinion giving additional reasons as to why
software, which is put on a medium and sold, is in the
nature of a commodity and has to be treated as goods.
The learned judge also held that the definition of
canned software would be exigible to sales tax.
4.4 In the present case, the impugned CESTAT order
has reproduced several paragraphs from the TCS
ruling and concluded in paragraph 35/Page 54, Vol. I
that once software is put in a media and marketed, it
would become goods.
4.5 The negative regime of service tax came into force
on July 1, 2012. Barring specific exemptions, almost all
contracts were to be treated as services when they
were supplied for consideration. Service tax was
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sought to be levied on Information and Technology
Service, under section 65(53a) which reads as follows:
(53a) “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;
4.6 Similarly, the definition of taxable services is
contained in section 65(105) (zzzze) which are also
reproduced earlier.
4.7 While the above definitions were prevailing prior
to 01.07.2012, section 66E(d) – provided for declared
service under the new negative regime and read as
follows:
“development, design, programming, customization,
adaptation, upgradation, enhancement,
implementation of information technology software”
4.8 Further, section 65B (28) defined “information
technology software” which was almost identical to the
earlier definition under section 65 (63a).”
22. The learned senior counsel thereafter made his
submissions on the CBEC Circular/Education Guide. Following
comments have been offered as regards the said Circular in the
written note furnished to this Court:
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“5.1 After the negative regime came into force on
1.7.2012, reproduced above, the CBEC Education Guide
issued the following guidelines:
(i)Prepackaged or canned software would not be covered
by the entry relating to information technology
software. This is because such software as “goods” as
held by the Supreme Court in the TCS case. The
guidelines specifically reproduced the text of the
Supreme Court ruling.
(ii)It then concluded that if prepackaged or canned
software, were sold, then the transaction would be in
the nature of a sale of goods and no service tax would
be levied.”
23. The learned senior counsel thereafter submitted as regards
the excise duty/tariff entry and exemption notifications as
under :
“6.1 It is pertinent to note that S. No. 84A of the third
schedule to the Central Excise Act, 1944, deals with
entry 8523 80 20 corresponding to “Packaged software
or canned software”. The Explanation provided
thereunder defined “packaged software or canned
software” as a software which is intended for sale or
capable of being sold offtheshelf.
6.2 Moreover, Notification No:14/2011 CE dated 01
032011 adopted this definition and exempted excise
duty on such “packaged software or canned
software”.”
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24. He vehemently submitted that the transaction cannot be
bifurcated into two components as suggested by the revenue i.e.
(i) sale of CD, and (ii) supply of updates. In this regard, he
submitted as under :
“7.1 During the arguments, the Department submitted
that apart from the sale of CD, the updates which were
to be provided under the contract would amount to
service. It is submitted that this is incorrect because the
prepackaged antivirus software which is sold in the
box has a condition of sale that updates for the period
of license would be also provided to the person who
has purchased the goods without any further
consideration. These updates are part and parcel of the
sale of software itself and cannot be divorced from the
transaction and treated separately as a service.
7.2 Indeed, every prepackaged software that was
sold in a box, where there it is Tally or Word or Excel,
would also include supply of updates for the period of
licence.
7.3 Further, section 65B (44) defined service to mean
any activity carried out by a person for a consideration
and includes a declared service. In the present case, no
separate consideration is charged for the updates
which are part and parcel of the sale of goods itself.
Consequently, even if the updates are treated as
declared services under section 66E(d), no
consideration is charged for such service separately.
7.4 In BSNL v. Union of India it was categorically held
that the contract cannot be vivisected or split out. Once
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a lumpsum has been charged for the sale of CD and
sales tax has been paid thereon, the Department
cannot levy service tax on the entire sale consideration
once again on the ground that updates are being
provided.”
25. In the last, the learned senior counsel submitted that the
payment of VAT and service tax are mutually exclusive. He
would submit that :
“8.1 It is well settled that sales tax and VAT is covered
by Entry 54 of ListII in the VII Schedule of the
Constitution. Only State Legislatures can levy VAT on
the sale of goods. On the other hand, service tax is
leviable under the Finance Act, 1994 (as amended) on
the provision of service and such levy is permissible
under Entry 97 of ListI.
8.2 It is also well settled that there could be no
overlapping of taxes as the taxing powers have been
carefully split between Union and the State.
Accordingly, the taxation of goods has been allotted to
the State Legislatures while taxing of service is
retained by the Centre.
8.3 In Imagic Creative Pvt. Ltd. v. CCT, (2008) 9 STR
337 (SC) : (2008) 2 SCC 614, this Court held that
payment of VAT and service tax are mutually exclusive.
After the TCS judgment, the controversy was put to rest
in intellectual property where software or music or film
which has been put on a medium such as a CD will be
treated as goods and consequently can subject only to
sales tax/VAT.”
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26. In such circumstances referred to above, the learned
senior counsel appearing on behalf of the assessee, prays that
there being no merit in the present appeal, the same may be
dismissed. ANALYSIS :
27. Having heard the learned counsel appearing for the parties
and having gone through the materials on record, the only
question that falls for our consideration is, whether the
Tribunal committed any error in passing the impugned order?
28. Before we advert to the rival submissions canvassed on
either side, we must look into some of the reasons assigned by
the Tribunal while allowing the appeal preferred by the assessee
against the order of the adjudicating authority. We quote:
“25. The contention of the Appellant is that the software
developed by it can neither be manipulated nor does it
provide any interactivity to a user and, therefore, does
not satisfy the requirement of “information technology
software”. According to the Appellant, once the computer
system is booted, the Antivirus Software begins its
activity of detecting the virus and continues to do so till
the time the computer system remains booted. Thus,
there is no interactivity or requirement of giving any
commands to the software to perform the function of
detecting and removing virus from the computer system.
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The Appellant further contends that the software
developed by it is quite distinct from software like ERP,
EXCEL, MS Word, where there is a constant to and from
interaction between the user and the computer system
containing the said software. These softwares perform
their function only after receipt of input from the user,
which is not the case in the Antivirus Software
developed by the Appellant.
x x x
28. The Adjudicating Authority, however, has not
accepted the contention of the Appellant and has
observed that the software can issue commands to scan
drives, both internal and external and that it has an
interface with the user to tuneup the personal computer
and that it has also a parallel control feature. These
features, according to the Adjudicating Authority, need a
command by the user to the software and, therefore, it is
interactive.
