GST is payable on sub-licensing of the software by the Indian Subsidiary to the end-user

GST is payable on sub-licensing of the software by the Indian Subsidiary to the end-user

Held by Hon’ble Authority of Advance Ruling 

Held in the matter of M/S. AVEVA SOFTWARE PRIVATE LIMITED

M/s AVEVA Software Private LImited (“The Applicant”) is a subsidiary of AVEVA Plc. AVEVA Group has a Central Hub, located outside India, which is an IP Owner and manages and grants the license of the AVEVA software products to the group entities. Such entities further sub-licence the same software to the end user on his own account (i.e., in his own capacity without acting as a agent). The Applicant receives the sub-licensing fees from the end user. In turn, the applicant pays operating fees to the Central Hub on quarterly basis after retaining the he cost and guaranteed margin from the value of sales. In case,  the Applicant is unable to retain the agreed cost and guaranteed margin, the Central Hub makes a payment to ensure that the Applicant retains the guaranteed margin. 

Hon’ble AAR held that:

  1. Supply of pre-designed and pre-developed softwares made available through encryption keys shall be considered as “Supply of goods”. Further, being The applicant and the end user are unrelated parties, actual consideration charged by the applicant shall be considered as “Taxable Value”
  2. Market Support fees is nothing but compensation provided by the Central Hub to the the applicant whenever the guaranteed profit margin is not earned by the Local Operating Entity. Therefore, it is just an additional consideration for the sub-licence provide by the applicant and such consideration is received from central hub. As per Section 2(31) of CGST Act, consideration includes payment received from any person other than the recipient also. Consequently, the amount received from the Central Hub in the form of Market support fees is an additional consideration charged towards the supply to the end user.
  3. Service provided by the central hub shall be considered as “Import of Service” and the applicant shall be entitled to pay the GST under RCM. The taxable value for the Operating Fees shall be determined as per Rule 28 of the Tax Valuation Rules prescribed in CGST Rules 2017.

1. Brief Facts of the Case

  • M/s. AVEVA Software Private Limited (“The Applicant”) is a subsidiary of AVEVA Plc, having its headquarters at the United Kingdom. AVEVA Plc and the applicant, located in Tamil Nadu, are part of AVEVA Group.
  • AVEVA Plc is engaged in providing engineering design and information management solutions services  and also provides specialized technology consulting services.
  • Central Hub is the IP (Intellectual Property) owner within the AVEVA Group which manages and licenses the AVEVA software products. Central Hub is located outside India.
  • Central Hub grants licenses of software products to other entities within the AVEVA Group and such other entities further sub-license the same to the End-users on their own account. 
  • The Applicant and Central Hub has entered into an arrangement by way of an Operating Agreement (“OA”). As per Agreement, the Applicant becomes distributor and undertakes sub-licensing, promotion and marketing of the software products to the End-users within India, Sri Lanka, Bangladesh, Nepal and Maldives (hereinafter referred to as ‘Territory’). 
  • As per such agreement, Central Hub has appointed the Applicant as a non-exclusive distributor of software products by granting a non-exclusive right to sub-license the software products. 
  • Further, the applicant also provides implementation services to the End-users, if requested. It also promotes and markets the software products to the End-users.
  • The Applicant provides all the services in its own name and for its own account within the territory.  As per agreement between the applicant and Central Hub, the Applicant does not represent Central Hub as an agent. Therefore, there is no principal and agent in terms of the said arrangement. 
  • The Applicant enters into a valid and binding contract with the End-users in its own name. 
  • In pursuant to agreement, the Applicant delivers a copy of the relevant product to the-End-users in object code form only along with the copy of product documentation. Therefore, the Applicant sub-licenses the software by transferring the right to use such software to the End-user. 
  • The Applicant receives the sub-licensing fees from the End-users. 
  • The applicant pays an operating fee on a quarterly basis to the central hub after retaining the cost and guaranteed margin from the value of sales.
  • In case,  the Applicant is unable to retain the agreed cost and guaranteed margin, the Central Hub makes a payment to ensure that the Applicant retains the guaranteed margin. Such an act of agreeing to make the payment for guaranteed margin retention is referred to as market support provided by the Central Hub to the Applicant.

