We are all aware of the fact that under pre GST regime softwares were being subjected to double taxation as both VAT as well as service tax was being charged thereon. This double taxation has come to an end in GST era. However a question may still arise as to whether supply of software would be regarded as supply of goods or supply of services under GST regime.
In this regard it is pertinent to mention that in the year 2005, the Supreme Court in the case of Tata Consultancy Services v. State of A.P had held that the transfer of branded software constitutes a sale and is liable to sales tax, levied by State Government. Thus there seems to be no dispute in regard to taxability of canned / readymade software, as in pre GST regime same was chargeable to VAT and in GST regime same will be charged to GST as supply of goods.
In is also important to note here that under GST law, para 5(d) of Schedule II of the CGST Act, 2017 mandates that development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of the information technology software shall be treated as supply of services.
Now in this backdrop let us discuss a recent Ruling adjudged by Karanataka AAR in regard to taxability of Computer Software, on the application filed by M/s Solize India Technologies Pvt. Ltd (Advance Ruling No. KAR ADRG 25/2020).
Facts of the Case
a. The applicant states that he is engaged in purchase of software from their principal partner and supply the same to their customers. The conditions of agreement between principal partner, applicant and customers inter-alia include that the applicant and customers shall not:-
- Decomile, disassemble or otherwise to derive the source code for the Software
- Modify, alter, adapt, translate and create derivative works from the software
- Remove, alter or obsure any proprietary noties, labels, or marks from the Software
- Copy or reproduce the Software in whole or in part, except as may be required for installation into the computer memory for the purpose of executing the Software for licensed use.
b. The applicant states that the principal partner delivers the Software to the customer directly by providing the License Keys to download on line and to run the Software.
c. The Software supplied by the applicant is generally used by the customer for designing/ validating/ manufacturing the parts / systems in industries like Automotive, Defence, OEM Tier 1 supplier, Aerospace, Railways, Heavy equipment, Machinery, etc. The functionality of Software (i.e. input to the Software and output from the Software) remains unchanged irrespective of the type of customers (Automotive, Defence, Aerospace etc.) using the same. In other words the software supplied by use could be used by the customers in different fields depending on their requirement. In short, it is a package software and not tailor made one, to suit individual requirement.
d. The applicant states that their customer base is mainly Government Departments, public funded research institutions and public sector undertakings viz. HAL, VSSC, BHEL, BEML, DRDL, VRDE, CVRDE, IITs at various locations, ADA and NAL, etc.
Ruling of Karnataka AAR
Karnataka concluded that as the applicant states that he purchases the off-the-shelf software which are not developed for any specific client and the same software is sold to all the clients. Hence we agree that the software sold by the applicant is a pre-developed or predesigned software and made available through the use of encryption keys and hence it satisfies all the conditions that are required to be satisfied to cover them under the definition of “goods”.
Further, the goods which are supplied by the applicant cannot be used without the aid of the computer and has to be loaded on a computer and then after activation, would become usable and hence the goods supplied is “computer software” and more specifically covered under “Application Software”. Hence the supply of software supplied by the applicant which is not designed and developed specific to any customer and sold without any customisation, qualifies as “supply of goods” and “supply of computer software as goods” and the goods supplied are covered under the HSN 8523.
Further it was also adjudged by Karnataka AAR that the benefits of Notifications No.45/2017-Central Tax (Rate) and Notification No.47/2017-Integrated Tax (Rate) both dated 14.11.2017 (concessional rate of GST @ 5%) are applicable to the supplies made if the same are made to recipients if they are covered under Column (2) and if the conditions as specified in Column (4) of the said Notifications.
For ready reference of the readers complete order passed by Karnataka AAR is given below:
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