29. It is not possible to accept this finding. The Antivirus
Software developed by the Appellant is complete in itself
to prevent virus in the computer system. Once the
computer system is booted, the Antivirus Software
begins the function of detecting the virus, which
continues till the time the computer system remains
booted. The computer system only displays a message
that viruses existed and that they have been detected
and removed. No interactivity takes place nor there is
any requirement of giving any command to the software
to perform its function of detecting and removing virus
from the computer system. It is also seen from the
meaning assigned to “interactive” that a program should
involve the user in the exchange of information. There
has to be action and communication between the two. A
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user should communicate with the computer facility and
receive rapid responses, which can be used to prepare
the next inputs. In contract, in other softwares like ERP,
EXCEL, MS Word, there is continues interaction between
the user and the computer system and these softwares
perform only after receipt of input from the user.
30. Such being the position, no service tax was leviable
under section 65(105)(zzzze) of the Act prior to 1 July,
2012. Even after 1 July, 2012 the definition of
“information technology software” under section 65B(28)
remained the same and so also service tax was not
leviable.
31. The matter can be examined from another angle.
Section 65B (51) defines a “taxable service” to mean any
service on which service tax is leviable under section
66B. Section 66B provides that there shall be levied
service tax on the value of all services, other than those
services specified in the negative list, provided or agreed
to be provided in the taxable territory by one person to
another and collected in such manner as may be
prescribed. Section 65B (44) define “service” to mean
any activity carried out by a person for consideration,
and includes a declared service, but shall not include,
amongst others, an activity which constitutes merely
such transfer, delivery or supply of any goods which is
“deemed to be a sale” within the meaning of clause
(29A) of article 366 of the Constitution.”
29. The Tribunal thereafter proceeded to consider the decision
of this Court rendered in the case of TATA Consultancy
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Services (supra). Upon analysis of the ratio of the said decision,
the Tribunal recorded the following findings :
“35. It is clear from the aforesaid decision of the
Supreme Court in Tata Consultancy Services that
intellectual property, once it is put on the media and
marketed could become “goods” and that a software
may be intellectual property and such intellectual
property contained in a medium is purchased and sold
in various forms including CDs.
36. Section 65B (44) of the Act also excludes from the
definition of “service” any activity which constitutes
merely such transfer, delivery or supply of any goods
which is deemed to be a sale within the meaning of
clause (29A) of article 366 of the Constitution. As noticed
above, the Supreme Court in Tata Consultancy Services
held that Canned Software supplied in CDs would be
“goods” chargeable to sales tax/VAT and no service tax
can be levied.”
30. The Tribunal thereafter, in para 37 of its order, considered
the CBEC Education Guide for service tax containing the official
guidelines for new system of levy of service tax. After due
consideration of the same, it recorded the following findings in
para 38:
“38. A perusal of the aforesaid guidelines would
indicate that after making a reference to the judgment of
Supreme Court in Tata Consultancy Services, it
mentions that a transaction would be in the nature of
sale of goods when a prepackaged or Canned Software
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is sold, and no service tax would be leviable. However, a
license to use the software which does not involve the
transfer of “right to use” would neither be a transfer of
title in goods nor a deemed sale of goods. Such an
activity would fall in the ambit of definition of “service”.
Thus, if a prepackaged or Canned Software is not sold
but is transferred under a license to use such software,
the terms and conditions of the license to use such
software would have to be seen to arrive at a conclusion
whether the license to use the packaged software
involves a transfer of “right to use” such software in the
sense the phrase has been used in subclause (d) of
article 366(29A) of the Constitution. The guidelines also
provide that in case a license to use prepackaged
software imposes restrictions on the usage of such
licenses, which restriction interfere with the free
enjoyment of the software, then such a license would
not result in transfer of “right to use” the software within
the meaning of Clause 29(A) of article 366 of the
Constitution. However, every condition imposed would
not make it leviable to service tax. The condition should
be such so as to restrain the right to free enjoyment on
the same lines as a person who has otherwise
purchased goods is able to have.”
31. The Tribunal thereafter proceeded to consider the terms of
the agreement to ascertain whether there was transfer of the
“right to use goods”. The Tribunal in para 44 of its order
recorded the following relevant provisions of the Quick Heal
Internet Security EndUser License Agreement:
“16. BY USING THIS SOFTWARE OR BY ACCEPTING
OUR SOFTWARE USAGE AGREEMENT POLICY OR
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ATTEMPTING TO LOAD THE SOFTWARE IN ANY WAY,
(SUCH ACTION WILL CONSTITUTE A SYMBOL OF
YOUR CONSENT AND SIGNATURE), YOU
ACKNOWLEDGE AND ADMIT THAT YOU HAVE READ,
UNDERSTOOD AND AGREED TO ALL THE TERMS AND
CONDITIONS OF THIS AGREEMENT, THIS
AGREEMENT ONCE ACCEPTED BY "YOU"[ AS AN
INDIVIDUAL (ASSUMING YOU ARE ABOVE 18 YEARS
AND/OR HAVING LEGAL CAPACITY TO ENTER INTO
AN AGREEMENT), OR THE COMPANY OR ANY LEGAL
ENTITY THAT WILL BE USING THE SOFTWARE
(HEREINAFTER REFERRED TO AS YOU' OR YOUR' FOR
THE SAKE OF BREVITY] SHALL BE A LEGALLY
ENFORCEABLE AGREEMENT BETWEEN YOU AND
QUICK HEAL TECHNOLOGIES PRIVATE LIMITED,
PUNE, INDIA (HEREINAFTER REFERRED TO AS
"QUICK HEAL") AND YOU SHALL HAVE THE RIGHTS
TO USE THE SOFTWARE SUBJECT TO THE TERMS
AND CONDITIONS MENTIONED IN THIS AGREEMENT
OR AS AMENDED BY QUICK HEAL FROM TIME TO
TIME. IF YOU DO NOT AGREE TO ALL THE TERMS
AND CONDITIONS BELOW, DO NOT USE THIS
SOFTWARE IN ANY WAY AND PROMPTLY RETURN IT
OR DELETE ALL THE COPIES OF THIS SOFTWARE IN
YOUR POSSESSION.
In consideration of payment of the License Fee, which
is a part of the price, evidenced by the Receipt. Quick
Heal grants the Licensee, a nonexclusive and nontransferable right. Quick Heal reserves all rights not
expressly granted, and retains the title and ownership
of the software, including all subsequent copies in any
media. This software and the accompanying written
materials are the property of Quick Heal and are
copyrighted. Copying of the software or the written
material is expressly forbidden. In addition to this
security software, Quick Heal offers you Quick Heal
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Remote Device Management Services to manage your
device(s).
