TMI Blog2011 (4) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... J These writ appeals are filed against the order passed by the learned Single Judge declining to entertain the Writ Petitions, which is filed challenging the order passed by the assessing authority on the ground that the petitioner has an alternate and efficacious remedy by way of statutory appeal. 2. The appellant-assessee is a Public Limited Company engaged in the business of software development and export and providing software services. The assessee is a registered dealer under the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as the 'KVAT Act') and the Central Sales Tax Act, 1956, (hereinafter referred to as 'the CST Act' for short). The assessee has been filing its VAT returns in Form VAT 100 in LVO - 045 regularly. The assessee is also registered under Section 69 of Chapter-V of the Finance Act, 1994 (hereinafter referred to as the 'Act') for the purpose of payment of service tax and has been paying service tax on its service turnover from the date of applicability. The place of business of the assessee was visited by the Commercial Tax Officer for the purpose of inspection on 8-6-2010. Subsequently the case was assigned for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnover does not arise. They also pointed out that the observations made in respect of the agreements are incorrect and they have set out in the nature of reply, the nature of services rendered to each of their clients and also pointed out the different clauses in the said agreements. Then they contended that they provide the Information Technology services and the clients owned all the Intellectual Property developed during the course of the performance of the agreement. They have assumed the deliverables only as a work for hire. At no point of time the assessee owns in any manner whatsoever any copyright or any other right in the work. Obviously the assessee cannot sell what it does not own. Hence there cannot be any transfer of property in goods. They contended that the assessee provides only services under the agreement and the service is solely related to information Technology software services. The assessee never owns at any point of time any intellectual Property or inventions or discoveries or new developments made during the course of the performance of the agreements. All the Intellectual Property or Inventions or discoveries or new developments are the exclusive propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel appearing for the assessee contended that the contract in question is a contract of service simplicitor. There is no element of sale in the execution of contract between the parties. The assessee has paid the service tax in respect of the entire consideration, received under the agreement. Therefore, once the field is covered by the Central Legislation, the Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or State List, the State has no power to enact a law or transgress the law enacted by the Parliament and levy tax under the guise that it involves sale of goods. As is clear from the terms of the agreement entered into between the parties there is no sale of any goods or deemed sale. The reliance placed by the assessing authority on the balance sheet to contend that in execution of the contract, as the assessee has purchased the software and the said software is without any substance. Though in the balance sheet the software purchase is shown, the said software is used as a tool by the assessee in executing the contract and the said tools are not transferred. The agreement and the other material on record clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are sold by the assessee can be termed to be goods and as such assessable to sales tax under the Act. The Apex Court relied on the judgment of the American Corporation in the case Advent Systems Ltd. v. Unisys Corpn. 925 F 2d 670 (3rd Cir 1991) where it was held that, computer programs are the product of an intellectual process, but once implanted in a medium they are widely distributed to computer owners. An analogy can be drawn to a compact-disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a goods , but when transferred to a later-readable disc it becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not goods, but, when transcribed as a book, it becomes goods. That a computer program may be copyrightable as intellectual property does not alter the tact that once in the form of a floppy disc or other medium, the program is tangible, movable and available in the market place. The fact that some programs may be tailored for specific purposes need not alter their status as goods because the definition includes specially manufactured goods . Thereafter, at para 24, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear that a software is goods as defined under Article 366(12) of the Constitution of India and therefore, there is no dispute about the said legal position. But the question for consideration in these cases is, whether a contract that is entered into for developing a software, is it a service contract or a composite contract including service and sale of goods. 12. The Apex Court after holding that even unbranded software when it is marketed/sold, may be goods, made it very clear that, in the aforesaid decision, they are not dealing with this aspect and expressed no opinion because in case of unbranded software whether the contract is a service contract or contract of sale is also involved , may arise. That is precisely the question that has to be decided in these cases. Therefore, the said judgment do not come in the way of this Court going into the said question, as the Supreme Court has not expressed their opinion on the said issue. Therefore, the field is open. 13. In order to justify the imposition of value added tax, the revenue contends that it is a composite contract, a works contract. There is an element of service and transfer of goods, consequently a dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of software involved in the entire transaction. 