2. Question before Authority of Advance Ruling

The applicant has sought Advance Ruling on the following questions:-

  • Whether GST is applicable on sub-licensing of the software by the applicant to end-users in India? If yes, then what shall be the value of supply?
  • Whether GST is applicable on the ‘Market Support fees’ received by the applicant from Central Hub?
  • Whether the taxable value for the operating fees paid to Central Hub by the applicant shall be determined as per Rule 28 of the Tax Valuation Rules prescribed in CGST Rules 2017?

3. Contentions of the Applicant

The Applicant has submitted following contentions and understanding before AAR:

a. Question 1: Taxability of Sub-Licence Fee received by the Applicant 

  • GST is leviable on supply of goods or services. As per Section 2(52) of CGST Act, supply of goods means transfer of any movable property. In the given case, no movable property is being transferred.
  • Services cover anything which does not qualify as goods. Therefore, sub-licencing activity is a supply of service.
  • Further, as per Clause 5(f) of Schedule II of CGST Act, transfer of right to use shall be treated as “Supply of Service”. In the given case, the applicant transfers the right to use software products to the end users. Therefore, the sub-licensing of software products to end users is “Supply of service”.
  • Sub-licencing fees received by the applicant from the end user shall qualify as “Consideration” as the applicant and the end users are not related parties.

b. Question 2: Applicability of GST on “Market Support Fee”

  • The Market Support fee is to compensate the applicant, where the guaranteed profit margin is not being maintained. 
  • The activity of tolerating an act by not being able to maintain the guaranteed margin upon distribution, shall be considered as ‘supply of service’ as it is within the ambit of clause 5(e) of Schedule II of the Act.
  • Further, since Central Hub is located outside India therefore such “Supply of service” shall qualify as ‘export of service’ 

c. Question 3: taxable value for the operating fees paid to Central Hub by the applicant 

  • The Applicant claims that the applicant and central hub are related persons as per explanation to Section 15(5) of the CGST Act. Therefore, value shall be determined as per Rule 28 of CGST Rules read with Section 15(4) of CGST Act.
  • As per second proviso to Rule 28, value declared in the invoice shall be the taxable value where the recipient is eligible for full Input tax credit.
  • In the given case, the Applicant is engaged in providing only taxable supplies. Therefore, The applicant is not required to make any proportionate reversal of ITC on account of exempted supply and the Applicant is \eligible to avail full ITC. 
  • Accordingly, The Applicant is entitledto claim full ITC of the tax discharged under RCM on payment of operating fees, to Central Hub. Therefore, value of supply in the said case shall be the value invoiced by Central Hub.

4. Discussions and Findings by Hon’ble AAR

Hon’ble AAR has carried out following discussions and analysis:

a. Question 1: Taxability of Sub-Licence Fee received by the Applicant 

i. Whether activities carried out by the applicant is a supply of service?

  • As per Operating agreement entered into between the Applicant and Central Hub, The Central Hub appoints the Local Operating Entity as a non-exclusive distributor of the Products within the Territory to grant sub-licences and distribute the products within the Territory on its own account including to resellers and other distributors.
  • Therefore,  activity carried out by the applicant shall qualify as ‘supply’. 

Ii. Sale of pre-developed software is considered as supply of “Goods” or “Services”?

  • Further, to decide on whether the said activity would be supply of goods or services, It can be seen that a software is an intellectual property having value. 
  • GST law does not recognize or make distinction between tangible and intangible property. Under GST law, the definition of “goods” makes it clear that all property whether tangible or intangible capable of being moved would fall within the definition of goods. 
  • Goods has following attributes: 
    • utility 
    • capable of being bought and sold 
    • capable of being sold, transferred, delivered, stored and possessed. 
  • If a software satisfies the attributes mentioned above, the same could be treated as “Goods”. 
  • Also, It is pertinent to mention that when a person purchases a software programme, especially canned software, implanted in some tangible medium, he does not become owner of such software programme, but only a license holder, i.e., he cannot use of its own will.
  • Further, as per Notification No. 1/2017-IT (Rate), read with Notification No. 1/2017-C.T. (Rate), if pre-developed or pre designed software is supplied in any medium/storage or made available through the use of encryption keys, the same is treated as a “supply of goods” classifiable under the Heading 8523.
  • CBIC vide its sectoral FAQs on Information Technology (‘IT’) and IT enabled services had said that “in terms of Schedule II of the CGST Act, upgradation and implementation of information technology software or permitting the use or enjoyment of any intellectual property right are treated as services. But, if a pre-developed or pre-designed software is supplied in any medium/ storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523.”
  • Thus, the software supplied by the Applicant is pre-developed and predesigned software and made available through the use of encryption keys and hence it satisfies all condition of the definition ‘goods’. 
  • Therefore, Supply of software license qualifies as “Supply of Goods”.Hence, the supply made by the Applicant is covered under ‘Supply of goods’ and GST shall be applicable on the same in terms of Section 9 of CGST Act, 2017.