Quick Heal reserves all rights not expressly granted,
and retains the title and ownership of the software,
including all subsequent copies in any media, This
software and the accompanying written materials are
the property of Quick Heal and are copyrighted.
1. DEFINITIONS
B. "License period" means the period as more
particularly described in this Agreement.
G. “Updates” means collections of any or all among
virus definition files including detections and solutions
for new viruses along with the corrections,
improvements or modifications to the software.
2. DO's & DON'TS
You can:
A. make copy of the software for backup purpose or for
the purpose of sharing through various means (and such
backup copy must be destroyed when you lose the right
to use the Software or is terminated for any other reason
according to the legislation in force in the country of your
principal residence or in the country where You are
using the software) and replace lost, destroyed, or
becomes unusable.
B. use one copy of the software on a single computer. In
case of multiuser pack, use of the software only on the
said number of systems as mentioned on the packaging.
C. install the software on a network, provided you have
a licensed copy of the software for each computer that
can access the software over that network.
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D. avail Quick Heal RDM service to manage your device
(a maximum of 10 devices in one account.)
You cannot:
A. emulate, or adapt any portion of the software.
B. sublicense, rent or lease any portion of the software.
C. try making an attempt to reveal/discover the source
code of the software.
D. debug, decompile, disassemble, modify, translate,
reverse engineer the software.
E. create derivative works based on the software or any
portion thereof with sole exception of a nonwaivable
right granted to You by any applicable legislation. F.
remove or alter any copyright notices or other
proprietary notices on any copies of the software.
G. reduce any part of the software to human readable
form. H. use the software in the creation of data or
software used for detection, blocking or treating threats
described in the user manual.
I. use for unlicensed and illegal purpose.
J. remove your user account from Quick Heal RDM
service once registered
K. retrieve deleted location entries and back up data
from the user account on the Quick Heal RDM service.
L. attempt to gain unauthorized access to Quick Heal
RDM networks.
5. LICENSE PERIOD
A. You are entitled to use this software/ RDM Services
from the date of license activation until the expiry date
of the license.
B. You understand, agree and accept that you are
entitled for the updates and technical support via the
Internet and telephone. Any use of this software/RDM
Services for any other purposes is strictly forbidden and
prohibited and Quick Heal reserves to take any action
against such unauthorized usage.
25
C. License for use of Quick Heal RDM service to manage
devices shell be valid till your device security software
license is valid.
D. You agree, understand that any unauthorized usage
of the software/ RDM services or breach of any/all
terms and conditions stated herein the Agreement shall
result in automatic and immediate termination of this
Agreement and the License granted hereunder and
which may result in criminal and/ Or civil action by
Quick Heal and/ Or its agents against you including but
not limited to right to block the key file/ License key/
product key and without any refund to You and without
any prior intimation/ notice to you in this regard.
E. If you have acquired the specific language localization
of the software/ RDM service, you will not be able to
activate the software by applying the activation code of
other language localization.
F. Quick Heal does not guarantee the protection from the
threats more particularly described in the user manual
after the License to use the software/RDM service is
terminated for any reason.
6. FEATURES OF SOFTWARE
A. During the license period of the software/RDM
services, You have the right to use features of
software/RDM service.
B. During the license Period of the Software/RDM, You
have the right to receive free updates of the software
and Quick Heal RDM service via Internet as and when
Quick Heal publishes the updated virus database and
free version upgrade as and when Quick Heal releases
new version upgrade. You agree, understand and accept
that You will be required to regularly download the
updates published by Quick Heal. Any and all updates/
upgrades you receive from Quick Heal shall be governed
by this Agreement, or as amended from time to time by
Quick Heal.
26
C. You agree, accept and acknowledge:
I. that You are solely responsible for the configuration of
the software/ RDM services settings and the result,
actions, inactions initiated due to the same and Quick
Heal assumes no liability/ responsibility in any case
and the Clause of Indemnification shall be applicable.
II. that Quick Heal assumes no liability/responsibility
for any date deletion, including but not limited to any
deletion/ loss of personal, and/or confidential date;
and/or uninstallation of thirdparty apps; and/or
change in settings; specifically authorized by You or
occurs due to the actions, inactions (whether intentional
or not) by You or any third party whom You have
authorized to use, handle you Device due to features or
software/RDM services.
III. that to avail/use certain features of the
software/RDM services, you may be required to incur
some cost and that Quick Heal does not warrant that
the usage of certain features of the software/RDM
services are free of cost and that Quick Heal shall not
entertain and expressly disclaims, any claim for
reimbursement of any expenses including but not limited
to any direct or incidental expenses arising out of Your
usage of such features of the software/RDM services.
IV. that you be solely responsible and shall comply all
applicable laws, regulations of India and any foreign
laws including without limitation, privacy, obscenity,
confidentiality, copyright laws for using any report,
date, information derived as a result of using the
software and Quick Heal RDM services.
V. that while using the software, Quick Heal suggests
some actions to be initiated by You in your sole benefit,
for example ‖Quick Heal software may suggest You to
uninstall infected applications‖, however such actions
are suggestive and Quick Heal takes no
responsibility/liability if you perform such suggestive
actions or not and Quick Heal assumes no
27
responsibility/ liability for any liability arising out of
such actions/inactions.
9. QUICK HEAL STATUS UPDATE
Upon every update of licensed copy, Quick Heal Update
module will send current product status information to
Quick Heal Internet Centre. The information that will be
sent to the Internet Centre includes the Quick Heal
protection health status like, which monitoring service is
in what state in the system. The information collected
does not contain any files or personal date. The
information will be used to provide quick and better
technical support for legitimate customers. All the
registered user/subscribers will get the updates free of
cost from the date of license activation until the expiry
date of the license.
13. Intellectual Property
The software, source code, activation code, license keys,
documentation, systems, ideas, information, content,
design, and other matters related to the software, Quick
Heal RDM services, trademarks are the sole proprietary
and intellectual property rights of Quick Heal protected
under the Intellectual Property Laws and belongs to
Quick Heal. Nothing contained in this Agreement grant
You any rights, title, interest to intellectual property,
including without limitation any error corrections,
enhancements, updates, or modifications to the software
and Quick Heal RDM service whether made by Quick
Heal or any third party. You understand and
acknowledge that you are provided with a license to use
this software and Quick Heal RDM services subject to
the terms and conditions of this Agreement.”
