ABCDEFGH933 WithCivil Appeal Nos.5168-5169 of 2022 Ms. Aishwarya Bhati v. QUICK HEALTECHNOLOGIES LTD. ABCDEFGH935(Rupees Fifty Six Crore Seven Lakh Five Thousand Five
Case at a glance
Outcome
Allowed
In the result, the appeals are allowed
Provisions considered
- Constitution of India arts. 366, 366(12), 366(29A), 366(29A)(d)
- L(b) of the Central Excise Act, 1944
- E(d) of the Act, 1994
- Finance Act, 1994
- E(f) of theFinance Act, 1994
- Andhra Pradesh General Sales Tax Act, 1957
- Central Excise Act, 1944
- Architects Act, 1972
- Finance Act, 2008
- Customs Act, 1962 s. 2(22)
- Customs Tariff Act, 1975
- Customs Tariff Act, 1997
- Sale of Goods Act, 1930
- Sale of Goods Act
Key paragraphs
- Para 1717. Referring to the decision of this Court in the case of BharatSanchar Nigam Ltd. v. Union of India, (2006) 3 SCC 1, (for short,‘BSNL’), he would submit that the same deals with the “compositetransaction” of giving telephone connection that involves service andsale. It was…
- Para 1818. He placed strong reliance on the decision of the Madras HighCourt in the case of M/s Infotech Software Dealers Association v.Union of India, 2010 (20) S.T.R. 289 (Mad.), wherein the High Courttook the view that the supply of packaged antivirus software to the enduser…
- Para 2020. On the other hand, Mr. Arvind P. Datar, the learned seniorcounsel appearing for the assessee, vehemently opposed this appeal bysubmitting that no error, not to speak of any error of law, could be said tohave been committed by the Tribunal in passing the impugned…
Judgment
ABCDEFGH933WithCivil Appeal Nos.5168-5169 of 2022Ms. Aishwarya Bhati, ASG, Arvind P. Datar, Sr. Adv., PratapVenugopal, Ms. Surekha Raman, Rahul Unnikrishnan, Akhil AbrahamRoy, M/s K J John and Co., Rupesh Kumar, Akshay Amritanshu, Ameyavikrama Thanvi, Durga Dutt, Ashutosh Jain, Mukesh KumarMaroria, Shubhranshu Padhi, Ashish Yadav, Vishal Bansal, Ms.Rajeshwari Shankar, Advs. for the appearing parties. The Judgment of the Court was delivered byJ. B. PARDIWALA, J.
Since the issues raised in both the captioned cases are thesame, those were taken up for hearing analogously and are being disposedof by this common judgment. Civil Appeal (Diary No. 24399 of 2020)
Delay condoned.
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 Act1994’), is at the instance of the revenue and is directed against the orderNo. 50022/2020 dated 09.01.2020 passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (for short, ‘the Tribunal’) inthe Service Tax Appeal No. 51175 of 2016 by which the Tribunal allowedthe appeal filed by the respondent herein (assessee) thereby set asidethe Order in Original dated 28.01.2016 passed by the Additional DirectorGeneral (Adjudication) DGCEI, Delhi.FACTUAL MATRIX4. For the sake of convenience, the appellant herein shall bereferred to as the “revenue” and the respondent herein shall be referredto as the “assessee”.
The assessee is registered with the Service Tax Commissioner, Pune-III for providing taxable services, inter alia, under the categoryof “Information Technology Software Service”. The assessee is engagedin the development of Quick Heal brand Antivirus Software which issupplied along with the license code/product code either online or on thereplicated CDs/DVDs to the end-customers in India.COMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. ABCDEFGH934SUPREME COURT REPORTS[2022] 17 S.C.R.6. It appears from the materials on record that it came to thenotice of the Directorate General of Central Excise Intelligence(Headquarters) that the assessee engaged in the development of QuickHeal brand Antivirus Software had not been paying service tax prior to01.07.2012 on the services covered under the category of “InformationTechnology Software Service” falling under Item No. (vi) of clause(zzzze) of sub-section (105) of Section 65 of the Act 1994 w.e.f01.07.2012 on the services covered under the category of “InformationTechnology Software Service” under Section 66E(d) of the Act 1994for providing Quick Heal brand Antivirus Software license key/codesupplied along with the CD/DVD replicated with the Quick Heal brandAntivirus Software through the dealers/distributors to the end-customersin India.
In the aforesaid context, an inquiry was initiated against theassessee and at the end of the same, the revenue reached to the conclusionthat the assessee is liable to pay service tax on the transactions with theend-customers to supply the license codes/keys of Quick Heal brandAntivirus Software in the retail packs. The revenue reached to theconclusion that the assessee had failed to pay the service tax on theconsideration received for the supply of the license codes/keys of Antivirus Software to the end-customers in retail packs during the periodbetween 01.03.2011 and 31.03.2014.
In such circumstances referred to above, a show cause noticedated 02.02.2015 came to be issued to the assessee by the AdditionalDirector General, DGCEI (Hqrs.), New Delhi proposing a demand/recovery of service tax amounting to Rs. 62,73,05,953.36p. (RupeesSixty Two Crore Seventy Three Lakh Five Thousand Nine HundredThree and paise Thirty Six Only) on the taxable value of Rs.5,30,94,66,783/- (Rupees Five Arab Thirty Crore Ninety Four Lakh SixtySix Thousand Seven Hundred Eighty Three Only) for supplying QuickHeal Antivirus Software replicated CDs/DVDs in the retail packs (i.e.Information Technology Software Service) through its dealers/distributorsto the end-customers in India for the period between 01.03.2011 and31.03.2014 under the proviso to Section 73(1) of the Act 1994 by invokingthe extended period of limitation with interest and penalty.
The show cause notice referred to above was adjudicated bythe Additional Director General (Adjudication), DGCEI, Delhi, who, inturn, confirmed the demand of service tax amount to Rs. 56,07,05,595/- ABCDEFGH935(Rupees Fifty Six Crore Seven Lakh Five Thousand Five Hundred NinetyFive Only) alleged to have been not paid by the assessee on the serviceof Information Technology Software Service vide its Order in Originaldated 28.01.2016.
The assessee, being aggrieved with the order passed by the Additional Director General (Adjudication), DGCEI, preferred the ServiceTax Appeal No. 51175 of 2016 before the Tribunal.
The Tribunal allowed the appeal filed by the assessee hereinessentially on the following three grounds:-i.The antivirus software did not have an element ofinteractivity.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 pre-packaged/cannedsoftware would be treated as goods. Once the software isput on a medium like a CD and then sold, such softwarewould be treated as goods.iii. The Central Board of Excise & Customs (CBEC) issuedguidelines when the negative regime was issued on 1.7.2012.The guidelines clarified that the pre-packaged/cannedsoftware would not be goods even if there was a licence.
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.
The revenue has in its memorandum of appeal formulated thefollowing questions of law for consideration of this Court:-
(i) Whether the Tribunal is right in holding that thetransaction in the present case results in the right to use thesoftware and would amount deemed sale?(ii) Whether the Antivirus Software license key/code suppliedby the respondent along with CD/DVD replicated with QuickHeal Brand Antivirus Software through dealers/distributorsto the End-Customers is liable to Service Tax?(iii) Whether the service provided by the respondent isclassifiable under Information Technology Service liable toCOMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH936SUPREME COURT REPORTS[2022] 17 S.C.R.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 usesuch goods, is a declared service under clause (1) of Section66E of the Finance Act, 1994?
