WIRC of ICAI. Indirect Tax Information Technology Software. CA Bharat Shemlani 20/08/2011

Transcription

1 WIRC of ICAI Controversial Issues Indirect Tax Information Technology Software CA Bharat Shemlani 20/08/2011

2 Background ASSOCIATED CEMENT COMPANIES LTD (128) ELT 21 (SC) Goods (Customs) - Drawings and designs - All tangible movable articles are goods for charge of customs duties under Section 12 read with Section 2(22)(e) of Customs Act, 1962, irrespective of what the articles may be or may contain - It may be that what the importer wanted and paid for was technical advice or information technology, an intangible asset, but the moment the information or advice was put on a media, whether paper or cassettes or diskettes or any other thing, that what is supplied becomes chattel - Drawings, designs, manuals and technical material are goods liable to customs duty - Fact that Reserve Bank of India permitted remittance of payment for them on Form A-2 which is used to pay for services and not for goods, not decisive of the issue - Sales Tax case law on goods has no applicability under the Customs Act. 2

3 Background TATA CONSULTANCY SERVICES (178) ELT 22 (SC) Software - Sales tax - Goods - Computer software in canned form - Sale of the shelf as sub-licence by its licensee on floppy/cd/hard drives with ownership remaining with developer thereof - HELD : Since software was capable of abstraction, consumption, use, transmission, transfer, delivery, storage, possession etc., it was included as material, articles and commodities in definition of goods in Section 2(h) of Andhra Pradesh General Sales Tax Act, 1957 and, accordingly its sale by licensee was liable to sales tax - Plea that software was not tangible movable property and hence not goods rejected. 3

4 MVAT Taxable under Schedule Entry C-39 under MVAT Act. Software Package (not defined) Rate of Tax is 5%. No set off is allowed except dealers trading in software. 4

5 MVAT L.M.L. LTD (258) ELT 321 (SC) Computer software is the set of instructions that allows physical hardware to function and perform computations in a particular manner, be it a word processor, web browser or the computer s operating system. These expressions are in contrast with the concept of hardware which are the physical components of a computer system, and data, which is information that performs no computation and gives no enabling instructions to computer hardware but is ready for processing by the computer software 5

6 Service Tax 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; 6

7 Service Tax Taxable service provided or to be provided to any person, by any other person in relation to information technology software (ITS) including, (i) development of ITS, (ii)study, analysis, design and programming of ITS, (iii) adaptation, up-gradation, enhancement, implementation and other similar services related to ITS, (iv) providing advice, consultancy and assistance on matters related to ITS, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the start-up phase of a new system, specifications to secure a database, advice on proprietary ITS, (v)providing the right to use ITS for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other ITS products, (vi) providing the right to use ITS supplied electronically. 7

8 Service Tax Management, maintenance or repair means any service provided by (i) any person under a contract or an agreement; or (ii) a manufacturer or any person authorised by him, in relation to, (a)management of properties, whether immovable or not; (b)maintenance or repair of properties, whether immovable or not; or (c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle; Explanation. For the removal of doubts, it is hereby declared that for the purposes of this clause, (a) goods includes computer software; (b) properties includes information technology software; 8

9 Excise Duty/CVD Central Excise Tariff item covers Information Technology Software. The definition of Information Technology Software is same as defined under service tax. Document conveying the right to use software by themselves do not satisfy this definition and therefore do not qualify for classification under this tariff item because they do not contain any representation of instructions, data, sound or image recorded in a machine readable form, which is capable of being manipulated or providing interactivity to a user. Paper licenses or Personal Unlocking Key (PUK) PUK), usually in the form of a scratch card of paper board or plastic merit classification as per their individual character under heading 4907 in case of paper license and heading 4911 in case of PUK card, the same being other printed matter. 9

10 Exemption In the context of assessment of pre-packaged software imports, Notification No. 30/2010-CE(NT) dt 21/12/ 2010 by which all such packaged software or canned software were brought under the purview of assessment based on retail sale price. Abatement of 15% granted. packaged software or canned software means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold off the shelf. Notification No. 25/2011-Cus., dt and Notification No. 14/2011-CE, dt , whereby in case of such packaged software which does not require affixation of Retail Sale Price (RSP), exemption has been provided, from payment of Excise duty/cvd, on the portion of value representing consideration for transfer of right to use such packaged/canned software (on which basically service tax is paid). 10