16. In order to appreciate the rival contentions and to find out whether the contract in question is a works contract, or an indivisible contract, and what is the dominant nature of the contract and what is the intention of the parties, it is necessary to see the relevant and material terms of the contract. The same is extracted hereunder:- Master Agreement for Services between Motorola India Electronics Private Ltd. and Sasken Communication Technologies Limited. 1.1 Definitions ** ** ** (b) Developed Software shall mean any software, modifications or enhancements to or derivative works of software and documentation developed as part of Services, pursuant to a Work Order by the Vendor or its agents and sub-contractors. (c) Intellectual Property shall mean the legal rights, including intellectual property rights, moral ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per performance and provision of the Services under such Work Order or Statement of Work, and are an inherent part of, or a necessary sub-part included within such Services, then such services, functions, responsibilities and tasks shall be deemed to be implied by and included within the scope of the Services to the same extent and in the same manner as if specifically described in such Work Order of Statement of Work. (c) The Vendor will provide the Services to Motorola as agreed in the applicable Work Order and the Statement of Work attached thereto. The Vendor will perform the Services requested in each Work Order in accordance with performance measures customarily applied by the Vendor and/or any service levels agreed between the Parties, which may include methodologies such as rates of production of lines of codes, function points, on time performance, customer satisfaction, percentage of defects or other metrics or methodologies. 3. Responsibility of Vendor ** ** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r; (c) Statement of Work, detailed Specification document; (d) List of specific resources required, who and how they would be procured (e) The MOTOROLA project manager, (f) The total hiding limit for the Work Order, if any, and (g) Any special terms and conditions agreed upon by the parties with respect to the Work Order. 12.2 Within ten (10) business days after the Vendors receipt of a mutually agreed Work Order, the Vendor shall accept or reject the Work order in writing and if accepted return a legible copy of the accepted Work Order to MOTOROLA, Provided, however, that if a Work Order fails to provide all required, ordering information or incorrectly states prices or other material information, relative to the Work Order, the Vendor may reject the Work Order by promptly submitting written notice of rejection to MOTOROLA stating in detail the reasons for rejection and the modifications necessary to make the Work Order acceptable to the Vendor. The Vendor shall make no changes, amendments, modifications, additions or deletions to a Work Order without the prior written consent of MOTOROLA. Acceptance of a Work order shall bind the Vendor to comply with the terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant Work Order and/or Statement of Work. As specified in each Statement of Work, the parties will agree whether the work will be billed on a time and materials basis or on a fixed price. For time and materials based projects. Vendor shall bill MOTOROLA on a monthly basis. Payment is due net forty five (45) days following receipt of a correct invoice therefore. 16.2 All invoices shall reference the MOTOROLA contract number assigned to this Agreement and the applicable Work Order number and shall be delivered, to the Finance department, Motorola India Electronics Private Limited, No. 66/1, Plot 5, Bagmane Techpark, CV Raman Nagar, Bangalore 560 093. 16.3 Pricing for time and materials projects shall be fixed at a rate set forth in Annexure A. Vendor agrees not to increase the price for twelve months from the effective date of this Agreement. The Parties agree to review prices on an annual basis and to renegotiate as necessary to meet market conditions. 16.4 The fees set forth in the relevant Work Order and/or Statement of Work for the Services and deliverables do not include applicable sales, use, excise, VAT or similar taxes. To the extent Vendor is required by law to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions planned for the Risk management. The Vendor will be responsible for defining the schedules for periodic back up of program and documentation data. This backup plan would include adequate measures to protect development work from hazards like fire, theft and natural calamities to minimize damages. ** ** ** 36. Ownership of Products 36.1 Notwithstanding anything to the contrary, the Vendor agrees that all patentable and unpatentable inventions, discoveries, and ideas which are made or conceived as a direct or indirect result of the programming or other Services performed under this Agreement, shall be considered works made for hire and shall remain the exclusive property of MOTOROLA and the Vendor shall have no ownership interest therein. Promptly upon conception of such invention, discovery, or idea, the Vendor agrees to disclose the same to MOTOROIA and MOTOROLA sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all or any of the components developed by it, outside the scope of this contract, for the execution of the projects under this Agreement. The ownership of such components would remain with the Vendor. These components will be identified by the Vendor at the beginning of any project under any Work Order. MOTOROLA and the Vendor would enter a Non-disclosure agreement prior to any discussions pertaining the components being considered for inclusion in any project executed under this agreement. 