SUBMISSIONS ON BEHALF OF THE REVENUE :
The learned counsel appearing for the revenue vehementlysubmitted that the Tribunal committed a serious error in passing theimpugned order by relying upon the decision of this Court in TATAConsultancy Services (supra). He would submit that the question beforethis Court in the case of the TATA Consultancy Services (supra) waswhether the canned software sold by the appellants therein could betermed to be “goods” under the Andhra Pradesh General Sales Tax Act,1957 and hence, assessable to the sales tax? He submitted that theprincipal contention of the appellants before this Court in the case of theTATA Consultancy Services (supra) was that the canned software was“intangible property” and hence would not come within the definition ofthe “goods”. He would submit that the issue was clearly not whether thecanned software was “goods” or “service”. He laid much stress on thefact that no argument was canvassed on the canned software being aservice. Since the question did not pertain to the canned software beinga “service”, this Court did not make any comment on whether the cannedsoftware could be a “service”. He would submit that in suchcircumstances, the Tribunal committed an error in relying on the ratio ofthe decision of this Court in the case of TATA Consultancy Services(supra).
The learned counsel would further submit that the entiretransaction of selling or trading of the software can be divided into twostages:-(a) Up to the replication of the Master CD by the replicatorsunder the terms of agreement. This is covered by this Court’sjudgment in the case of TATA Consultancy Services (supra).There rises no dispute of paying duty at this stage, since, therecording of the software on their CDs and making themmarketable makes it ‘Goods’ which is chargeable to the CentralExcise Duty; ABCDEFGH937(b) The supply to the end-users under a separate End UserLicensing Agreement, consists of 2 parts: (i) Supply of Antivirus software in the CD.(ii) Providing electronic updates to the software originallyprovided.
He would submit that the present dispute is one relating topart (b) as above of the transaction.
Referring to the decision of this Court in the case of BharatSanchar Nigam Ltd. v. Union of India, (2006) 3 SCC 1, (for short,‘BSNL’), he would submit that the same deals with the “compositetransaction” of giving telephone connection that involves service andsale. It was held therein by the majority that it is possible for the State totax the sale element provided there is a discernible sale and the “dominantintention” test is satisfied. To put it in other words, the learned counselwould submit that the test for a composite contract other than thosementioned in the Article 366(29A) of the Constitution continues to be“did the parties have in mind or intend separate rights arising out of thesale of goods?”. If there was no such intention, there is no sale even ifthe contract could be disintegrated. According to the learned counsel, the test for deciding whether a contract falls into one category or theother is as to what is ‘the substance of the contract’. He pointed out thatin the case of BSNL (supra) it was held that what amounts to being“goods” in the sale transaction remains primarily a matter of contractand intentions.
He placed strong reliance on the decision of the Madras HighCourt in the case of M/s Infotech Software Dealers Association v.Union of India, 2010 (20) S.T.R. 289 (Mad.), wherein the High Courttook the view that the supply of packaged antivirus software to the enduser by charging license fee as per the end user license agreementamounts service and not sale. The Madras High Court held that for thepurpose of imposition of tax, the nature of transaction should be lookedinto.
In such circumstances referred to above, the learned counselappearing for the revenue, prays that there being merit in his appeal, thesame may be allowed by answering the proposed questions of law infavour of the revenue and against the assessee.COMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH938SUPREME COURT REPORTS[2022] 17 S.C.R.SUBMISSIONS ON BEHALF OF THE ASSESSEE :
On the other hand, Mr. Arvind P. Datar, the learned seniorcounsel appearing for the assessee, vehemently opposed this appeal bysubmitting that no error, not to speak of any error of law, could be said tohave been committed by the Tribunal in passing the impugned order. Hewould submit that in para 29 of the impugned order the Tribunal rightlyrejected the contention of the revenue that the antivirus software wasinteractive. Mr. Datar would submit that the Tribunal rightly held that aprogramme could be said to be interactive only when it involves the userto have exchange of information or when there is action andcommunication between the user and the software. The learned seniorcounsel gave an example by pointing that the MS Word, Excel, etc. areinteractive softwares which can be run only after the receipt of theinstructions from the user. On the other hand, there is no interactivity inan antivirus software as there is no requirement of giving any commandfor detecting and removing the virus. In other words, no manual input isrequired to operate an antivirus software as it acts automatically upondetecting any virus. He would submit that the antivirus software whichis installed in a computer system cannot be treated as an interactivesoftware.
The learned senior counsel thereafter took this Court throughthe decision rendered by this Court in the case of TATA ConsultancyServices (supra). The learned senior counsel offered the followingcomments on the impact of the decision in the case of TATA ConsultancyServices (supra) :-“4.1 The question as to whether software can be treated asgoods was referred to a bench of five judges in the aforesaidTCS case.4.2 The State of Andhra Pradesh had levied VAT/sales tax onsoftware CDs, which were packed and sold to customers. ThisHon’ble Court, after extensive consideration of India andU.S. decisions, held that even though the copyright in asoftware program may remain with the originator of theprogram, the moment the software is loaded onto a CD andcopies are made and marketed, they become goods, “whichare susceptible to sales tax”.4.3 There is no difference between sale of a software programon a CD/floppy disc or the sale of music or film CD. It ABCDEFGH939categorically held that the software and the medium cannotbe split up in a sale of a computer software, which is a sale ofgoods.
Apart from the judgment of Justice Variava, JusticeS.B. Sinha gave a concurring opinion giving additionalreasons as to why software, which is put on a medium andsold, is in the nature of a commodity and has to be treated asgoods. The learned judge also held that the definition ofcanned software would be exigible to sales tax.4.4 In the present case, the impugned CESTAT order hasreproduced several paragraphs from the TCS ruling andconcluded in paragraph 35/Page 54, Vol. I that once softwareis 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 contractswere to be treated as services when they were supplied forconsideration. Service tax was sought to be levied on Information and Technology Service, under section 65(53a)which reads as follows: (53a) “information technology software” means anyrepresentation of instructions, data, sound or image, includingsource code and object code, recorded in a machine readableform, and capable of being manipulated or providinginteractivity to a user, by means of a computer or an automaticdata processing machine or any other device or equipment;4.6 Similarly, the definition of taxable services is containedin section 65(105) (zzzze) which are also reproduced earlier.4.7 While the above definitions were prevailing prior to01.07.2012, section 66E(d) – provided for declared serviceunder the new negative regime and read as follows: “development, design, programming, customization, adaptation, upgradation, enhancement, implementation ofinformation technology software” 4.8 Further, section 65B (28) defined “information technologysoftware” which was almost identical to the earlier definitionunder section 65 (63a).” COMMISSIONER OF SERVICE TAX DELHI v.
QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH940SUPREME COURT REPORTS[2022] 17 S.C.R.22. The learned senior counsel thereafter made his submissionson the CBEC Circular/Education Guide. Following comments have beenoffered as regards the said Circular in the written note furnished to this Court:-“5.1 After the negative regime came into force on 1.7.2012,reproduced above, the CBEC Education Guide issued thefollowing guidelines: (i) Pre-packaged or canned software would not be coveredby the entry relating to information technology software. Thisis because such software as “goods” as held by the SupremeCourt in the TCS case. The guidelines specifically reproducedthe text of the Supreme Court ruling. (ii) It then concluded that if pre-packaged or canned software, were sold, then the transaction would be in the nature of asale of goods and no service tax would be levied.”
The learned senior counsel thereafter submitted as regardsthe excise duty/tariff entry and exemption notifications as under :-“6.1 It is pertinent to note that S. No. 84A of the third scheduleto the Central Excise Act, 1944, deals with entry 8523 80 20corresponding to “Packaged software or canned software”.The Explanation provided thereunder defined “packagedsoftware or canned software” as a software which is intendedfor sale or capable of being sold off-the-shelf.6.2 Moreover, Notification No:14/2011 CE dated 01-03-2011adopted this definition and exempted excise duty on such“packaged software or canned software”.”
