CESTAT Mumbai Sets Aside Service Tax on Packaged Software Sale, Rules It Is Goods, Not Service

The Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that packaged (canned) software is "goods". It therefore ruled that its sale cannot be treated as a taxable service merely because the conditions for claiming the available service tax exemption were not met.

A coram of Judicial Member Dr. Suvendu Kumar Pati observed that once packaged software is recognised as "goods" under Article 366(12) of the Constitution, its sale falls outside the definition of "service" under the Finance Act, 1994.

The tribunal observed, "Therefore, when such sale of Information Technology Software is considered as sale of goods in terms of 'goods' as defined under Article 366(12) of the Constitution of India and the definition of 'service' under Section 65B(44) of the Finance Act, 1994 excludes such transfer, delivery or supply of any goods, the presence or absence of any of the stipulation... to comply with Notification No. 11/2016-ST would be of no consequence once such information technology software is placed out of the category of service. Therefore, non-fulfilment of the conditions enumerated in the said notification would not bring the transaction of sale of information technology software into the category of service since the Hon'ble Supreme Court had included it within the purview of goods."

The case arose after the department found a mismatch between the taxpayer's income tax returns and service tax returns for the period from 2015 to June 2018. It issued a show cause notice seeking to recover more than ₹13 lakh in service tax, along with interest and an equal penalty by invoking the extended period. The department also proposed a late fee of ₹60,000 for delayed filing of service tax returns.

During adjudication, the taxpayer secured partial relief. The adjudicating authority granted the small service provider exemption for the first financial year under dispute and extended certain other benefits. However, it confirmed a service tax demand of ₹2.86 lakh for the financial year 2016-17. Interest and penalty were also imposed. The late fee of ₹60,000 was confirmed as well. The Commissioner (Appeals) later upheld that decision.

Before the tribunal, the taxpayer argued that the disputed amount related to the sale of packaged software. It submitted that the transaction amounted to a sale of goods and not the provision of a service.

The taxpayer relied on earlier decisions of the tribunal as well as the Supreme Court's ruling in Tata Consultancy Services v. State of Andhra Pradesh.

The department argued that the taxpayer had failed to satisfy the conditions required to claim the exemption available for packaged information technology software. It also pointed to deficiencies in the records. According to the department, the documents did not contain details of the software media or the declaration required under the exemption.

After examining the record, the tribunal observed that the adjudicating authority had not conclusively found that the conditions for claiming the exemption had actually been breached. More importantly, it held that the dispute did not turn on whether those conditions had been fulfilled.

Relying on the Supreme Court's decision in Tata Consultancy Services, the tribunal observed that software recorded on a medium and marketed possesses the characteristics of "goods".

Since the Finance Act excludes transactions involving the sale of goods from the definition of "service", the tribunal ruled that failure to satisfy the conditions for claiming the exemption could not convert the sale of packaged software into a taxable service.

The tribunal accordingly modified the appellate order. It set aside the service tax demand, interest, and penalty. However, it upheld the late fee of ₹60,000 imposed for delayed filing of service tax returns.

For Appellant: Advocate Ananta Khandait, 

For Respondent: Dhananjay Dahiwale, Deputy Commissioner, Authorised Representative.