11 Exemption These exemptions have been issued in order to rule out taxation of this portion of the value twice-once as Excise duty/additional duty of Customs and another time as Service Tax on the consideration that all package software is not sold as shrink wrapped software and that affixation of retail sale price is not required for certain categories viz. (i) software on optical media supplied free of charge, for which right to use or license is purchased separately; (ii) full pack -packaged software with limited validity, not for resale and generally imported for demonstrations or for OEMs; (iii) up-grade full pack-packaged software-supplied free of charge under annual maintenance/subscription/software assurance contract; and (iv) up-dates for packaged software-supplied free of charge under annual maintenance/subscription/software assurance contract etc. 11

12 Exemption All packaged/canned software imported in shrink wrapped packages, will attract Excise duty/cvd on such retail sale price declared being the combined value of the software and the licenses (right to use). Such software will, however, be exempt from payment of service tax under the category ITSS (item (v) of 65(105)(zzzze) as provided in Notification No. 53/2010-S.T. Dt 21/12/

13 Exemption On the other hand, such packaged/canned software, on which affixation of retail sale price is not required under the relevant provisions for the packaged commodities, and the assessment is based therefore, on the value determined under section 4 of the Central Excise Act, 1944, the excise duty/cvd will be charged only on the value, excluding the value representing consideration for transfer of right to use such packaged/canned software. However, service tax under the category ITSS would be levied on such portion subsequently. 13

14 Overlapping of Taxation Taxable service provided or to be provided to any person, by any other person in relation to information technology software (ITS) including, (i) development of ITS, (v) providing the right to use ITS for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other ITS products, (vi) providing the right to use ITS supplied electronically. 14

15 Case law STEAG ENCOTEC INDIA PVT. LTD (250) ELT 287 (Tri. - Mumbai) Software - Customized software - Custom designed software - Notification No. 6/2006-C.E. - Clear cut meaning attributed to customized software in notification itself - Dictionary meaning or description in websites cannot override the same - Software to be developed from basic building blocks resulting in emergence of new software product as per specific requirement of customer to qualify as custom designed software - Software just modified from already existing established software packages/modules not covered under custom designed software 15

16 Case law PENTAMEDIA GRAPHICS LTD (198) ELT 164 (SC) Software - Computer software - Motion capture animation files are computer software recorded in a machine readable form and capable of being manipulated by means of an automatic data processing machines - Merely because motion capture animation files require another software known as soft image to get final results does not detract goods under import from being software - Goods continue to be a software, entitled to exemption under Notification No. 20/99-Cus. Software - Programming aids also known as software - Heading of Customs Tariff Act,

17 Case law In Infosys Technologies Ltd. (2008) 17 VST 256 (Mad), the HC held that, if a software whether customized or non-customized satisfied the attributes of goods as explained in preceding paragraph would be goods and therefore the order holding that the petitioner is not entitled to use Form C for its purchases meant for use in preparation of customized software is liable to be set aside. 17

18 Case law The DB of Karnataka HC in Inventa software (India) Private Limited (2008) 17 VST 362 (Kar.) has held based on the Supreme Court decision in Tata Consultancy services that the development of application software in the areas such as financial accounting, inventory control, sales analysis, purchase order system is works contract attracting sales tax under entry 22 of the Sixth Schedule of the Karnataka Sales Tax Act, 1957 under Programming and providing computer software. 18

19 Case law INFOTECH SOFTWARE DEALERS ASSOCIATION 2010 (20) STR 289 (Mad.) ITSS- Sale v. service - Software whether treatable as goods and if so, transaction to be treated as sale or service when supplied to customer as per End User Licence Agreement (EULA) - Sale of software contended as liable to sales tax/vat as goods and service element absent - Law as to whether software is goods or not, settled by Supreme Court ruling in TCS case [2004 (178) ELT 22 (SC)] - Software is goods as per Article 366(12) of Constitution - Software being an intangible property can be considered as goods for levy of sales tax - Transaction whether amounting to sale or service depends on individual transaction - Terms in EULA indicating dominant intention of parties whereby developer retains copyright of software while right to use given to subscriber or member - Software as such not sold by developer as per EULA - Transaction between members of petitioner-association and customers is not sale of software as such but only contents of data stored in software which amounts to service only 19

20 Thank You Who Speaks Sows But Who Listens Reaps 20