He vehemently submitted that the transaction cannot bebifurcated into two components as suggested by the revenue i.e. (i) saleof CD, and (ii) supply of updates. In this regard, he submitted as under :-
7.1 During the arguments, the Department submitted thatapart from the sale of CD, the updates which were to beprovided under the contract would amount to service. It issubmitted that this is incorrect because the pre-packagedantivirus software which is sold in the box has a condition ofsale that updates for the period of license would be alsoprovided to the person who has purchased the goods without ABCDEFGH941any further consideration. These updates are part and parcelof the sale of software itself and cannot be divorced from thetransaction and treated separately as a service.7.2 Indeed, every pre-packaged software that was sold in abox, where there it is Tally or Word or Excel, would alsoinclude supply of updates for the period of licence.7.3 Further, section 65B (44) defined service to mean anyactivity carried out by a person for a consideration andincludes a declared service. In the present case, no separateconsideration is charged for the updates which are part andparcel of the sale of goods itself. Consequently, even if theupdates 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 thatthe contract cannot be vivisected or split out. Once a lumpsumhas been charged for the sale of CD and sales tax has beenpaid thereon, the Department cannot levy service tax on theentire sale consideration once again on the ground thatupdates are being provided.
In the last, the learned senior counsel submitted that the paymentof 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 List-II in the VII Schedule of the Constitution. Only State Legislatures can levy VAT on the sale of goods. Onthe other hand, service tax is leviable under the Finance Act,1994 (as amended) on the provision of service and such levyis permissible under Entry 97 of List-I.8.2 It is also well settled that there could be no overlappingof taxes as the taxing powers have been carefully split between Union and the State. Accordingly, the taxation of goods hasbeen allotted to the State Legislatures while taxing of serviceis 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 VATand service tax are mutually exclusive. After the TCS judgment, the controversy was put to rest in intellectual property whereCOMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH942SUPREME COURT REPORTS[2022] 17 S.C.R.software or music or film which has been put on a mediumsuch as a CD will be treated as goods and consequently cansubject only to sales tax/VAT.
In such circumstances referred to above, the learned seniorcounsel appearing on behalf of the assessee, prays that there being nomerit in the present appeal, the same may be dismissed.ANALYSIS :
Having heard the learned counsel appearing for the partiesand having gone through the materials on record, the only question thatfalls for our consideration is, whether the Tribunal committed any errorin passing the impugned order?28. Before we advert to the rival submissions canvassed on eitherside, we must look into some of the reasons assigned by the Tribunalwhile allowing the appeal preferred by the assessee against the order ofthe adjudicating authority. We quote:-“25. The contention of the Appellant is that the softwaredeveloped by it can neither be manipulated nor does it provideany interactivity to a user and, therefore, does not satisfy therequirement of “information technology software”. Accordingto the Appellant, once the computer system is booted, the Antivirus Software begins its activity of detecting the virusand continues to do so till the time the computer system remainsbooted. Thus, there is no interactivity or requirement of givingany commands to the software to perform the function ofdetecting and removing virus from the computer system. TheAppellant further contends that the software developed by itis quite distinct from software like ERP, EXCEL, MS Word, where there is a constant to and from interaction between theuser and the computer system containing the said software. These softwares perform their function only after receipt ofinput from the user, which is not the case in the AntivirusSoftware developed by the Appellant.xxx28. The Adjudicating Authority, however, has not acceptedthe contention of the Appellant and has observed that thesoftware can issue commands to scan drives, both internal ABCDEFGH943and external and that it has an interface with the user totune-up the personal computer and that it has also a parallelcontrol feature. These features, according to the AdjudicatingAuthority, need a command by the user to the software and, therefore, it is interactive.
It is not possible to accept this finding. The AntivirusSoftware developed by the Appellant is complete in itself toprevent virus in the computer system. Once the computersystem is booted, the Antivirus Software begins the functionof detecting the virus, which continues till the time thecomputer system remains booted. The computer system onlydisplays a message that viruses existed and that they havebeen detected and removed. No interactivity takes place northere is any requirement of giving any command to the softwareto perform its function of detecting and removing virus fromthe computer system. It is also seen from the meaning assignedto “interactive” that a program should involve the user in theexchange of information. There has to be action andcommunication between the two. A user should communicatewith the computer facility and receive rapid responses, whichcan be used to prepare the next inputs. In contract, in othersoftwares like ERP, EXCEL, MS Word, there is continuesinteraction between the user and the computer system andthese softwares perform only after receipt of input from theuser.
Such being the position, no service tax was leviable undersection 65(105)(zzzze) of the Act prior to 1 July, 2012. Evenafter 1 July, 2012 the definition of “information technologysoftware” under section 65B(28) remained the same and soalso service tax was not leviable.
The matter can be examined from another angle. Section65B (51) defines a “taxable service” to mean any service onwhich service tax is leviable under section 66B. Section 66Bprovides that there shall be levied service tax on the value ofall services, other than those services specified in the negativelist, provided or agreed to be provided in the taxable territoryby one person to another and collected in such manner asmay be prescribed. Section 65B (44) define “service” to meanCOMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH944SUPREME COURT REPORTS[2022] 17 S.C.R.any activity carried out by a person for consideration, andincludes a declared service, but shall not include, amongstothers, an activity which constitutes merely such transfer, delivery or supply of any goods which is “deemed to be asale” within the meaning of clause (29A) of article 366 of the Constitution.” 29.
The Tribunal thereafter proceeded to consider the decision ofthis Court rendered in the case of TATA Consultancy Services (supra).Upon analysis of the ratio of the said decision, the Tribunal recorded thefollowing findings :-“35. It is clear from the aforesaid decision of the SupremeCourt 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 andsuch intellectual property contained in a medium is purchasedand sold in various forms including CDs.36. Section 65B (44) of the Act also excludes from thedefinition of “service” any activity which constitutes merelysuch transfer, delivery or supply of any goods which is deemedto be a sale within the meaning of clause (29A) of article 366of the Constitution. As noticed above, the Supreme Court in Tata Consultancy Services held that Canned Softwaresupplied 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 theCBEC Education Guide for service tax containing the official guidelinesfor new system of levy of service tax. After due consideration of thesame, it recorded the following findings in para 38:-“38. A perusal of the aforesaid guidelines would indicatethat after making a reference to the judgment of SupremeCourt in Tata Consultancy Services, it mentions that atransaction would be in the nature of sale of goods when apre-packaged or Canned Software is sold, and no servicetax would be leviable. However, a license to use the softwarewhich does not involve the transfer of “right to use” wouldneither be a transfer of title in goods nor a deemed sale ofgoods. Such an activity would fall in the ambit of definition ABCDEFGH945of “service”. Thus, if a pre-packaged or Canned Software isnot sold but is transferred under a license to use such software, the terms and conditions of the license to use such softwarewould have to be seen to arrive at a conclusion whether thelicense to use the packaged software involves a transfer of“right to use” such software in the sense the phrase has beenused in sub-clause (d) of article 366(29A) of the Constitution.
The guidelines also provide that in case a license to use pre-packaged software imposes restrictions on the usage of suchlicenses, which restriction interfere with the free enjoymentof the software, then such a license would not result in transferof “right to use” the software within the meaning of Clause29(A) of article 366 of the Constitution. However, everycondition imposed would not make it leviable to service tax. The condition should be such so as to restrain the right tofree enjoyment on the same lines as a person who hasotherwise purchased goods is able to have.” 31. The Tribunal thereafter proceeded to consider the terms ofthe agreement to ascertain whether there was transfer of the “right touse goods”. The Tribunal in para 44 of its order recorded the followingrelevant provisions of the Quick Heal Internet Security End-User LicenseAgreement:-“16. BY USING THIS SOFTWARE OR BY ACCEPTING OURSOFTWARE USAGE AGREEMENT POLICY OR ATTEMPTINGTO LOAD THE SOFTWARE IN ANY WAY, (SUCH ACTIONWILL CONSTITUTE A SYMBOL OF YOUR CONSENT ANDSIGNATURE), YOU ACKNOWLEDGE AND ADMIT THATYOU HAVE READ, UNDERSTOOD AND AGREED TO ALLTHE TERMS AND CONDITIONS OF THIS AGREEMENT,THIS AGREEMENT ONCE ACCEPTED BY “YOU”[ AS ANINDIVIDUAL (ASSUMING YOU ARE ABOVE 18 YEARS AND/OR HAVING LEGAL CAPACITY TO ENTER INTO ANAGREEMENT), OR THE COMPANY OR ANY LEGAL ENTITYTHAT WILL BE USING THE SOFTWARE (HEREINAFTERREFERRED TO AS YOU’ OR YOUR’ FOR THE SAKE OFBREVITY] SHALL BE A LEGALLY ENFORCEABLEAGREEMENT BETWEEN YOU AND QUICK HEALTECHNOLOGIES PRIVATE LIMITED, PUNE, INDIACOMMISSIONER OF SERVICE TAX DELHI v.
QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH946SUPREME COURT REPORTS[2022] 17 S.C.R.(HEREINAFTER REFERRED TO AS “QUICK HEAL”) ANDYOU SHALL HAVE THE RIGHTS TO USE THE SOFTWARESUBJECT TO THE TERMS AND CONDITIONS MENTIONEDIN THIS AGREEMENT OR AS AMENDED BY QUICK HEALFROM TIME TO TIME. IF YOU DO NOT AGREE TO ALLTHE TERMS AND CONDITIONS BELOW, DO NOT USE THISSOFTWARE IN ANY WAY AND PROMPTLY RETURN IT ORDELETE ALL THE COPIES OF THIS SOFTWARE IN YOURPOSSESSION.In consideration of payment of the License Fee, which is apart of the price, evidenced by the Receipt. Quick Heal grantsthe Licensee, a non-exclusive and non-transferable right. Quick Heal reserves all rights not expressly granted, andretains the title and ownership of the software, including allsubsequent copies in any media. This software and theaccompanying written materials are the property of QuickHeal and are copyrighted.
Copying of the software or thewritten material is expressly forbidden. In addition to thissecurity software, Quick Heal offers you Quick Heal RemoteDevice Management Services to manage your device(s).Quick Heal reserves all rights not expressly granted, andretains the title and ownership of the software, including allsubsequent copies in any media, This software and theaccompanying written materials are the property of QuickHeal and are copyrighted.1. DEFINITIONS———————B. “License period” means the period as more particularlydescribed in this Agreement.———————G. “Updates” means collections of any or all among virusdefinition files including detections and solutions for newviruses along with the corrections, improvements ormodifications to the software.2. DO’s & DON’TSYou can: ABCDEFGH947A. make copy of the software for backup purpose or for thepurpose of sharing through various means (and such backupcopy must be destroyed when you lose the right to use the Software or is terminated for any other reason according tothe legislation in force in the country of your principalresidence 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 caseof multiuser pack, use of the software only on the said numberof systems as mentioned on the packaging.C. install the software on a network, provided you have alicensed copy of the software for each computer that canaccess the software over that network.D. avail Quick Heal RDM service to manage your device (amaximum 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. trymaking an attempt to reveal/discover the source code of thesoftware.D. debug, decompile, disassemble, modify, translate, reverseengineer the software.E. create derivative works based on the software or anyportion thereof with sole exception of a non-waivable rightgranted to You by any applicable legislation. F. remove oralter any copyright notices or other proprietary notices onany 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 usedfor detection, blocking or treating threats described in theuser manual.I. use for unlicensed and illegal purpose.J. remove your user account from Quick Heal RDM serviceonce registeredK. retrieve deleted location entries and back up data fromCOMMISSIONER OF SERVICE TAX DELHI v.
QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH948SUPREME COURT REPORTS[2022] 17 S.C.R.the user account on the Quick Heal RDM service.L. attempt to gain unauthorized access to Quick Heal RDMnetworks.5. LICENSE PERIODA. You are entitled to use this software/ RDM Services fromthe date of license activation until the expiry date of thelicense.B. You understand, agree and accept that you are entitled forthe updates and technical support via the Internet andtelephone. Any use of this software/RDM Services for anyother purposes is strictly forbidden and prohibited and QuickHeal reserves to take any action against such unauthorizedusage.C. License for use of Quick Heal RDM service to managedevices shell be valid till your device security software licenseis valid.D. You agree, understand that any unauthorized usage of thesoftware/ RDM services or breach of any/all terms andconditions stated herein the Agreement shall result in automaticand immediate termination of this Agreement and the Licensegranted hereunder and which may result in criminal and/ Orcivil action by Quick Heal and/ Or its agents against youincluding but not limited to right to block the key file/ Licensekey/ product key and without any refund to You and withoutany prior intimation/ notice to you in this regard.E. If you have acquired the specific language localization ofthe software/ RDM service, you will not be able to activatethe software by applying the activation code of other languagelocalization.F. Quick Heal does not guarantee the protection from thethreats more particularly described in the user manual afterthe License to use the software/RDM service is terminated forany reason.6.
FEATURES OF SOFTWARE ABCDEFGH949A. 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 havethe right to receive free updates of the software and QuickHeal RDM service via Internet as and when Quick Healpublishes the updated virus- database and free versionupgrade as and when Quick Heal releases new versionupgrade. You agree, understand and accept that You will berequired 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 asamended from time to time by Quick Heal.C. You agree, accept and acknowledge:I. that You are solely responsible for the configuration of thesoftware/ RDM services settings and the result, actions, inactions initiated due to the same and Quick Heal assumesno liability/ responsibility in any case and the Clause of Indemnification shall be applicable.II. that Quick Heal assumes no liability/responsibility for anydate deletion, including but not limited to any deletion/ lossof personal, and/or confidential date; and/or uninstallationof third-party apps; and/or change in settings; specificallyauthorized by You or occurs due to the actions, inactions(whether intentional or not) by You or any third party whomYou have authorized to use, handle you Device due to featuresor software/RDM services.III. that to avail/use certain features of the software/RDMservices, you may be required to incur some cost and that Quick Heal does not warrant that the usage of certain featuresof the software/RDM services are free of cost and that QuickHeal shall not entertain and expressly disclaims, any claimfor reimbursement of any expenses including but not limitedto any direct or incidental expenses arising out of Your usageof such features of the software/RDM services.IV. that you be solely responsible and shall comply allapplicable laws, regulations of India and any foreign lawsincluding without limitation, privacy, obscenity, confidentiality, COMMISSIONER OF SERVICE TAX DELHI v.
QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH950SUPREME COURT REPORTS[2022] 17 S.C.R.copyright laws for using any report, date, information derivedas a result of using the software and Quick Heal RDMservices.V. that while using the software, Quick Heal suggests someactions to be initiated by You in your sole benefit, for exampleQuick Heal software may suggest You to uninstall infectedapplications , however such actions are suggestive and QuickHeal takes no responsibility/liability if you perform suchsuggestive actions or not and Quick Heal assumes noresponsibility/ liability for any liability arising out of suchactions/inactions.9. QUICK HEAL STATUS UPDATEUpon every update of licensed copy, Quick Heal Updatemodule will send current product status information to QuickHeal Internet Centre. The information that will be sent to the Internet Centre includes the Quick Heal protection healthstatus like, which monitoring service is in what state in thesystem.
The information collected does not contain any filesor personal date. The information will be used to providequick and better technical support for legitimate customers. All the registered user/subscribers will get the updates free ofcost from the date of license activation until the expiry dateof the license.13. Intellectual PropertyThe software, source code, activation code, license keys, documentation, systems, ideas, information, content, design, and other matters related to the software, Quick Heal RDMservices, trademarks are the sole proprietary and intellectualproperty rights of Quick Heal protected under the IntellectualProperty Laws and belongs to Quick Heal. Nothing containedin this Agreement grant You any rights, title, interest tointellectual property, including without limitation any errorcorrections, enhancements, updates, or modifications to thesoftware and Quick Heal RDM service whether made by QuickHeal or any third party.