37.2 Vendor grants to MOTOROLA and its affiliates, a perpetual, irrevocable, worldwide, non-exclusive, royalty free license to Company Background Property necessary to make, have made, use, have used, import, sell, offer for sale, dispose of, distribute and/or create derivative works of Motorola's products embodying the deliverables in whole or part, and to sublicense for the filed of such MOTOROLA products any and all of the foregoing rights to third parties, provided that Company Background Property cannot be used or sub-licensed on a stand alone basis. However, if Motorola wants to use the Company Background Property on a stand-alone basis, MOTOROLA will seek Vendor's prior writt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uest detailed reports on the aggregate value of the Development ordered under this Agreement as well as any open questions submitted by the Developer to Nokia, as well as description of such Development ordered and of quotations open. 3.5 The Developer shall upon request by Nokia give Nokia access to all facilities that may reasonably be required to enable Nokia to monitor the progress of the Development and afford Nokia the right to verify at source that a Deliverable conforms to the Specifications and other specified requirements. Any such monitoring or verification shall be without prejudice to any other rights of Nokia under this Agreement or the Project Order and shall not relieve the Developer from any of its obligations under this Agreement or the Project Order nor shall such verification be used by the Developer as evidence of effective control of quality. 3.6 The Developer shall not without the prior written consent of Nokia engage any subcontractor to perform any part of its obligations under this Agreement or the Project Order. However. notwithstanding any such consent from Nokia, the Developer shall remain fully responsible and liable for the performance of any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Work order specifies the deliverables. So, it is considered that Master agreement itself construes the nature of transaction and proposals of tax shall be on the strength of the said master agreement. 3. Though the nomenclature of the work carried out is mentioned as services, the scope of work and other classes of the agreement confirms that there is a development of software and normally it is carried out on software of the client company resulting in development of altogether new software. 4. The Master agreement also speaks of the deliverables incorporating the development. So it is admitted that there is a development of code on your part and it should, he handed over to the clients concerned. This amounts to sale of intangible goods in view of judgment by the Hon'ble Supreme Court in the case of M/s TCS v. State of Andhra Pradesh. The transfer of intellectual property from the technicians of M/s Sasken to the client parties will constitute sale of goods in terms of the judgment. 5. In respect, of ownership of the products (deliverables), every other agreement specifies that any software developed, reports, designs, programs, specifications, documentations et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee to the client constitute sale of goods in terms of the judgment and therefore liable to sales tax. It is the correctness of the said reasoning and finding which is assailed in these proceedings. 20. The terms of the contract set out above make it clear that the contract is one for rendering service. The assessee is paying service tax levied on the said service rendered, under the provisions of the Act, which is enacted by the Parliament by virtue of the power conferred on it under Article 248 of the Constitution which reads as under:- 248. Residuary powers of legislation. (1) Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent list or State List. (2) Such power shall include the power of making any law imposing a tax not mentioned in either of those Lists. Entry 97 in List-I reads as under: Any other matter not enumerated in this List-II or List-III including any tax not mentioned in either of those Lists. 21. Article 246(1) of the Constitution specifies that the Parliament has exclusive, powers to make laws with respect to any of the matters enumerated in List 1 in the Seventh Schedule of the Cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Legislature in the field of legislation which is clearly ear marked for them namely, List-I and List-II. The second part deals with the law made in respect of the Entries in the concurrent list over which both the Parliament, and Legislature has power. In List-II. there is no Entry providing for making of a law and imposition on Information Technology and software. 23. However, the Act was amended by inserting Section 65(105) (zzzze) which came into effect from 16-5-2008 which provides for service in relation to Information Technology software for using in the course, or furtherance of business or commerce including (i) development of Information Technology software. (ii) study, analysis, design and programming of information technology software, (iii) adaptation, up-gradation, enhancement, implementation and other similar services related to information technology software. (iv) providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the start-up phase of a new system, specificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 Programming and providing of computer software Four per cent In Schedule VI to the said Act with effect from 1.4.2006 tax is sought to be levied on sale or purchase of goods involved in works contract. One such works contract which is specified in VI Schedule is programming and providing of computer software. Therefore, if the works contract of programming and providing of computer software involves apart from agreement of service, the agreement to sell the goods the State Legislature can levy tax on such goods. It is after the introduction of VI Schedule on 1.4.2006, the Act was amended by inserting Section 65 (105) (zzze) with effect from 16.5.2008 providing for service in relation to information technology software for using in the course of furtherance of business or commerce including development of Information Technology software, study, analysis, design and programming of information technology software. Information and technology software includes computer software. In other words programming and providing of computer software prescribed in VI Schedule now forms part of Section 65(105) (zzze). However, it is well sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Acts are made applicable. 