TMI Blog2019 (4) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of claim of the assessee, relying upon which his case falls apart from the definition of goods and immediately come within the purview of service. Where any assessee is carrying on both the work of sale of software and development of software, then the assessing authority has to distinguish and indentify between the two in such a harmonious way so as to uphold the right of both the Legislation to levy tax, which falls within their respective area for arriving at such conclusion the assessee is also duty bound, apart from submitting his return to produce such documents as may be necessary and demanded by the authority concerned to segregate between the two, so as to make it abundantly clear as to which Law i.e. the State Law or the Central Act will be applicable. In the present case, the moment assessee produces/submits work contract/agreement before the assessing authority so as to bring his case within the purview of software development, the case comes out of the purview of the State Taxing authority and the same becomes amenable to Service Tax under the Law enacted by the Parliament. There is no doubt as to the fact that the Company is dealing in two types of produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volved is software development as per client specifications and rendering support work for its client (software consultancy). According to revisionist, Noida unit, which is registered with Software Technology Park of India (known as STP ) renders only the software services to overseas client while Lucknow unit has two distinct locations known as Lucknow STP and Lucknow non-STP. The STP location works on similar basis as Noida unit providing only software services to overseas clients, while non-STP location caters to domestic client by providing specific application software development and support services generally known as software consultancy services. 3. According to revisionist, computer software sold off the shelf also called as branded software, trade tax was charged and the same was deposited with the Department and the customer can use the licensed standard software as it is. As far as the agreement entered by the assessee with various clients for developing application software strictly on the basis of the specific needs of a particular client, the intellectual rights in so developed software solution vested with the client. 4. According to revisionist-assessee, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate Legislature while the Finance Act is a Law enacted by the Parliament and both the Laws operate in different areas. 8. According to revisionist-assessee it had entered into a number of agreements for providing consultancy services with Government, Semi-Government and other authorities within the State of U.P. and has provided services for development of application software. 9. The dispute is in regard to this unbranded software developed by the assessee for its customers for which the assessing authority issued a show cause notice on 13.2.2004 for making assessment for the relevant year. Through the aforesaid notice the assessee was required to give explanation as to why no tax was deposited for development and sale of software amounting to ₹ 4,96,08,284/-. It was further required to submit detail, as to whom the sale was made within and outside the State and further the notice stated why the Company was not liable to pay tax. The assessee was required to submit his reply by 25.2.2004. Revisionist-assessee replied the said notice which was received on 24.2.2004, wherein it was specifically mentioned that Lucknow unit which has STP location and non-STP location, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puter software. 13. The assessee relied upon various judgments of this Court in support of his contention that new plea could be raised before the appellate authority in appeal, which was not raised before the assessing authority. 14. By order dated 23.3.2005, the appellate authority upheld the assessment order and rejected the appeal of the revisionist. It was further held that additional ground so taken by the assessee amounts to contradiction and the same could not be permitted to be added at this stage and rejected the application for the addition of additional grounds. Aggrieved by the said order, the revisionist assessee preferred an appeal before Trade Tax Tribunal, Noida which was rejected by order dated 19.6.2006. 15. Sri Tarun Gulati learned counsel for the revisionist-assessee submits that the taxing authorities completely failed to distinguish between the branded and unbranded software. According to him, the software sold off the shelf, which is covered by branded item, come under the definition of goods as defined in Section 2(d) of the Act, for which the tax has been deposited by the Company. As far as the software developed and the support services given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as falling within the ambit of goods under the APGST Act. 40. Insofar as the computer software is concerned, we have already mentioned above two categories of software, viz., (i) the branded software and (ii) unbranded software. Whereas the first type of software falls within the meaning of goods , the second type of software, viz., unbranded software cannot be treated as goods . Therefore, it would not only be inappropriate but also incorrect to state that intellectual property does not fall within the ambit of goods . In our view a correct statement would be that all intellectual properties may not be goods and therefore branded software with which we are concerned here cannot be said to fall outside the purview of goods merely because it is intellectual property; so far as unbranded software is concerned, it is undoubtedly intellectual property but it may perhaps be outside the ambit of goods . However, we consider it unnecessary to discuss its various aspects and express any opinion in that regard. We are, therefore, unable to accept the contention that merely because software is intellectual property it cannot be treated as goods as being too broad a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become goods . We see no difference between a sale of a software program on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of goods within the meaning of the term as defined in the said Act. The term all materials, articles and commodities includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edia and then handed over to the customer. The transfer of property from the technicians of the 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. 29. The Apex Court in the case of Imagic Creative (P.) Ltd. v. CCT MANU/SC/0518/2008 : (2008) 12 STT 392 held as under:- 28. We have, however, a different problem at hand. The appellant admittedly is a service provider. When it provides for service, it is assessable to a tax known as service tax. Such tax is leviable by reason of a parliamentary statute. In the matter of interpretation of a taxing statute, as also other statutes where the applicability of Article 246 of the Constitution of India, read with the Seventh Schedule thereof is in question, the Court may have to take recourse to various theories including aspect theory as was noticed by this Court in Federation of Hotel Restaurant Assn. of India v. Union of India. MANU/SC/0180/1989 : (1989) 3 SCC 634. 