You understand and acknowledgethat you are provided with a license to use this software and Quick Heal RDM services subject to the terms and conditionsof this Agreement.” ABCDEFGH95132. After due consideration of the terms of agreement, the Tribunalproceeded to observe the following in para 45 of the impugned order :-
45. The agreement provides that the licensee shall have rightto use software subject to terms and the conditions mentionedin the agreement. The licensee is entitled to use the software/RDM services from the date of license activation until theexpiry date of the license. The licensee is also entitled for theupdates and technical support. The conditions set out in theagreement do not interfere with the free enjoyment of thesoftware by the licensee. Merely because ¯Quick Heal retainstitle and ownership of the software does not mean that itinterferes with the right of the licensee to use the software.
The Tribunal ultimately concluded as under while allowing theappeal filed by the assessee herein :-“51. Thus, viewed from any angle, the transaction in thepresent Appeal results in the right to use the software andwould amount to “deemed sale”. It is, therefore, not possibleto accept the contention of the learned AuthorizedRepresentative of the Department that the transaction wouldnot be covered under sub-clause (d) of article 366(29A) ofthe Constitution.”
Thus, from the aforesaid, it is evident that the Tribunal laidmuch emphasis on the fact that in accordance with the agreement thelicensee has the right to use the software subject to the terms and theconditions laid therein. The Tribunal took notice of the fact that inaccordance with the agreement the licensee is entitled to use thesoftware/RDM service from the date of the activation of the license tillthe date of its expiry. The Tribunal also took into consideration the factthat 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 tothe “deemed sale”. The Tribunal rejected the contention of the revenuethat the transaction would not be covered under sub-clause (d) of the Article 366(29A) of the Constitution.RELEVANT PROVISIONS OF LAW35. The New definition of the term “service” has been given underthe clause 44 of Section 65B of the Act 1994 which reads as follows :-COMMISSIONER OF SERVICE TAX DELHI v.
QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH952SUPREME COURT REPORTS[2022] 17 S.C.R.“(44) “service” means any activity carried out by a personfor another for consideration, and includes a declared service, but shall not include-(a) an activity which constitutes merely,–(i) a transfer of title in goods or immovable property, by wayof sale, gift or in any other manner; or(ii) such transfer, delivery or supply of any goods which isdeemed 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 inthe course of or in relation to his employment; (c) fees taken in any Court or tribunal established under anylaw for the time being in force. Explanation 1.- For the removal of doubts, it is hereby declaredthat 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 localauthorities who receive any consideration in performing thefunctions of that office as such member; or(B) the duties performed by any person who holds any postin pursuance of the provisions of the Constitution in thatcapacity; or(C) the duties performed by any person as a Chairperson ora Member or a Director in a body established by the CentralGovernment or State Governments or local authority and whois not deemed as an employee before the commencement ofthis section.
Explanation 2.-For the purposes of this clause, transactionin money shall not include any activity relating to use of moneyor its conversion by cash or by any other mode, from oneform, currency or denomination, to another form, currencyor denomination for which a separate consideration ischarged; ABCDEFGH953Explanation 3.– For the purposes of this Chapter,-(a) an unincorporated association or a body of persons, asthe case may be, and a member thereof shall be treated asdistinct persons; (b) an establishment of a person in the taxable territory andany of his other establishment in a non-taxable territory shallbe treated as establishments of distinct persons. Explanation 4.- A person carrying on a business through abranch or agency or representational office in any territoryshall be treated as having an establishment in that territory;”
The analysis of the definition of “service” as above makes itclear that the service will not include those activities which includestransfer, delivery or supply of any goods which is deemed to be salewithin the meaning of Clause (29A) of Article 366 of the Constitution.
Clause (29A) of Article 366 of the Constitution of India definesthe deemed sale. This clause reads as follows:-
(29A) tax on the sale or purchase of goods includes—(a) a tax on the transfer, otherwise than in pursuance of acontact, of property in any goods for cash, deferred paymentor other valuable consideration; (b) a tax on the transfer of property in goods (whether asgoods or in some other form) invoked in the execution of aworks contract; (c) a tax on the delivery of goods on hire purchase or anysystem of payment by instalments; (d) a tax on the transfer of the right to use any goods for anypurpose (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 unincorporatedassociation 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 orin any other manner whatsoever, of goods, being food or anyother article for human consumption or any drink (whetherCOMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH954SUPREME COURT REPORTS[2022] 17 S.C.R.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 bedeemed to be a sale of those goods by the person making thetransfer, delivery or supply and a purchase of those goodsby the person to whom such transfer, delivery or supply ismade;
Thus, the above clause specifies the cases which the tax inrelation to sale and purchase of goods will include and also outlines itsapplicability even in the case of deemed sale.
Section 66E deals with the concept of declared services. ThisSection reads as follows:-“66E. The following shall constitute declared services, namely:––(a) renting of immovable property; (b) construction of a complex, building, civil structure or apart thereof, including a complex or building intended forsale to a buyer, wholly or partly, except where the entireconsideration is received after issuance of completion-certificate 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 completioncertificate under any law for the time being in force and incase of nonrequirement of such certificate from suchauthority, from any of the following, namely:–(A) architect registered with the Council of Architectureconstituted 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 cityor town or village or development or planning authority; (II) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civilstructure; ABCDEFGH955(c) temporary transfer or permitting the use or enjoyment ofany intellectual property right; (d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation ofinformation technology software; (e) agreeing to the obligation to refrain from an act, or totolerate an act or a situation, or to do an act; (f) transfer of goods by way of hiring, leasing, licensing orin any such manner without transfer of right to use suchgoods; (g) activities in relation to delivery of goods on hire purchaseor 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 foodor any other article of human consumption or any drink(whether or not intoxicating) is supplied in any manner as apart of the activity.”
Thus, the declared services include the services of renting ofimmovable property, works contract, hire purchase/instalment paymentsystem, supply of food/drink, etc. In other words, under the Constitutionwhat is related to deemed sale is also covered under the deemed serviceas per the above Section.41. The Transfer of Right to use goods for case, deferred paymentor value consideration is considered as deemed sale under sub-clause(d) of Article 366(29A) of the Constitution of India. Right to use oftangible goods service has also been brought under the service tax netby the Finance Act, 2008, with effect from 16.05.2008 vide notificationNo. 18/2008-ST, dated 10.05.2008 whereby taxable service has beendefined under Section 65(105)(zzzzj) of the Act 1994 to mean as:-
Any services provided or to be provided, to any person, byany other person in relation to supply of tangible goodsincluding machinery, equipment and appliances for use, without transferring right of possession and effective controlof such machinery, equipment and appliances.
COMMISSIONER OF SERVICE TAX DELHI v.
QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH956SUPREME COURT REPORTS[2022] 17 S.C.R.POSITION OF LAW42. TATA Consultancy Services (supra) was a case in which thespecific issue of computer software packages was considered as is theconcern in the present case also. There was, however, a distinction drawninsofar as the ‘uncanned software’ and ‘canned software’ alternativelytermed as ‘unbranded’ and ‘branded’ is concerned. The distinction is inthat a ‘canned software’ contains programmes which can be used assuch by any person purchasing it, while an ‘uncanned software’ is oneprepared for a particular purchaser’s requirements by tweaking theoriginal software to adapt to the specific requirements of a particularentity. While a ‘canned software’ could be sold over the shelf, an‘uncanned software’ is programmed to specific and particular needsand requirements. This Court held that in India the test to determinewhether a property is “goods”, for the purpose of sales tax, is not confinedto whether the goods are tangible or intangible or incorporeal.
The correcttest 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 Article366(12) of the Constitution and as defined under the saidAct is very wide and includes all types of movable properties, whether those properties be tangible or intangible. We are incomplete agreement with the observations made by this Courtin Associated Cement Companies Ltd. A software program mayconsist of various commands which enable the computer toperform a designated task. The copyright in that programmay remain with the originator of the program.