32. Payments of service tax as also VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged. in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy .. 30. Wherever legislative powers are distributed between the Union and the States, situations may arise where the two legislative fields might apparently overlap. It is the duty of the Courts, however difficult it may be, to ascertain to what degree and to what extent, the authority can deal with matters falling within these classes of subjects exists in each Legislature and to define, in the particular case, before them, the limits of the respective powers. It could not have been the intention that a conflict should exist; and, in order to prevent such a result the two provisions must be read together, and the language of one interpreted, and where necessary modified by that of the other. From time to time that legislation, though purporting to deal with a subject in one list, touches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement to render service, neither the concept of a works contract nor the concept of aspect theory is attracted. It is by virtue of Entry 54 in List II of the VII Schedule the Karnataka Value Added Tax is enacted by the State Legislature, as the State Legislature is competent to enact laws in respect of sale of goods. By introducing a schedule to the said enactment and describing under a works contract programming and providing a computer software is specified'', unless the said works contract involves an element of sale of goods, the State Legislature has no power to levy tax under the said Act. Similarly, the Parliament also has no power to levy service tax on sale of goods if by including in the Finance Act, development of information technology software, study, analysis, design and programming, information technology software and various other aspects touching software if it involves sale of goods. It has to be necessarily confined to the service aspect. In both the enactments they specify the types of activities which are liable for tax. A duty is cast on the Court to interpret those provisions in such a harmonious way so as to uphold the right of both the legislations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the time being. If the words sale of goods has to be interpreted in their legal sense, that sense can only be what it has in the law relating to sale of goods. The ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in law, acquired a definite and precise sense, and that, accordingly, the Legislature must be taken to have intended that, they should be understood in that sense. Therefore while interpreting an expression used in a legal sense, we have only to ascertain the precise connotation which it possess in law. In India, to constitute a transaction of sale there should be an agreement, express or implied, relating to goods to be conveyed by passing on title in those goods. It is the essence of this concept that both the agreement and the sale should relate to the same subject-matter. Where the goods delivered under the contract are not the goods contracted for, the purchaser has a right to reject them, or to accept them and claim damages for breach of condition. Therefore, in law, there cannot be an agreement relating to one kind of property and sale of different property. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct-matter of sale or purchase. In arriving at a conclusion the court would have to approach the matter from the point of view of a reasonable person of average intelligence. 37. The Apex Court in the case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 dealing with deemed sale has stated as under: 43. All the clauses of article 366(29A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchases and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerly Limited. The amendment especially allows specific composite contracts, viz., works contracts [(clause(b)), hire purchase contracts (clause(c)), catering contracts (clause(f)) by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax where the sale element could be isolated and be subjected to sales tax. 44. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of sale for the purposes of the Constitution in general and for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not involve a sale for the purposes of entry 54 of List II is, as we see it for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case (1958) 9 STC 353 (SC), namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts oilier than, those mentioned in Article 366(29A) continues to be - did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is as to what is the substance of the contract . We will for the want of a better phrase, call this the dominant nature test. ** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goods.' 