29. If the submission of Mr. Hegde is accepted in its entirety, whereas on the one hand, the Central Government w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernible from the terms of the contract then we have to find out what is the pith and substance of the contract or in other words what is the true nature and character of the contract. If on an examination of the contract as a whole, it is not possible to discern that the contract involves sale of goods but is essentially an agreement 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 VIIth Schedule to the Karnataka Value Added Tax Act 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are mutant sales are limited to the clauses of Article 366(29A). All other transactions would have to qualify as sales within the meaning of the Sales of Goods Act, 1930 for the purpose of levy of sales tax. 45. Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in clauses (b) and (f) of clause (29A) of Article 366, there is no other service which has been permitted to be so split. For example the clauses of Article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinctly discernible in the transaction. ** ** ** 88. This does not however allow State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29A), the value of the goods involved, in the execution of the whole transaction cannot be assessed to sales tax. As was said in Larsen Toubro v. Union of India (1993) 1 SCC 365. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods. 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., for software development and other services. Pursuant to the agreement and the work orders, the service shall be performed by the assessee. Services must be reques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 50. In the light of the aforesaid discussion, the finding recorded by the assessing authority that the contract in question involves a sale of software development by the assesses cannot be sustained. It is contrary to the material on record, the constitutional provisions and the law declared by the Apex Court. Accordingly it is hereby set aside. 20. Sri Tarun Gulati submits that the Apex Court in the case of assessee arising out of the judgment of the High Court had considered the case of the branded software and has referred as canned software , and held it to be goods liable to tax but had not expressed any opinion in regard to unbranded software, but the Tribunal fell into trap and relying upon the said judgment upheld the order of the assessing authority as well as First Appellate Authority imposing tax liability on the so called unbranded softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of appeal was not correct and instead of moving application for additional ground the assessee should have amended his appeal. 23. He also submitted that whatever information was required by the assessing officer in pursuance to the show cause notice was given by the assessee Company as such the imposition of tax liability on the services so provided for the software development and rendering support service to its client was unjustified, treating it to be a sale. 24. Per contra, Sri Bipin Kumar Pandey, learned standing counsel vehemently argued and submitted that the revisionistassessee failed to bring on record any material to prove that he was in the work of developing application software for his client and it was unbranded software and no agreement was filed before the assessing authority or till the stage of Tribunal to substantiate their claim. Sri Pandey submits that it is for the first time before this Court that the revisionist-assessee has come up with a case that the applicant had entered into an agreement for consultancy services with various Government, Semi-Government bodies as well as banks. He invited attention of the Court to the reply submitted by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the query so raised in regard to the branded and unbranded software, i.e., the application software development and support services provided by the revisionist Company which does not fall within the definition of goods. He further relied upon the 1996 judgment where the Andhra Pradesh High Court held that the software which is specialized and exclusively custom made to cater individual need of the client is not goods. He further contended that had the assessing authority any doubt in regard to treating such type of application software development as goods, it should have sought further clarification for which the assessee was always ready to provide. He further contended that neither the assessing authority nor the First Appellate Authority as well as the Tribunal asked the assessee to establish his case on this ground as the Company had brought on record all the material so available, with the authorities concerned and had relied upon the judgments of various High Courts and Apex Court to substantiate its claim and there was no doubt or ambiguity, which needed any further clarification. 29. Reliance was also placed upon judgment of Raza Textile Ltd. (supra) wherein the Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the revisionist in the case of Sasken Communication Technologies Ltd. (supra) as far as the unbranded software is concerned, the Karnataka High Court held, after considering the agreement and contract so placed that the agreement was a simple service contract and not covered under the definition of goods and not amenable to tax. 35. Argument of Sri Gulati as regards the unbranded software, which is a part of software development and support service for its client is covered under service and not under goods has force and the said fact is in consonance with the view taken by the Andhra Pradesh High Court as well as the Apex Court in the case of Tata Consultancy Service (supra). Further, the judgment of Sasken Communication (supra) also in categorical term held such type of software development for the client pursuant to the agreement/contract as a service and not branded goods sold off the shelf, so developed by the assessee. 36. In the present case, it is not disputed that no agreement or contract was ever filed or brought to the notice of the assessing authority or the appellate authority by the assessee, despite the show cause notice given by the assessing authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing authority so as to substantiate its claim and the assessee failed to do so, and for the first time the same are being filed before this Court in the revisional proceedings. The question is whether the Court can rely upon the agreement so placed under the revisional jurisdiction while the Tribunal is the last fact finding Court, and could have perused and gone into the question of validity of the agreement so brought on record along with the present revision. 40. In my opinion, there is no doubt as to the fact that the Company is dealing in two types of products, namely, the branded software which are sold off the shelf, which is not under dispute and the other unbranded software, which is developed according to the specification of the client. These softwares so developed are undoubtedly are for the clients and the same becomes the property of the client, the moment it is developed and the assessee Company has no right over the same, nor it can sell the same to the other clients as a branded item. But, in the present case during the assessment proceedings when the assessee Company was required by the assessing authority to substantiate the sale under the head 'unbran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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