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2019 (4) TMI 579

whether comes under the scope of 'Goods' or not? - levy of tax - Held that:- 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 authority. Argument of Sri Gulati to the extent that had the assessing authority called for further information or document, the assessee was ready to furnish the same does not have much force, as the entire case of the revisionist-assessee rest upon the fact that software so developed, is on the instructions and specification of client and after the software is developed it becomes the property of the client as per the contract or agreement so arrived between them, hence the agreement/contract is the basis 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 rig .....

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T RANJAN AGARWAL, J. 1. Heard Sri Tarun Gulati along with Sri Kunal Kishore and Ms.Pooja Talwar, learned counsel for revisionist and Sri B.K.Pandey, learned standing counsel for respondent. 2. Revisionist is a Company incorporated under the Companies Act, having its unit in Uttar Pradesh at Noida and Lucknow. It is registered both under the U.P.Trade Tax Act as well as Central Sales Tax Act. Dispute is in regard to Assessment Year 2001-02 (U.P.). According to revisionist, it is engaged in the business of software development and rendering support services. According to revisionist its software business is divided in two parts, one which deals with standard software packages, which are sold off the shelf, and the other type of product in which the Company is mainly involved 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 .....

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, (zza), (zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk), (zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu), (zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb), (zzzc), (zzzd), (zzze), (zzzf), (zzzg,) (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm), (zzzn), (zzzo), (zzzp), (zzzq), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw), (zzzx), (zzzy), (zzzz), (zzzza), (zzzzb), (zzzzc), (zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzj), (zzzzk), (zzzzl), (zzzzm), (zzzzn), (zzzzo), (zzzzp),(zzzzq) (zzzzr) (zzzzs) (zzzzt),(zzzzu), (zzzzv) (zzzzv) and (zzzzw) of clause (105) of section 65 and collected in such manner as may be prescribed: 7. Thus, the U.P. Trade Tax Act has been enacted by the State 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 fo .....

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t Commissioner (Appeals), Trade Tax, Noida. An application was also filed for addition of grounds in the appeal. In the said application it was stated that the assessee had sold computer hardware to PWD, U.P. for ₹ 1,40,54,040/- and had raised bills, further under Section 3-A of the Act, the sale of computer hardware is exempted from tax. It was stated that due to clerical mistake the appellant showed the aforesaid sale of computer hardware as computer consultancy services. Another ground taken was that during relevant year the assessee received ₹ 14,58,380/- against annual maintenance contract, but the assessing authority had wrongly imposed tax on the appellant assuming it to be the sale of computer 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 permitt .....

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sales tax. However, insofar as unbranded software is concerned, the learned Government Pleader conceded that as it related to skill and labour so it might not be falling within the meaning of goods . 36. As our discussion is confined to branded software, as it is called here, of which American equivalent is computer software off the shelf , we do not consider it appropriate to embark upon discussion on the question of the nature of unbranded software which is also termed as software tailor-made to the customer's particular requirements . 37. In the light of the above discussion, we have no hesitation in concluding that the branded software can safely be treated 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 . .....

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oods" as used in Article 366(12) of the Constitution of India and as defined under the said Act is very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software program may consist of various commands which enable the computer to perform a designated task. The copyright in that program may remain with the originator of the program. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, 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 .....

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on, as the Supreme Court has not expressed their opinion on the said issue. Therefore, the field is open. 19. From the aforesaid reasons of the assessing authority, it is clear that the asses-see is in the business of creating complete solutions to his clients. They have a comprehensive range of applications, services and solutions. They are a solution providers. They are in the development of software. Their solutions and services are backed by a proven reputation for expert support and high quality. The asses-see provides solutions and develops software and the same is carried out on the software of the client company. The said software developed has to be on a media 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 .....

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are involves two aspects, one falling within the power of the Parliament and the other falling within the power of the State Legislature to enact the law, the law so enacted cannot be found fault with. When the programming and providing of computer software is treated as works contract, as the works contract necessarily involves an agreement to render service and an agreement for sale of goods, service aspect could be taxed by the Parliament and the sale of goods aspect could be taxed by the State Legislature. But, this distinctiveness of two transactions is to be ascertainable from the terms of the composite contract. If such an intention is not discernible 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 i .....

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tention of the parties, goods delivery, etc., would, continue to be defined according to known legal, connotations. This does not mean that the content of the concepts remain static. Courts must move with the times. But the 46th Amendment, does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word "goods" has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by Article 366(29A). Transactions 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 .....

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erefore, remains primarily a matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject matter of sale or purchase. The court would have to arrive at the conclusion as to what the parties had intended when they entered into a particular transaction of sale, as being the subject-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. Lastly, they held that no one denies the legislative competence of States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is 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 e .....

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ctions and understand the need and requirement of the customer and through their employees, the software is to be developed. The technicians of the assessee and the employees of the customer are working together at the project site. In most of the cases, the service rendered by the assessee is in the nature of making one of the inputs into a final product which is produced at the project place with the assistance 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. 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 sustain .....

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catena of judgments of this Court, that as the First Appellate Court is a fact finding Court, such grounds could have been added by the assessee and the First Appellate Authority committed gross error by not allowing the same. He further submitted that the assessee by the said application only wanted to add the ground that certain sales of hardware made to the Public Works Department, which were exempted from the trade tax under Section 3-A of the Act, was shown by mistake under the head of Computer Consultancy Service. He further contended that the observation of the First Appellate Authority in regard to the contradictory grounds in the grounds 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 .....

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as brought on record the various agreements so entered during the relevant period and the matter should be relegated to the Tribunal as it being the last fact finding Court to go into the question which has been left open by the Apex Court in the case of assessee itself and the same be decided on the basis of material so adduced before it. 28. Sri Tarun Gulati in rejoinder submits that in reply filed by the assessee to show cause notice, had categorically stated that in case any further details are required the assessee was ready to provide the same. He submitted that through the said detailed reply the assessee had distinguished 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 good .....

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allenged before the Apex Court which was upheld in 2005, as regards the branded software while the matter regarding unbranded software was left open by the Apex Court holding that in case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise. 33. The question before this Court is in regard to the second part of the case where the claim is as to the unbranded software also known as tailor made to the customers particular requirement and the same being service and not covered under the definition of goods. 34. The reliance placed by counsel 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 take .....

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ly clear as to which Law i.e. the State Law or the Central Act will be applicable. 38. 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. 39. Argument raised by Sri Pandey, learned standing counsel has force to the extent that the assessee-revisionist should have brought on record the agreement so claimed before the assessing 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 sof .....

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