38. The test for deciding whether a contract falls into one category or the other is as to what is the substance of the contract i.e., the dominant nature of the contract. The test therefore for composite contracts other than those mentioned in Article 366(29A) continues to be, did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. In order to attract sales tax, it should fall within one of the exceptions provided under the aforesaid provision. If the contract entered into is not a works contract, then that would not fall under any of those exceptions or under the above provision. Therefore, it is necessary to look into the terms of the contract carefully to ascertain the true intent and nature of the contract, what is the nature of activity, what the parties intended, what is agreed upon and what is the consideration paid. Nature of Contract 39. From the aforesaid Clauses; it is abundantly clear that the parties have entered into an agreement whereby the assessee renders service to the client for development of software, i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration is for the service rendered, based on time or man hours. Once the project is developed, all rights in respect of the said project including the Intellectual Property rights vest with the customer and he is at liberty to deal with it in any manner he likes. The assessee has agreed to execute all such documents which are required for the exercise of such absolute rights over the software developed by the assessee. 42. The 'deliverables' has been defined under the agreement to mean all materials in whatever form generated, treated or resulting from the development including but not related to the software modules or any part thereof, the source code and or object code, enhancement applications as well as any other materials media and documentation which shall be prepared, written and or developed by the developer for the client under this agreement and/or Project Order. If the customer agrees to provide any hardware, software and other deliverables that may be required to carry out the development and provide the deliverables he may do so. Otherwise the assessee has to make or provide all those hardware and software to develop the deliverables and the final pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istance of the staff of service providers. In fact, the material on record discloses that the customers have engaged the services of several service providers, who have expertise in different fields and all of them put their mind and hands together and find a solution to the problem of the customer. The end product, i.e., the ultimate software, is not necessarily the work of any one such service provider. It is a collective effort. Nobody can claim that the end product exclusively belongs to them except the customer who has paid for the service rendered by the various service providers. 45. As clear from the terms of the agreement, on the day they entered into agreement, there was no software in existence. In other words, there was no goods in existence. The agreement is not for transfer of software. The agreement is for development of software. Even before the software comes into existence, the assessee has given up all the rights and claims of the software to be developed and has expressly agreed that such a software which may come into existence in the end of the contract period is the absolute property of the customer. The customer is at liberty to deal with that software in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s head. If a person possesses in his head a good idea, there is no risk that any one will see or find it, and thereby appropriate it. Such intellectual property may be preserved thus until its owner chooses to divulge it. If the idea consists of a process of doing something, it even remains securely in the possession of its owner if he performs that process when no one sees him performing. The possessor of such property can take it to the grave with him, safe in the knowledge that no one will inherit it. There is relatively little potential for the commercial exploitation of intellectual property while it remains in his head. This is because the keeping of an idea to oneself and the commercial utilisation of that idea are inherently contradictory notions. The acquirer of an intellectual property right can derive no financial benefit from it except by using it commercially. He will gain advantage only by making a product and selling it or by charging others who wish to exploit his intellect. When he offers his services or intellect to an employer, he is not selling any intellectual property as none exists on the date of contract of employment. The employer gets a right to exploit th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cond appeal is provided and therefore the learned Single Judge was justified in directing the parties to approach the appellate forum and this court should not entertain these appeals. Normally, when the statute provides an alternative remedy by way of an appeal, this court declines to entertain a writ petition against such assessment orders. But it is not an invariable rule specifically when the case involves interpretations of constitutional provisions and when the authorities have already interpreted these provisions in a particular manner, the question of the party approaching the very departmental authorities would make no difference. That apart, these assessment orders are passed after coming into force of the Finance Act, 1994 and when service tax was imposed. The question for consideration is, when once by a parliamentary legislation, service tax is levied on the entire consideration received by the assessee, whether it is open to the State Legislature to levy sales tax on any portion of the said consideration which has already suffered service tax. Even otherwise also, the question for consideration is as discussed above, whether the contract in question is an indivisible ..... X X X X Extracts X X X X X X X X Extracts X X X X
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