28
32. After due consideration of the terms of agreement, the
Tribunal proceeded to observe the following in para 45 of the
impugned order :
“45. The agreement provides that the licensee shall have
right to use software subject to terms and the conditions
mentioned in the agreement. The licensee is entitled to
use the software/RDM services from the date of license
activation until the expiry date of the license. The
licensee is also entitled for the updates and technical
support. The conditions set out in the agreement do not
interfere with the free enjoyment of the software by the
licensee. Merely because Quick Heal ― ‖ retains title and
ownership of the software does not mean that it
interferes with the right of the licensee to use the
software.”
33. The Tribunal ultimately concluded as under while allowing
the appeal filed by the assessee herein :
“51. Thus, viewed from any angle, the transaction in the
present Appeal results in the right to use the software
and would amount to “deemed sale”. It is, therefore, not
possible to accept the contention of the learned
Authorized Representative of the Department that the
transaction would not be covered under subclause (d) of
article 366(29A) of the Constitution.”
34. Thus, from the aforesaid, it is evident that the Tribunal
laid much emphasis on the fact that in accordance with the
agreement the licensee has the right to use the software subject
29
to the terms and the conditions laid therein. The Tribunal took
notice of the fact that in accordance with the agreement the
licensee is entitled to use the software/RDM service from the
date of the activation of the license till the date of its expiry. The
Tribunal also took into consideration the fact that the licensee
is also entitled for the updates and the technical support. In
view of the Tribunal, the right to use the software would
amount to the “deemed sale”. The Tribunal rejected the
contention of the revenue that the transaction would not be
covered under subclause (d) of the Article 366(29A) of the
Constitution.
RELEVANT PROVISIONS OF LAW
35. The New definition of the term “service” has been given
under the clause 44 of Section 65B of the Act 1994 which reads
as follows :
“(44) “service” means any activity carried out by a
person for another for consideration, and includes a
declared service, but shall not include
(a) an activity which constitutes merely,–
30
(i) a transfer of title in goods or immovable property, by
way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which
is deemed to be a sale within the meaning of clause
(29A) of Article 366 of the Constitution; or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer
in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under
any law for the time being in force.
Explanation 1. For the removal of doubts, it is hereby
declared that nothing contained in this clause shall
apply to,–
(A) the functions performed by the Members of
Parliament, Members of State Legislative, Members of
Panchayats, Members of Municipalities and Members of
other local authorities who receive any consideration in
performing the functions of that office as such member;
or
(B) the duties performed by any person who holds any
post in pursuance of the provisions of the Constitution in
that capacity; or
(C) the duties performed by any person as a
Chairperson or a Member or a Director in a body
established by the Central Government or State
Governments or local authority and who is not deemed
as an employee before the commencement of this
section.
Explanation 2.For the purposes of this clause,
transaction in money shall not include any activity
relating to use of money or its conversion by cash or by
31
any other mode, from one form, currency or
denomination, to another form, currency or
denomination for which a separate consideration is
charged;
Explanation 3.– For the purposes of this Chapter,
(a) an unincorporated association or a body of persons,
as the case may be, and a member thereof shall be
treated as distinct persons;
(b) an establishment of a person in the taxable territory
and any of his other establishment in a nontaxable
territory shall be treated as establishments of distinct
persons.
Explanation 4. A person carrying on a business through
a branch or agency or representational office in any
territory shall be treated as having an establishment in
that territory;”
36. The analysis of the definition of “service” as above makes it
clear that the service will not include those activities which
includes transfer, delivery or supply of any goods which is
deemed to be sale within the meaning of Clause (29A) of Article
366 of the Constitution.
37. Clause (29A) of Article 366 of the Constitution of India
defines the deemed sale. This clause reads as follows:
“(29A) tax on the sale or purchase of goods
includes—
32
(a) a tax on the transfer, otherwise than in pursuance of
a contact, of property in any goods for cash, deferred
payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as
goods or in some other form) invoked in the execution of
a works contract;
(c) a tax on the delivery of goods on hire purchase or any
system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for
any purpose (whether or not for a specified period) for
cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated
association or body of persons to a member thereof for
cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any
service or in any other manner whatsoever, of goods,
being food or any other article for human consumption or
any drink (whether or not intoxicating), where such
supply or service, is for cash, deferred payment or other
valuable consideration,
and such transfer, delivery or supply of any goods shall
be deemed to be a sale of those goods by the person
making the transfer, delivery or supply and a purchase
of those goods by the person to whom such transfer,
delivery or supply is made;”
38. Thus, the above clause specifies the cases which the tax in
relation to sale and purchase of goods will include and also
outlines its applicability even in the case of deemed sale.
39. Section 66E deals with the concept of declared services.
This Section reads as follows:
33
“66E. The following shall constitute declared services,
namely:––
(a) renting of immovable property;
(b) construction of a complex, building, civil structure or
a part thereof, including a complex or building intended
for sale to a buyer, wholly or partly, except where the
entire consideration is received after issuance of
completioncertificate by the competent authority.
Explanation. For the purposes of this clause,
(I) the expression “competent authority” means the
Government or any authority authorized to issue
completion certificate under any law for the time being
in force and in case of nonrequirement of such
certificate from such authority, from any of the
following, namely:–
(A) architect registered with the Council of Architecture
constituted under the Architects Act, 1972; (20 of
1972.) or
(B) chartered engineer registered with the Institution of
Engineers (India); or
(C) licensed surveyor of the respective local body of the
city or town or village or development or planning
authority;
(II) the expression “construction” includes additions,
alterations, replacements or remodeling of any existing
civil structure;
(c) temporary transfer or permitting the use or
enjoyment of any intellectual property right;
(d) development, design, programming, customisation,
adaptation, upgradation, enhancement, implementation
of information technology software;
(e) agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act;
34
(f) transfer of goods by way of hiring, leasing, licensing
or in any such manner without transfer of right to use
such goods;
(g) activities in relation to delivery of goods on hire
purchase or any system of payment by instalments;
(h) service portion in the execution of a works contract;
(i) service portion in an activity wherein goods, being
food or any other article of human consumption or any
drink (whether or not intoxicating) is supplied in any
manner as a part of the activity.”
