TMI Blog2020 (8) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... and. - O.T.Rev.Nos.171 & 175 of 2015 - - - Dated:- 4-8-2020 - THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN And THE HONOURABLE MR. JUSTICE T.R.RAVI FOR THE PETITIONER : SR.GOVERNMENT PLEADER SRI.MOHAMMED RAFIQ FOR THE RESPONDENT : ADV. SRI.HARISANKAR V. MENON BY ADV. SMT.MEERA V.MENON ORDER Vinod Chandran, J. The revisions are with respect to assessment years 2006-07 and 2007-08. The assessee is a software developer, who submitted their returns for the relevant assessment years. The Intelligence Officer issued notice on the ground that the assessee has not included the consultancy charges and the amounts received for annual maintenance contract (AMC) in the relevant assessment years. The Intelligence Officer also relied on a clarification issued by the Commissioner of Commercial Taxes, wherein it was held that if the agreement executed is inclusive of the consultancy charges, it will form part of the taxable turnover. The books of accounts and agreements were verified to find that both the components have to be included in the sales turnover, which the assessee failed to do. The assessee took the contention that the software was sold for a particular price an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The payment terms are also at percentages in each stage without any distinction drawn of the different components. The sale price, hence, involves the price quoted by the assessee and it cannot be said that the customization is on the product sold to the purchaser, after its sale. The sale itself is occasioned with the customization is the argument. The learned Government Pleader relies on the decision in Associated Cement Companies Ltd. v. Commissioner of Customs [(2001) 4 SCC 593] and Tata Consultancy Services v. State of A.P. [(2004) 137 STC 620 (SC)]. The learned Government Pleader also relies on the decision in Girish Kumar, K.E. v. Sales Tax Appellate Assistant Commissioner [(2001) 122 STC 546 (Ker.)] to argue for a remand, since both the appellate authorities, enjoined upon to look at the facts and adjudicate on it, have not considered the issue in the proper perspective. 5. The learned Counsel for the assessee-respondent, however, argues that the product is one developed by the assessee, which is sold to various institutions. The software as such may not satisfy the requirements of the individual purchasers. It requires a customization, which can be done only with ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that the subject transaction is a works contract. The assessee admits that the sale of software in a CD is a sale of goods but argues for the position that the customization made is purely a service rendered, after the sale, the consideration for which cannot be taxed as sale value of the goods. The Department asserts that the sale of CD, with the customization is a sale of goods. The transaction in any event is admitted to be a sale of goods the value of which is the bone of contention. 7. Associated Cement Companies Ltd considered the question whether drawings, designs, etc. relating to machinery or industrial technology were goods, leviable to duty of customs on their transaction value at the time of import. It was argued that transfer of technology or know-how though valuable was intangible. The technology when transmitted to India on some media does not get converted from an intangible thing to tangible thing or chattel and that in a contract by supply of services there is no sale of goods, was the argument. Reading Section 2(22) of the Customs Act which defines the word goods , including clause (c) baggage and clause (e) any other kind of moveable property , it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The plant was originally installed in Germany, which Company went into liquidation, upon which the Bank which was appointed as a Receiver sold it to one Investment Company. EGL entered into a contract with the Investment Company to purchase the 'Direct Reduction Iron Plant' which operated on the basis of a process developed by one Midrex International B.V. The agreement of the respondent with the Investment Company required the latter to obtain the operational licence from Midrex. The agreement stipulated not only the Midrex process licence, but also some technical services provided by Midrex, for which respectively DM 20,00,000 and DM 1,01,00,000 were payable. A further sum of DM 2,31,00,000 was also payable to the Investment Company on account of engineering and consultancy fees. The Hon'ble Supreme Court held that the amounts payable for the process licence as also the technical consultancy provided by the licensor has to be included in the valuation of goods under Section 14 of the Customs Act. It was held so in paragraph 18: 18. The entire purpose of Section 14 is to find out the value of the goods which are being imported. The EGL in this case was purchasin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; alternatively termed as 'unbranded' and 'branded'. The distinction is in that a 'canned software' contains programmes which can be used as such by any person purchasing it, while an 'uncanned software' is one prepared for a particular purchaser's requirements by tweaking the original software to adapt to the specific requirements of a particular entity. While a 'canned software' could be sold over the shelf an 'uncanned software' is programmed to specific and particular needs and requirements. Their Lordships held that in India the test, to determine whether a property is 'goods', for the purpose of sales tax, is not confined to whether the goods are tangible or intangible or incorporeal. The correct test 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 was heavily relied on. It was held so in paragraphs 27: 27. In our view, the term goods as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty; so far as 'unbranded software' is concerned, it is undoubtedly intellectual property but may perhaps be outside the ambit of 'goods'. (emphasis supplied) 29. Mr Sorabjee submitted that the High Court correctly held that unbranded software was undoubtedly intellectual property . Mr Sorabjee submitted that the High Court fell in error in making a distinction between branded and unbranded software and erred in holding that branded software was goods . We are in agreement with Mr Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted, consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even unbranded software, when it is marketed/sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise . The declaration made in the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nents for the goods purchased to be effectively utilized, which makes the amounts payable for obtaining such licence and technical know-how includible in the value of the goods on which tax or duty on the goods can be levied. Both the appellate authorities have not looked at this specific issue. If the customization carried out is imperative for the operation of the software necessarily it would be a sale of goods with the software on which the customization is incorporated. However we are of the opinion that the AMC would be taxable only if there is any sale of goods. Even if consultancy charges are received to tweak the customized software to the changing requirements of the client or to extend it to more premises, then necessarily it is occasioned after the sale. 14. The learned Senior Government Pleader invited us to the records to point out that the invoices produced would clearly demonstrate the manner in which the transaction was carried out, making the entire turnover taxable under the KVAT Act. We are, however, not looking at the facts in the above revisions and have to confine ourselves to determination of questions of law. We have stated the law and the facts have to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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