iii. valuation of supply of software

  • In the instant case the applicant and end user are not related persons, the taxable value will be the actual transaction value which the applicant has charged the end user for sub-licensing the software.

b. Question-2: Whether GST is applicable on the ‘Market Support fees’ received by the applicant from Central Hub?

  • As per Operating Agreement(OA) entered between Aveva Solutions Ltd. and the applicant, a Market Support Service Fee shall be payable by the Central Hub to the Local Operating Entity (“The Applican”) to the extent of any shortfall in profit margin guaranteed to the Local Operating Entity.
  • As per the agreement, it is clear that the Market Support fees is nothing but a compensation provided by the Central Hub to the Local Operating Entity, whenever the guaranteed profit margin is not earned by the Local Operating Entity.
  • Therefore, it is nothing but an additional consideration received by the Applicant from the Central Hub for an agreed obligation as per the Operating Agreement. 
  • As per Section 2(31) of CGST Act, 2017, consideration includes payment received from any person other than the recipient also for the inducement of, the supply of goods or services or both.
  • Consequently, the amount received from the Central Hub in the form of Market support fees is an additional consideration charged towards the supply to the end user.

c. Question 3: Whether the taxable value for the operating fees paid to Central Hub by the applicant shall be determined as per Rule 28 of the Tax Valuation Rules prescribed in CGST Rules 2017?’

  • The Applicant pay an amount as ‘Operating fee’ to the Central Hub in lieu of various rights, collectively may be referred to as ‘distribution rights’.
  • As per Section 2(11) of IGST Act, “import of services” means the supply of any service, where-
    •  the supplier of service is located outside India;
    • the recipient of service is located in India; and
    • the place of supply of service is in India;
  • In the given case the Central Hub being the supplier is located outside India, the recipient being the Applicant is located in India and the key factor to be decided is the place of supply.
  • As per Section 13(2) of IGST Act, the place of supply is the location of the recipient of Service viz. India. The value for the said activity is determined as per Section 15 of the CGST Act 2017.
  • Therefore, The conditions as envisaged in Section 2(11) of the IGST Act are satisfied, the distribution rights granted by the Central Hub to the Applicant shall qualify as ‘import of services’ in the hands of the Applicant. 
  • Accordingly, GST is payable on such supply of service under reverse charge.
  • Coming to the Valuation part, the Applicant and the Central Hub qualifies to be related persons in terms of Explanation to Section 15(5) of CGST Act, 2017. Hence, value shall be determined as per Rule 28 of CGST Rules.
  • As per Rule 28 of CGST Rules, in case where the ‘open market value’ is available, then valuation of the supply shall not be governed by clause (b) or (c) of Rule 28 of CGST Rules. 
  • Further, in case, where the recipient of service is eligible to claim the full ITC, the value shall be determined as per the second proviso to Rule 28 of CGST Rules.

5. Conclusion

1. Question 1: The sub-licensing of the software by the Applicant to end-users in India would fall under ‘Supply of goods’ and GST shall be applicable on such supply. The taxable value shall be the actual transaction value charged by the Applicant.

2. Question 2: The amount received from the Central Hub in the form of Market support fees is an additional consideration charged towards the supply. Therefore, it shall form part of the value of supply.

3. Question 3: The taxable value for the Operating Fees paid to Central Hub by the Applicant pursuant to the said arrangement shall be determined as per Rule 28 of the Tax Valuation Rules prescribed in CGST Rules 2017.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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