40. Thus, the declared services include the services of renting
of immovable property, works contract, hire
purchase/instalment payment system, supply of food/drink,
etc. In other words, under the Constitution what is related to
deemed sale is also covered under the deemed service as per the
above Section.
41. The Transfer of Right to use goods for case, deferred
payment or value consideration is considered as deemed sale
under subclause (d) of Article 366(29A) of the Constitution of
India. Right to use of tangible goods service has also been
brought under the service tax net by the Finance Act, 2008,
with effect from 16.05.2008 vide notification No. 18/2008ST,
35
dated 10.05.2008 whereby taxable service has been defined
under Section 65(105)(zzzzj) of the Act 1994 to mean as:
“Any services provided or to be provided, to any person,
by any other person in relation to supply of tangible
goods including machinery, equipment and appliances
for use, without transferring right of possession and
effective control of such machinery, equipment and
appliances.”
POSITION OF LAW
42. TATA Consultancy Services (supra) was a case in which
the specific issue of computer software packages was
considered as is the concern in the present case also. There
was, however, a distinction drawn insofar as the 'uncanned
software' and 'canned software' alternatively termed as
'unbranded' and 'branded' is concerned. The distinction is in
that a 'canned software' contains programmes which can be
used as such by any person purchasing it, while an 'uncanned
software' is one prepared for a particular purchaser's
requirements by tweaking the original software to adapt to the
specific requirements of a particular entity. While a 'canned
software' could be sold over the shelf, an 'uncanned software' is
36
programmed to specific and particular needs and requirements.
This Court held that in India the test to determine whether a
property is “goods”, for the purpose of sales tax, is not confined
to whether the goods are tangible or intangible or incorporeal.
The correct test would be to determine whether an item is
capable of abstraction, consumption and use and whether it
can be transmitted, transferred, delivered, stored, possessed,
etc. It was held that both in the case of 'canned' and 'uncanned'
software all these are possible (sic para 16). Associated
Cement Companies Ltd. v. Commissioner of Customs, (2001)
4 SCC 593, was heavily relied on by this Court. It was held:
"27. In our view, the term "goods" as used in Article
366(12) of the Constitution and as defined under the
said Act is very wide and includes all types of
movable properties, whether those properties be
tangible or intangible. We are in complete agreement
with the observations made by this Court in
Associated Cement Companies Ltd. A software
program may consist of various commands which
enable the computer to perform a designated task.
The copyright in that program may remain with the
originator of the program. But the moment copies are
made and marketed, it becomes goods, which are
susceptible to sales tax. Even intellectual property,
once it is put on to a media, whether it be in the form
37
of books or canvas (in case of painting) or computer
discs or cassettes, 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".
28. At this stage it must be mentioned that Mr
Sorabjee had pointed out that the High Court has, in
the impugned judgment, held as follows:
"... In our view a correct statement would be that
all intellectual properties may not be 'goods' and
therefore branded software with which we are
concerned here cannot be said to fall outside the
purview of 'goods' merely because it is intellectual
property; so far as 'unbranded software' is
concerned, it is undoubtedly intellectual property
but may perhaps be outside the ambit of 'goods'."
(emphasis supplied)
38
29. Mr Sorabjee submitted that the High Court
correctly held that unbranded software was
"undoubtedly intellectual property". Mr Sorabjee
submitted that the High Court fell in error in making
a distinction between branded and unbranded
software and erred in holding that branded software
was "goods". 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".
43. Associated Cement Companies Ltd. (supra) considered
the question whether the drawings, designs, etc. relating to
machinery or industrial technology were goods, leviable to duty
of customs on their transaction value at the time of import. It
was argued that the transfer of technology or knowhow though
valuable was intangible. The technology when transmitted to
India on some media does not get converted from an intangible
thing to tangible thing or chattel and that in a contract by
39
supply of services there is no sale of goods, was the argument.
Reading Section 2(22) of the Customs Act, 1962 which defines
the word "goods", including clause (c) "baggage" and clause (e)
"any other kind of moveable property", it was held that any
moveable article brought into India by a passenger as part of
his baggage can make him liable to pay customs duty as per
the Customs Tariff Act, 1975. Any media whether in the form of
books or computer disks or cassettes which contain information
technology or ideas would necessarily be regarded as “goods”
under the aforesaid provisions of the Customs Act, these items
being moveable goods, covered by Section 2(22)(e) of the
Customs Act. What was transferred was technical advice on
information technology. But the moment the information or
advice is put on a media, whether paper or diskettes or any
other thing, the supply is of a chattel. It is in respect of the
drawings, designs, etc. which are received that payment is
made to the foreign collaborators. The question whether the
papers or diskettes etc. containing advice and/or information
are goods for the purpose of the Customs Act was answered in
40
the affirmative. This Court clearly held that "the intellectual
property when put on a media would be regarded as an article
on the total value of which customs duty is payable". "When
technical material is supplied whether in the form of drawings or
manuals the same are goods liable to customs duty on the
transaction value in respect thereof". It was concluded so in
paragraph 46:
"46. The concept that it is only chattel sold as chattel,
which can be regarded as goods, has no role to play
in the present statutory scheme as we have already
observed that the word "goods" as defined under
the Customs Act has an inclusive definition taking
within its ambit any moveable property. The list of
goods as prescribed by the law are different items
mentioned in various chapters under the Customs
Tariff Act, 1997 or 1999. Some of these items are
clearly items containing intellectual property like
designs, plans, etc".
(underlining by us for emphasis)
44. We may also refer to and rely upon a decision of this Court
in the case of 20th Century Finance Corpn. Ltd. v. State of
Maharashtra, reported in (2000) 6 SCC 12. In this decision,
this Court considered the incorporation of clause (d) of Clause
41
(29A) of Article 366 of the Constitution referred to above. It is
apt to quote the following relevant portion from the judgment :
“26… The various subclauses of clause (29A)
of Article 366 permit the imposition of tax thus: subclause (a) on transfer of property in goods; subclause (b) on transfer of property in goods; subclause (c) on delivery of goods; subclause (d) on
transfer of the right to use goods; subclause (e) on
supply of goods; and subclause (f) on supply of
services. The words and such transfer, delivery or
supply. In the latter portion of clause (29A),
therefore, refer to the words transfer, delivery and
supply, as applicable, used in the various subclauses. Thus, the transfer of goods will be a
deemed sale in the cases of subclauses (a) and (b),
the delivery of goods will be a deemed sale in case
of subclause (c), the supply of goods and services
respectively will be deemed sales in the cases of
sub clauses (e) and (f) and the transfer of the right
to use any goods will be a deemed sale in the case
of subclause (d). Clause (29A) cannot, in our view,
be read as implying that the tax under subclause
(d) is to be imposed not on the transfer of the right to
use goods but on the delivery of the goods for use.