But the momentcopies are made and marketed, it becomes goods, which aresusceptible to sales tax. Even intellectual property, once it isput on to a media, whether it be in the form of books or canvas(in case of painting) or computer discs or cassettes, andmarketed would become “goods”. We see no differencebetween a sale of a software program on a CD/floppy discfrom a sale of music on a cassette/CD or a sale of a film on avideo cassette/CD. In all such cases, the intellectual property ABCDEFGH957has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very littlevalue. The software and the media cannot be split up. Whatthe buyer purchases and pays for is not the disc or the CD.As in the case of paintings or books or music or films thebuyer is purchasing the intellectual property and not the mediai.e. the paper or cassette or disc or CD. Thus a transaction/sale of computer software is clearly a sale of “goods” withinthe meaning of the term as defined in the said Act.
The term“all materials, articles and commodities” includes bothtangible and intangible/incorporeal property which is capableof abstraction, consumption and use and which can betransmitted, transferred, delivered, stored, possessed, etc. Thesoftware programs have all these attributes”.28. At this stage it must be mentioned that Mr Sorabjee hadpointed out that the High Court has, in the impugnedjudgment, held as follows:
... In our view a correct statement would be that allintellectual properties may not be ‘goods’ and thereforebranded software with which we are concerned here cannotbe said to fall outside the purview of ‘goods’ merely becauseit is intellectual property; so far as ‘unbranded software’is concerned, it is undoubtedly intellectual property butmay perhaps be outside the ambit of ‘goods’.
(emphasis supplied)29. Mr Sorabjee submitted that the High Court correctly heldthat unbranded software was “undoubtedly intellectualproperty”.
Mr Sorabjee submitted that the High Court fell inerror in making a distinction between branded and unbrandedsoftware and erred in holding that branded software was“goods”. We are in agreement with Mr Sorabjee when hecontends that there is no distinction between branded andunbranded software. However, we find no error in the HighCourt holding that branded software is goods. In both cases, the software is capable of being abstracted, consumed anduse. In both cases the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even unbrandedsoftware, when it is marketed/sold, may be goods. We,COMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH958SUPREME COURT REPORTS[2022] 17 S.C.R.however, are not dealing with this aspect and express noopinion thereon because in case of unbranded software otherquestions like situs of contract of sale and/or whether thecontract is a service contract may arise”.43.
Associated Cement Companies Ltd. (supra) considered thequestion whether the drawings, designs, etc. relating to machinery orindustrial technology were goods, leviable to duty of customs on theirtransaction value at the time of import. It was argued that the transfer oftechnology or know-how though valuable was intangible. The technologywhen transmitted to India on some media does not get converted froman intangible thing to tangible thing or chattel and that in a contract bysupply 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 kindof moveable property”, it was held that any moveable article broughtinto India by a passenger as part of his baggage can make him liable topay customs duty as per the Customs Tariff Act, 1975. Any mediawhether in the form of books or computer disks or cassettes whichcontain information technology or ideas would necessarily be regardedas “goods” under the aforesaid provisions of the Customs Act, theseitems being moveable goods, covered by Section 2(22)(e) of the CustomsAct.
What was transferred was technical advice on informationtechnology. 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 thatpayment is made to the foreign collaborators. The question whether thepapers or diskettes etc. containing advice and/or information are goodsfor the purpose of the Customs Act was answered in the affirmative. This Court clearly held that “the intellectual property when put on amedia would be regarded as an article on the total value of whichcustoms duty is payable”. “When technical material is suppliedwhether in the form of drawings or manuals the same are goodsliable 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, whichcan be regarded as goods, has no role to play in the presentstatutory scheme as we have already observed that the word“goods” as defined under the Customs Act has an inclusive ABCDEFGH959definition taking within its ambit any moveable property.
Thelist of goods as prescribed by the law are different itemsmentioned in various chapters under the Customs Tariff Act,1997 or 1999. Some of these items are clearly items containingintellectual property like designs, plans, etc”.(underlining by us for emphasis)44. We may also refer to and rely upon a decision of this Court inthe case of 20th Century Finance Corpn. Ltd. v. State of Maharashtra, reported in (2000) 6 SCC 12. In this decision, this Court considered theincorporation of clause (d) of Clause (29A) of Article 366 of the Constitution referred to above. It is apt to quote the following relevantportion from the judgment :-“26… The various sub-clauses of clause (29A) of Article366 permit the imposition of tax thus: sub-clause (a) ontransfer of property in goods; sub-clause (b) on transfer ofproperty in goods; sub-clause (c) on delivery of goods; sub-clause (d) on transfer of the right to use goods; sub-clause(e) on supply of goods; and sub-clause (f) on supply ofservices.
The words and such transfer, delivery or supply. Inthe latter portion of clause (29A), therefore, refer to the wordstransfer, delivery and supply, as applicable, used in the varioussub-clauses. Thus, the transfer of goods will be a deemedsale in the cases of sub-clauses (a) and (b), the delivery ofgoods will be a deemed sale in case of sub-clause (c), thesupply of goods and services respectively will be deemed salesin the cases of sub- clauses (e) and (f) and the transfer of theright to use any goods will be a deemed sale in the case ofsub-clause (d). Clause (29A) cannot, in our view, be read asimplying that the tax under sub-clause (d) is to be imposednot on the transfer of the right to use goods but on the deliveryof the goods for use. Nor, in our view, can a transfer of theright to use goods in sub-clause (d) of clause (29A) be equatedwith the third sort of bailment referred to in Bailment by Palmer,1979 edition, page 88.
The third sort referred to there is whengoods are left with the bailee to be used by him for hire, whichimplies the transfer of the goods to the bailee. In the case ofsub-clause (d), the goods are not required to be left with thetransferee. All that is required is that there is a transfer of theCOMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH960SUPREME COURT REPORTS[2022] 17 S.C.R.right to use the goods. In our view, therefore, on a plainconstruction of sub-clause (d) of Clause (29A), the taxableevent is the transfer of the right to use the goods regardlessof when or whether the goods are delivered for use. What isrequired is that the goods should be in existence so that theymay be used. And further contract in respect thereof is alsorequired to be executed. Given that, the locus of the deemedsale is the place where the right to use the goods is transferred.
Where the goods are when the right to use them is transferredis of no relevance to the locus of the deemed sale. Also of norelevance to the deemed sale is where the goods are deliveredfor use pursuant to the transfer of the right to use them, thoughit may be that in the case of an oral or implied transfer of theright 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 touse goods, the taxable event would be the execution of the contract fordelivery of the goods, it was observed :-“27. Article 366(29A)(d) further shows that levy of tax is noton use of goods but on the transfer of the right to use goods. The right to use goods accrues only on account of the transferof right. In other words, right to use arises only on the transferof such a right and unless there is transfer of right, the rightto use does not arise. Therefore, it is the transfer which issine qua non for the right to use any goods.
If the goods areavailable, the transfer of the right to use takes place whenthe contract in respect thereof is executed. As soon as thecontract is executed, the right is vested in the lessee. Thus, the situs of taxable event of such a tax would be the transferwhich legally transfers the right to use goods. In other words, if the goods are available irrespective of the fact where thegoods are located and a written contract is entered intobetween the parties, the taxable event on such a deemed salewould be the execution of the contract for the transfer ofright to use goods. But in case of an oral or implied transferof the right to use goods it may be effected by the delivery ofthe goods.”(Emphasis Supplied) ABCDEFGH96146.In BSNL (supra) this Court took the view that a telephoneservice is nothing but a “service”. However, the nature of the transactioninvolved in providing the telephone connection may be a compositecontract of “service” and “sale”.
There may be a transfer of right to usethe “goods” as defined in the providing of access or telephone connectionby the telephone service provider to a subscriber. Justice Ruma Pal, speaking for the Bench in her separate judgment, took the view that asubscriber to a telephone service could not reasonably be taken to haveintended to purchase or obtain any right to use electromagnetic wavesor radio frequencies when a telephone connection is given. Nor does thesubscriber 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 asubscriber’s mind would be limited to the handset that might have beenpurchased for the purposes of getting a telephone connection. As far asthe 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 orradio frequencies are not “goods” within the meaning of the word “eitherin Article 366(12) or for the purpose of Article 366(29A)(b)”.