Nor, in our view, can a transfer of the right to use
goods in subclause (d) of clause (29A) be equated
with the third sort of bailment referred to in
Bailment by Palmer, 1979 edition, page 88. The
third sort referred to there is when goods are left
with the bailee to be used by him for hire, which
implies the transfer of the goods to the bailee. In the
case of subclause (d), the goods are not required to
be left with the transferee. All that is required is that
there is a transfer of the right to use the goods. In
42
our view, therefore, on a plain construction of subclause (d) of Clause (29A), the taxable event is the
transfer of the right to use the goods regardless of
when or whether the goods are delivered for use.
What is required is that the goods should be in
existence so that they may be used. And further
contract in respect thereof is also required to be
executed. Given that, the locus of the deemed sale is
the place where the right to use the goods is
transferred. Where the goods are when the right to
use them is transferred is of no relevance to the
locus of the deemed sale. Also of no relevance to the
deemed sale is where the goods are delivered for
use pursuant to the transfer of the right to use them,
though it may be that in the case of an oral or
implied transfer of the right to use goods, it is
effected by the delivery of the goods.”
45. While holding that in a contract for the transfer of the
right to use goods, the taxable event would be the execution of
the contract for delivery of the goods, it was observed :
“27. Article 366(29A)(d) further shows that levy of tax
is not on use of goods but on the transfer of the right to
use goods. The right to use goods accrues only on
account of the transfer of right. In other words, right to
use arises only on the transfer of such a right and
unless there is transfer of right, the right to use does
not arise. Therefore, it is the transfer which is sine qua
non for the right to use any goods. If the goods are
available, the transfer of the right to use takes place
when the contract in respect thereof is executed. As
43
soon as the contract is executed, the right is vested in
the lessee. Thus, the situs of taxable event of such a
tax would be the transfer which legally transfers the
right to use goods. In other words, if the goods are
available irrespective of the fact where the goods are
located and a written contract is entered into between
the parties, the taxable event on such a deemed sale
would be the execution of the contract for the transfer
of right to use goods. But in case of an oral or implied
transfer of the right to use goods it may be effected by
the delivery of the goods.”
(Emphasis Supplied)
46. In BSNL (supra) this Court took the view that a
telephone service is nothing but a “service”. However, the
nature of the transaction involved in providing the telephone
connection may be a composite contract of “service” and “sale”.
There may be a transfer of right to use the “goods” as defined in
the providing of access or telephone connection by the
telephone service provider to a subscriber. Justice Ruma Pal,
speaking for the Bench in her separate judgment, took the view
that a subscriber to a telephone service could not reasonably be
taken to have intended to purchase or obtain any right to use
electromagnetic waves or radio frequencies when a telephone
44
connection is given. Nor does the subscriber intend to use any
portion of the wiring, the cable, the satellite, the telephone
exchange, etc. At the most, the concept of the sale in a
subscriber's mind would be limited to the handset that might
have been purchased for the purposes of getting a telephone
connection. As far as the subscriber is concerned, no right to
the use of any other goods, incorporeal or corporeal, is given to
him with the telephone connection. In such circumstances, it
was held that the electromagnetic waves or radio frequencies
are not “goods” within the meaning of the word “either in Article
366(12) or for the purpose of Article 366(29A)(b)”. Emphasis
was laid on the fact, whether there are any deliverable goods or
not. If there are no deliverable goods in existence, like the one
in BSNL (supra), there is no transfer of user under Article
366(29A)(b) at all.
47. Justice Dr. AR. Lakshmanan, in his separate but
concurring judgment, highlighted the following attributes in
para 97 of the judgment to constitute a transaction for the
transfer of right to use the goods:
45
“97. …
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the
identity of the goods;
c. The transferee should have a legal right to use the
goods consequently all legal consequences of such
use including any permissions or licenses required
therefor should be available to the transferee;
d. For the period during which the transferee has such
legal right, it has to be the exclusion to the transferor
this is the necessary concomitant of the plain
language of the statute viz. a "transfer of the right to
use" and not merely a licence to use the goods;
e. Having transferred the right to use the goods during
the period for which it is to be transferred, the owner
cannot again transfer the same rights to others.”
48. In the case of BSNL (supra), His Lordship noticed that
none of the aforesaid attributes were present in the relationship
between the telecom service provider and a consumer of such
services.
49. His Lordship thereafter in para 117 of the judgment
referred to the Sale of Goods Act, 1930. We quote para 117 as
under:
46
“117. Sale of Goods Act, comprehends two elements,
one is a sale and the other is delivery of goods.
20th Century Finance Corporation Limited vs. State of
Maharashtra, 2000 (6) SCC 12 at p. 44, para 35 ruled
that
"35. (c) where the goods are available for the
transfer of right to use the taxable event on the
transfer of right to use any goods is on the
transfer which results in right to use and the situs
of sale would be the place where the contract is
executed and not where the goods are located for
use.
(d) In cases where goods are not in existence or
where there is an oral or implied transfer of the
right to use goods, such transactions may be
effected by the delivery of the goods. In such
cases the taxable event would be on the delivery
of goods."
50. Ultimately, His Lordship took the view that as no goods’
elements were involved, the transaction was purely one of
service as there was no transfer of right to use the goods at all.
51. The following principles to the extent relevant may be
summed up:
(a) The Constitution (Fortysixth) Amendment Act intends to
rope in various economic activities by enlarging the scope
of “tax on sale or purchase of goods” so that it may include
47
within its scope, the transfer, delivery or supply of goods
that may take place under any of the transactions referred
to in subclauses (a) to (f) of Clause (29A) of Article 366.
The works contracts, hire purchase contracts, supply of
food for human consumption, supply of goods by
association and clubs, contract for transfer of the right to
use any goods are some such economic activities.
(b) The transfer of the right to use goods, as distinct from the
transfer of goods, is yet another economic activity intended
to be exigible to State tax.
(c) There are clear distinguishing features between ordinary
sales and deemed sales.
(d) Article 366(29A)(d) of the Constitution implies tax not on
the delivery of the goods for use, but implies tax on the
transfer of the right to use goods. The transfer of the right
to use the goods contemplated in subclause (d) of clause
(29A) cannot be equated with that category of bailment
where goods are left with the bailee to be used by him for
hire.
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(e) In the case of Article 366(29A)(d) the goods are not
required to be left with the transferee. All that is required
is that there is a transfer of the right to use goods. In such
a case taxable event occurs regardless of when or whether
the goods are delivered for use. What is required is that
the goods should be in existence so that they may be used.
(f) The levy of tax under Article 366(29A)(d) is not on the use
of goods. It is on the transfer of the right to use goods
which accrues only on account of the transfer of the right.
In other words, the right to use goods arises only on the
transfer of such right to use goods.
(g) The transfer of right is the sine qua non for the right to
use any goods, and such transfer takes place when the
contract is executed under which the right is vested in the
lessee.
(h) The agreement or the contract between the parties would
determine the nature of the contract. Such agreement has
to be read as a whole to determine the nature of the
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transaction. If the consensus ad idem as to the identity of
the good is shown the transaction is exigible to tax.
(i) The locus of the deemed sale, by transfer of the right to
use goods, is the place where the relevant right to use the
goods is transferred. The place where the goods are
situated or where the goods are delivered or used is not
relevant.
52. From the judicial decisions, the settled essential
requirement of a transaction for the transfer of the right to use
the goods are :
(i) it is not the transfer of the property in goods, but it is the
right to use the property in goods;
(ii) Article 366(29A)(d) read with the latter part of the clause
(29A) which uses the words, “and such transfer, delivery or
supply”… would indicate that the tax is not on the delivery of
the goods used, but on the transfer of the right to use goods
regardless of when or whether the goods are delivered for use
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subject to the condition that the goods should be in existence
for use;
(iii) in the transaction for the transfer of the right to use goods,
delivery of the goods is not a condition precedent, but the
delivery of goods may be one of the elements of the transaction;
(iv) the effective or general control does not mean always
physical control and, even if the manner, method, modalities
and the time of the use of goods is decided by the lessee or the
customer, it would be under the effective or general control over
the goods;
(v) the approvals, concessions, licences and permits in relation
to goods would also be available to the user of goods, even if
such licences or permits are in the name of owner (transferor) of
the goods, and
(vi) during the period of contract exclusive right to use goods
along with permits, licenses, etc., vests in the lessee.
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CONSTRUCTION OF AGREEMENT BETWEEN THE PARTIES:
53. The salient features of the Quick Heal Internet Security
EndUser License Agreement are as follows:
1. Grant of License, not ownership
In consideration of payment of the License Fee, which is a
part of the price, Quick Heal (developer) grants the
purchaser (enduser) a license which is nonexclusive and
nontransferable. The developer reserves all rights not
expressly granted and retains the title and ownership of
the software, including all subsequent copies in any
media.
2. Termination
The Enduser is entitled to use the software till the date on
which the license expires. Any unauthorised usage of the
software would result in automatic and immediate
termination of the agreement and the license granted.
3. Breach of Contract
The developer reserves to take any action against
unauthorised usage. This may be criminal/civil action by
the developer, including the right to block the key
file/License key/product key with neither issuance of any
notice nor refund to the enduser.
4. Right to Updates
During the license period of the software, the endusers
are entitled to receive free software updates via Internet.
The Endusers will be required to regularly download these
updates, which shall be governed by the agreement or as
amended by the developer.
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5. Limiting Liability
The Endusers are solely responsible for configuring the
software settings and the results, actions, inactions
initiated due to the same. The developer assumes no
liability for any deletion or modification authorised by the
user in any case, and the indemnification clause would
become applicable.
6. Disclaiming Warranties
Certain features of the software may require additional
payment. The developer disclaims any claim for
reimbursement of expenses arising out of endusers’ usage
of such features.
7. Governing Law
The Endusers are obliged to comply with all laws,
regulations of India and any foreign law, including privacy,
obscenity, confidentiality, copyright laws, while using the
software.
8. Data Collection
On updating every licensed copy, the developer would
collect “the current product status information”, which
include the state of monitoring service in the system. This
information is used for improving the developer’s technical
support towards its customers. No files or personal data is
collected.
9. Intellectual Property Rights of the Developer
The Endusers do not have any right, title, or interest to
the intellectual property, including any error corrections,
enhancements, updates, or modifications to the software,
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whether made by the developer or third party.
54. In Delta International Ltd. v. Shyam Sundar
Ganeriwalla, (1999) 4 SCC 545 : AIR 1999 SC
2607 and Ramdev Food Products (P) Ltd. v. Arvindbhai
Rambhai Patel, (2006) 8 SCC 726, this Court quoted with
approval the following principles of construction of contracts
from the ‘Interpretation of Contracts’ by Kim Lewison, Q.C.
as follows.
“1.03 For the purpose of the construction of contracts,
the intention of the parties is the meaning of the words
they have used. There is no intention independent of
that meaning.
6.09 Where the words of a contract are capable of two
meanings, one of which is lawful and the other
unlawful, the former construction should be preferred.
Sir Edward Coke [Co. Litt. 42a] expressed the
proposition thus:
‘It is a general rule, that whensoever the words of
a deed, or of one of the parties without deed, may have
a double intendment and the one standeth with law and
right, and the other is wrongful and against law, the
intendment that standeth with law shall be taken.’
In more modern times that statement was
approved by the Privy Council in Rodger v. Comptoir
54
D'Escomple de Paris, (1869) LR 2 PC 393 : 16 ER 618, in
which Sir Joseph Napier, delivering the advice of the
Board said:
‘The rule that words shall be construed most
strongly against him who uses them gives place to a
higher rule; higher because it has a moral element,
that the construction shall not be such as to work a
wrong.’
Similarly, in Fausset v. Carpenter, (1831) 2 Dow
& Cl 232 : 6 ER 715, the House of Lords accepted the
submission of counsel that the court:
‘… in judging of the design and object of a deed,
will not presume that a party executing the deed meant
to do and did what he was wrong in doing, when a
construction may be put on the instrument perfectly
consistent with his doing only what he had a right to do.
However, the question of construction should not
be approached with a leaning in one direction or
another. Thus although the law frowns upon covenants
in restraint of trade, nevertheless such a covenant
should not be approached on the basis that it is prima
facie illegal. ‘You are to construe the contract, and then
see whether it is legal.’”