Emphasiswas laid on the fact, whether there are any deliverable goods or not. Ifthere 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 concurringjudgment, highlighted the following attributes in para 97 of the judgmentto constitute a transaction for the transfer of right to use the goods:-“97. …a. There must be goods available for delivery;b. There must be a consensus ad idem as to the identity of thegoods;c. The transferee should have a legal right to use the goods -consequently all legal consequences of such use includingany permissions or licenses required therefor should beavailable to the transferee;d. For the period during which the transferee has such legalright, it has to be the exclusion to the transferor - this is thenecessary concomitant of the plain language of the statuteCOMMISSIONER OF SERVICE TAX DELHI v.
QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH962SUPREME COURT REPORTS[2022] 17 S.C.R.viz. a “transfer of the right to use” and not merely a licenceto use the goods;e. Having transferred the right to use the goods during theperiod for which it is to be transferred, the owner cannotagain transfer the same rights to others.” 48. In the case of BSNL (supra), His Lordship noticed that noneof the aforesaid attributes were present in the relationship between thetelecom service provider and a consumer of such services. 49. His Lordship thereafter in para 117 of the judgment referredto the Sale of Goods Act, 1930. We quote para 117 as under:-“117. Sale of Goods Act, comprehends two elements, one is asale and the other is delivery of goods. 20th Century FinanceCorporation Limited vs. State of Maharashtra, 2000 (6) SCC12 at p. 44, para 35 ruled that“35. (c) where the goods are available for the transfer ofright to use the taxable event on the transfer of right to useany goods is on the transfer which results in right to use andthe situs of sale would be the place where the contract isexecuted and not where the goods are located for use.
(d) In cases where goods are not in existence or where thereis an oral or implied transfer of the right to use goods, suchtransactions may be effected by the delivery of the goods. Insuch cases the taxable event would be on the delivery ofgoods.” 50. Ultimately, His Lordship took the view that as no goods’elements were involved, the transaction was purely one of service asthere was no transfer of right to use the goods at all.51. The following principles to the extent relevant may be summedup:-(a)The Constitution (Forty-sixth) Amendment Act intends torope in various economic activities by enlarging the scopeof “tax on sale or purchase of goods” so that it may includewithin its scope, the transfer, delivery or supply of goodsthat may take place under any of the transactions referredto in sub-clauses (a) to (f) of Clause (29A) of Article 366. ABCDEFGH963The works contracts, hire purchase contracts, supply offood for human consumption, supply of goods by associationand clubs, contract for transfer of the right to use any goodsare some such economic activities.
(b)The transfer of the right to use goods, as distinct from thetransfer of goods, is yet another economic activity intendedto be exigible to State tax. (c)There are clear distinguishing features between ordinarysales and deemed sales. (d)Article 366(29A)(d) of the Constitution implies tax not onthe delivery of the goods for use, but implies tax on thetransfer of the right to use goods. The transfer of the rightto use the goods contemplated in sub-clause (d) of clause(29A) cannot be equated with that category of bailmentwhere goods are left with the bailee to be used by him forhire. (e)In the case of Article 366(29A)(d) the goods are not requiredto be left with the transferee. All that is required is thatthere is a transfer of the right to use goods. In such a casetaxable event occurs regardless of when or whether thegoods are delivered for use. What is required is that thegoods should be in existence so that they may be used.
(f)The levy of tax under Article 366(29A)(d) is not on the useof goods. It is on the transfer of the right to use goodswhich accrues only on account of the transfer of the right. In other words, the right to use goods arises only on thetransfer of such right to use goods. (g)The transfer of right is the sine qua non for the right touse any goods, and such transfer takes place when thecontract is executed under which the right is vested in thelessee. (h)The agreement or the contract between the parties woulddetermine the nature of the contract. Such agreement hasto be read as a whole to determine the nature of thetransaction. If the consensus ad idem as to the identity ofthe good is shown the transaction is exigible to tax.COMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH964SUPREME COURT REPORTS[2022] 17 S.C.R.(i)The locus of the deemed sale, by transfer of the right touse goods, is the place where the relevant right to use thegoods is transferred.
The place where the goods are situatedor where the goods are delivered or used is not relevant.52. From the judicial decisions, the settled essential requirementof 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 rightto 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 orsupply”… would indicate that the tax is not on the delivery of thegoods used, but on the transfer of the right to use goods regardlessof when or whether the goods are delivered for use subject to thecondition 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 deliveryof goods may be one of the elements of the transaction; (iv) the effective or general control does not mean always physicalcontrol and, even if the manner, method, modalities and the timeof the use of goods is decided by the lessee or the customer, itwould be under the effective or general control over the goods; (v) the approvals, concessions, licences and permits in relation togoods would also be available to the user of goods, even if suchlicences or permits are in the name of owner (transferor) of thegoods, and(vi) during the period of contract exclusive right to use goodsalong with permits, licenses, etc., vests in the lessee.CONSTRUCTION OF AGREEMENT BETWEEN THEPARTIES:-53.
The salient features of the Quick Heal Internet Security End-User License Agreement are as follows:-1.Grant of License, not ownershipIn consideration of payment of the License Fee, which is apart of the price, Quick Heal (developer) grants thepurchaser (end-user) a license which is non-exclusive and ABCDEFGH965non-transferable. The developer reserves all rights notexpressly granted and retains the title and ownership of thesoftware, including all subsequent copies in any media. 2. TerminationThe End-user is entitled to use the software till the date onwhich the license expires. Any unauthorised usage of thesoftware would result in automatic and immediatetermination of the agreement and the license granted. 3. Breach of ContractThe developer reserves to take any action againstunauthorised usage. This may be criminal/civil action bythe developer, including the right to block the key file/Licensekey/product key with neither issuance of any notice norrefund to the end-user.
4. Right to UpdatesDuring the license period of the software, the end-usersare entitled to receive free software updates via Internet. The End-users will be required to regularly download theseupdates, which shall be governed by the agreement or asamended by the developer. 5. Limiting LiabilityThe End-users are solely responsible for configuring thesoftware settings and the results, actions, inactions initiateddue to the same. The developer assumes no liability for anydeletion or modification authorised by the user in any case, and the indemnification clause would become applicable. 6. Disclaiming WarrantiesCertain features of the software may require additionalpayment. The developer disclaims any claim forreimbursement of expenses arising out of end-users’ usageof such features. 7. Governing LawThe End-users are obliged to comply with all laws, regulations of India and any foreign law, including privacy, COMMISSIONER OF SERVICE TAX DELHI v.
QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH966SUPREME COURT REPORTS[2022] 17 S.C.R.obscenity, confidentiality, copyright laws, while using thesoftware. 8. Data CollectionOn updating every licensed copy, the developer wouldcollect “the current product status information”, whichinclude the state of monitoring service in the system. Thisinformation is used for improving the developer’s technicalsupport towards its customers. No files or personal data iscollected. 9. Intellectual Property Rights of the DeveloperThe End-users do not have any right, title, or interest to theintellectual property, including any error corrections, enhancements, updates, or modifications to the software, whether made by the developer or third party. 54. In Delta International Ltd. v. Shyam SundarGaneriwalla, (1999) 4 SCC 545 : AIR 1999 SC 2607 and Ramdev FoodProducts (P) Ltd. v. Arvindbhai Rambhai Patel, (2006) 8 SCC 726,this Court quoted with approval the following principles of constructionof contracts from the ‘Interpretation of Contracts’ by Kim Lewison,Q.C. as follows.