55. The sum and substance of the ratio of the case of BSNL
(supra) as discernible is that the contract cannot be vivisected
or split into two. Once a lumpsum has been charged for the
sale of CD (as in the case on hand) and sale tax has been paid
thereon, the revenue thereafter cannot levy service tax on the
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entire sale consideration once again on the ground that the
updates are being provided. We are of the view that the artificial
segregation of the transaction, as in the case on hand, into two
parts is not tenable in law. It is, in substance, one transaction
of sale of software and once it is accepted that the software put
in the CD is “goods”, then there cannot be any separate service
element in the transaction. We are saying so because even
otherwise the user is put in possession and full control of the
software. It amounts to “deemed sale” which would not attract
service tax.
56. In view of the aforesaid, we have reached to the
conclusion that the impugned order of the Tribunal suffers from
no jurisdictional or any other legal infirmity warranting any
interference at our end in the present appeal.
57. In the result, the appeal fails and it is hereby dismissed.
58. There shall be no order as to costs.
59. Pending application(s), if any, also stands disposed of.
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CIVIL APPEALS ARISING OUT OF S.L.P. (CIVIL) NOS. 6715
6716 OF 2022
60. Leave granted.
61. These appeals, by special leave, are at the instance of the
assessee and is directed against the order passed by the High
Court of Judicature at Madras in Writ Appeal No. 1881 of 2021
and CMP No. 11998 of 2021 decided on 05.08.2021 by which
the High Court dismissed the writ appeal thereby affirming the
Order in Original dated 26.04.2018 passed by the respondent
herein.
FACTUAL MATRIX
62. The appellant herein obtained the antivirus software
replicated from the units in Himachal Pradesh duly assessed to
Nil Central Excise duty under the Notification No. 50/2003 CE
dated 10.06.2003, and sold antivirus software in the CD form
i.e., as a “packaged software or canned software” both
indigenously by remitting appropriate VAT or exported the
same. Disputes were raised by the tax authorities claiming that
the activities of the appellant herein came within the ambit of
the Information Technology Software Service as defined under
57
Section 65(105)(zzzze) of the Act 1994. The initial notices issued
ended in the confirmation of demand on the ground that since
the appellant was providing the key and allowing updates
online, it amounted to digital delivery and therefore it would fall
under the above taxable entry.
63. The appellant preferred statutory appeals against these
orders passed by the Tribunal, Chennai Branch.
64. The Tribunal was pleased to grant interim stay as the
appellant had paid VAT on the sale of the software. While the
appeals were pending before the Tribunal, Chennai Branch, the
Department continued to issue further show cause notices from
time to time along with the issued statement of demand for
these periods. The appellant filed a detailed reply dated
17.04.2018 contending that no service tax was payable as the
liability towards the VAT had already been discharged and the
software being goods could not be made exigible to service tax.
Despite the clear pronouncement by this Court, an OrderinOriginal dated 26.04.2018 was passed confirming tax on the
regime value charged by the appellant for the sale of the
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software on which the VAT was paid including the value of the
software exported, leading to the excessive demand not
authorized under law. Further, the authority observed in para
6.6 of his order that in terms of the judgment of this Hon’ble
Court in TCS, the character of the software as goods cannot be
taken away and that it fell within the ambit of “deemed sales”.
The said authority further imposed penalty and levied interest
as well.
65. The appellant filed Writ Petition No. 25923 of 2018 before
the Madras High Court and a learned single Judge admitted the
writ petition and also granted interim stay noting that the VAT
had already been paid on the goods.
66. While the writ petition was pending, the Tribunal, Chennai
Branch followed the decision of the Tribunal, Delhi Bench in the
case of Quick Heal Technologies Ltd. (supra) and allowed the
appeals filed by the appellant in their earlier cases. It is
significant to note that against this order of the Tribunal,
Chennai Bench no further appeal has been filed by the
59
Department and thus, the view taken by the Tribunal became
final in so far as the appellant is concerned.
67. When the abovementioned Writ Petition No. 25923 of
2018 came up for final disposal, the learned single Judge vide
order dated 29.10.2020 dismissed the Writ Petition, inter alia,
on the ground that the High Court was not bound by the
decision of the Tribunal, Delhi Bench in the case of Quick Heal
Technologies Ltd. and the appellant’s own order passed by the
Tribunal, Chennai Bench.
68. Aggrieved by the order of the learned single Judge, the
appellant preferred the Writ Appeal No. 1881 of 2021 against
the order dated 29.10.2020 passed by the learned single Judge
in Writ Petition No. 25923 of 2018. The Division Bench vide
order dated 05.08.2021 declined to interfere with the order of
the learned single Judge on the ground that an earlier Division
Bench decision of the Madras High Court in the case of M/s
Infotech Software Dealers Association v. Union of India
(supra) covered the issue. It also held that the antivirus
60
software which is installed in the hardware would interact
whenever the user of the computer engages the system.
69. In such circumstances referred to above, the appellant
herein has come up before this Court by filing the present
appeals.
70. These appeals should succeed in the light of the reasoning
assigned by us while dismissing the Civil Appeal (Diary No.
24399 of 2020), as above.
71. However, while allowing these appeals, we may only
observe that in the case of M/s Infotech Software Dealers
Association v. Union of India (supra) the challenge was to the
validity of Section 65(105)(zzzze) levying service tax on the
information technology software service. The High Court held
that the question whether the software is “goods” or not would
depend on the facts and circumstances of individual case. It is
evident on plain reading of the judgment rendered by the
Madras High Court in the case of M/s Infotech Software
Dealers Association (supra) that it has not referred to the
61
decision of this Court in the case of TATA Consultancy
Services (supra).
72. We take notice of the fact that the appellant herein had
also filed a Review Petition No. 205 of 2021 against the order
dated 05.08.2021 in the Writ Appeal No. 1881 of 2021, which
came to be rejected vide order dated 20.12.2021.
73. In view of the judgment rendered above in Civil Appeal
(Diary No. 24399 of 2020), these appeals should succeed and
deserve to be allowed.
74. In the result, the appeals are allowed. The impugned
order passed by the High Court dated 05.08.2021 in the Writ
Appeal No. 1881 of 2021 as also the order dated 20.12.2021
passed in the Review Petition No. 205 of 2021 in Writ Appeal
No. 1881 of 2021 are hereby set aside.
75. There shall be no order as to costs.
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76. Pending application(s), if any, also stands disposed of.
……………………………………..J.
(ABHAY S. OKA)
…………………………………….J.
(J.B. PARDIWALA)
NEW DELHI;
AUGUST 05, 2022
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