“1.03 For the purpose of the construction of contracts, theintention of the parties is the meaning of the words they haveused. There is no intention independent of that meaning.6.09 Where the words of a contract are capable of twomeanings, one of which is lawful and the other unlawful, theformer construction should be preferred. Sir Edward Coke [Co. Litt. 42a] expressed theproposition thus:‘It is a general rule, that whensoever the words of adeed, or of one of the parties without deed, may have a doubleintendment and the one standeth with law and right, and theother is wrongful and against law, the intendment that standethwith law shall be taken.’In more modern times that statement was approved bythe Privy Council in Rodger v. Comptoir D’Escomple de Paris, ABCDEFGH967(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 stronglyagainst him who uses them gives place to a higher rule; higherbecause it has a moral element, that the construction shallnot be such as to work a wrong.’Similarly, in Fausset v.
Carpenter, (1831) 2 Dow & Cl232 : 6 ER 715, the House of Lords accepted the submissionof counsel that the court:‘… in judging of the design and object of a deed, willnot presume that a party executing the deed meant to do anddid what he was wrong in doing, when a construction may beput on the instrument perfectly consistent with his doing onlywhat he had a right to do. However, the question of construction should not beapproached with a leaning in one direction or another. Thusalthough the law frowns upon covenants in restraint of trade, nevertheless such a covenant should not be approached onthe basis that it is prima facie illegal. ‘You are to construe thecontract, 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 splitinto two. Once a lumpsum has been charged for the sale of CD (as inthe case on hand) and sale tax has been paid thereon, the revenuethereafter cannot levy service tax on the entire sale consideration onceagain on the ground that the updates are being provided.
We are of theview that the artificial segregation of the transaction, as in the case onhand, into two parts is not tenable in law. It is, in substance, one transactionof sale of software and once it is accepted that the software put in theCD is “goods”, then there cannot be any separate service element in thetransaction. We are saying so because even otherwise the user is put inpossession 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 conclusionthat the impugned order of the Tribunal suffers from no jurisdictional orany other legal infirmity warranting any interference at our end in thepresent appeal.COMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH968SUPREME COURT REPORTS[2022] 17 S.C.R.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.CIVIL APPEALS ARISING OUT OF S.L.P. (CIVIL) NOS.6715-6716 OF 202260. Leave granted.61. These appeals, by special leave, are at the instance of theassessee 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 dismissedthe writ appeal thereby affirming the Order in Original dated 26.04.2018passed by the respondent herein.FACTUAL MATRIX62. The appellant herein obtained the antivirus software replicatedfrom the units in Himachal Pradesh duly assessed to Nil Central Exciseduty under the Notification No. 50/2003 CE dated 10.06.2003, and soldantivirus software in the CD form i.e., as a “packaged software or cannedsoftware” both indigenously by remitting appropriate VAT or exportedthe same.
Disputes were raised by the tax authorities claiming that theactivities of the appellant herein came within the ambit of the InformationTechnology Software Service as defined under Section 65(105)(zzzze)of the Act 1994. The initial notices issued ended in the confirmation ofdemand on the ground that since the appellant was providing the keyand allowing updates online, it amounted to digital delivery and thereforeit would fall under the above taxable entry.63. The appellant preferred statutory appeals against these orderspassed by the Tribunal, Chennai Branch.64. The Tribunal was pleased to grant interim stay as the appellanthad paid VAT on the sale of the software. While the appeals were pendingbefore the Tribunal, Chennai Branch, the Department continued to issuefurther show cause notices from time to time along with the issuedstatement of demand for these periods. The appellant filed a detailedreply dated 17.04.2018 contending that no service tax was payable asthe liability towards the VAT had already been discharged and the softwarebeing goods could not be made exigible to service tax.
Despite the clearpronouncement by this Court, an Order-in-Original dated 26.04.2018 ABCDEFGH969was passed confirming tax on the regime value charged by the appellantfor the sale of the software on which the VAT was paid including thevalue of the software exported, leading to the excessive demand notauthorized under law. Further, the authority observed in para 6.6 of hisorder that in terms of the judgment of this Hon’ble Court in TCS, thecharacter of the software as goods cannot be taken away and that it fellwithin the ambit of “deemed sales”. The said authority further imposedpenalty 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 petitionand also granted interim stay noting that the VAT had already been paidon the goods.66. While the writ petition was pending, the Tribunal, ChennaiBranch followed the decision of the Tribunal, Delhi Bench in the case of Quick Heal Technologies Ltd.
(supra) and allowed the appeals filed bythe appellant in their earlier cases. It is significant to note that againstthis order of the Tribunal, Chennai Bench no further appeal has beenfiled by the Department and thus, the view taken by the Tribunal becamefinal in so far as the appellant is concerned.67. When the above-mentioned Writ Petition No. 25923 of 2018came up for final disposal, the learned single Judge vide order dated29.10.2020 dismissed the Writ Petition, inter alia, on the ground that the High Court was not bound by the decision of the Tribunal, Delhi Benchin the case of Quick Heal Technologies Ltd. and the appellant’s ownorder passed by the Tribunal, Chennai Bench.68. Aggrieved by the order of the learned single Judge, the appellantpreferred the Writ Appeal No. 1881 of 2021 against the order dated29.10.2020 passed by the learned single Judge in Writ Petition No. 25923of 2018. The Division Bench vide order dated 05.08.2021 declined tointerfere with the order of the learned single Judge on the ground that anearlier Division Bench decision of the Madras High Court in the case ofM/s Infotech Software Dealers Association v.
Union of India (supra)covered the issue. It also held that the anti-virus software which is installedin the hardware would interact whenever the user of the computerengages the system.69. In such circumstances referred to above, the appellant hereinhas come up before this Court by filing the present appeals.COMMISSIONER OF SERVICE TAX DELHI v. QUICK HEALTECHNOLOGIES LTD. [J. B. PARDIWALA, J. ] ABCDEFGH970SUPREME COURT REPORTS[2022] 17 S.C.R.70. These appeals should succeed in the light of the reasoningassigned by us while dismissing the Civil Appeal (Diary No. 24399 of2020), as above.71. However, while allowing these appeals, we may only observethat in the case of M/s Infotech Software Dealers Association v. Unionof India (supra) the challenge was to the validity of Section65(105)(zzzze) levying service tax on the information technology softwareservice. The High Court held that the question whether the software is“goods” or not would depend on the facts and circumstances of individualcase.
Operative part
It is evident on plain reading of the judgment rendered by the Madras High Court in the case of M/s Infotech Software DealersAssociation (supra) that it has not referred to the decision of this Courtin the case of TATA Consultancy Services (supra).72. We take notice of the fact that the appellant herein had alsofiled a Review Petition No. 205 of 2021 against the order dated05.08.2021 in the Writ Appeal No. 1881 of 2021, which came to berejected vide order dated 20.12.2021.73. In view of the judgment rendered above in Civil Appeal (DiaryNo. 24399 of 2020), these appeals should succeed and deserve to beallowed.74. In the result, the appeals are allowed. The impugned orderpassed by the High Court dated 05.08.2021 in the Writ Appeal No. 1881of 2021 as also the order dated 20.12.2021 passed in the Review PetitionNo. 205 of 2021 in Writ Appeal No. 1881 of 2021 are hereby set aside. 75. There shall be no order as to costs. 76. Pending application(s), if any, also stands disposed of. Bibhuti Bhushan Bose and Amarendra KumarAppeals disposed of. (Assisted by : Pragya Samal, LCRA)
Questions this judgment answers
What did the Court decide in this case?
The Court recorded the following disposition: In the result, the appeals are allowed
Which statutory provisions did this judgment involve?
Constitution of India — arts. 366, 366(12), 366(29A), 366(29A)(d); L(b) of the Central Excise Act, 1944; E(d) of the Act, 1994; Finance Act, 1994; E(f) of theFinance Act, 1994; Andhra Pradesh General Sales Tax Act, 1957.
Precedent status how later indexed judgments have treated this case
No known negative treatment found in the Courts & Cases corpus.
This is a result about the indexed corpus, not a finding that the judgment remains good law. Coverage may be incomplete.