M/S Tata Consultancy Services ... vs The Commissioner Of Trade Tax U.P. ...
2019 Latest Caselaw 2496 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD
 
 

AFR
 
Reserved
 
Trade Tax Revision No.1566 of 2006
 
M/s Tata Consultancy Services
 
Vs.
 
Commissioner of Trade Tax U.P.
 
***** 
 
Hon'Rohit 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 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, the branded software comes under the definition of goods. Section 2(d) of the U.P. Trade Tax Act (hereinafter called as an "Act") defines as under:

2. (d) 'Goods' means every kind or class of movable property and includes all materials, commodities and articles involved in the execution of a works contract, and growing crops, grass, trees and things attached to, or fastened to anything permanently attached to the earth which, under the contract of sale, are agreed to severed, but does not include actionable claims, stocks, shares, securities or postal stationery sold by the Postal Department;"

5. While unbranded software, which is developed according to the specification of the client also known as unbranded software or software, tailor made to the customers particular requirement does not cover under the definition of goods and comes under service and is not amenable to tax under the Act.

6. By the Finance Act of 1994, Chapter-V and V-A were inserted and provisions relating to Service Tax was incorporated. Section 65(95) defines the Service Tax as under:

"Service Tax" means tax leviable under the provisions of this Chapter."

Section 66 defines charge of service tax as under:

"66. Charge of service tax - There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub-clauses (a), (d), (e), (f), (g,) (h), (i), (j),(k), (l), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zh), (zi), (zj), (zk),(zl), (zm), (zn), (zo), (zq), (zr), (zs), (zt), (zu), (zv), (zw), (zx), (zy), (zz), (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 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 Rs.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 STP location was working on similar basis as Noida STP providing services only to overseas clients, while Lucknow non-STP centre caters to domestic clients by providing application software development and support services (generally known as "consultancy services"), and licensing of standard software packages, generally known as product for sales. It was further stated that billing done for consultancy services, i.e., application software development and support services for domestic clients, do not fall within the definition of term goods because these are services rendered for development of software, according to clients specific requirement.

10. Reliance was also placed on the decision of Andhra Pradesh High Court in the case of M/s Tata Consultancy vs. State of Andhra Pradesh, in which the Court held software designed and made for customer for his individual need is not goods. It was also replied that out of Rs.4,96,08,824/-, Rs.14,58,380/- is on account of fees for annual technical support. It was also contended that licensed products sold were shown under the taxable sale and tax was paid. Lastly, it was stated that any further details or clarification so required by the Department would be provided.

11. The assessing authority passed assessment order under Section 41(8) of the Act, accepted the books of accounts, but rejected the claim of assessee in regard to billing for software development being treated as consultancy service charges and imposed a tax of Rs.19,84,184/- on the receipt of Rs.4,96,04,597/- as a tax on sale of software.

12. Aggrieved by this order the assessee Company filed an appeal before the Joint 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 Rs.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 Rs.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 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 the Company to its client falls under the category of unbranded software, which is also termed as software "tailor made to the customer particular requirement", which is a service rendered to the client and does not fall within the definition of goods and not amenable to tax.

16. Sri Gulati has relied upon the judgment of the Apex Court in the case of revisionist Company itself, i.e., Tata Consultancy Services vs. State of Andhra Pradesh, 2005(1)SCC 308, Tata Consultancy Services vs. State of Andhra Pradesh, 1996 SCC OnLine AP 1260, Sasken Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxed (Appeals)-3, Banglore, 2011(33)STT 507 and Raza Textile Limited, Rampur vs. Commissioner of Sales Tax, U.P., Lucknow, 1973 SCC On Line All 479.

17. According to him, matter of the revisionist Company in regard to branded software was under consideration in the case of Tata Consultancy Services (supra) before the Andhra Pradesh, High Court. He relies upon paragraph nos.7, 36, 37 and 40 of the judgment, which are extracted hereunder:

"7. The learned Special Government Pleader for Taxes, contends that the questions raised in the writ petition are only academic questions and therefore the writ petition is liable to be dismissed. He further contends that the various software packages like FOXPRO, WORDSTAR, WINGS, LOTUS, DBASE, WINDOWS, MS-DOS, UNIX, etc., are "goods" known in the market and therefore they have been correctly described in the instructions as liable to tax. In other words the contention of the learned Government Pleader is that the turnover relating to sale of "branded software" will be the turnover relating to sale of "goods" and therefore exigible to 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". 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 statement."

18. He further relied upon the 2005 judgment of the revisionist Company in Tata Consultancy Services (supra), which was challenged before the Apex Court against the order of Andhra Pradesh High Court. Relevant paragraphs nos.2, 3, 5, 27 and 29 of the said judgments reads as under:

" 2. Briefly stated the facts are as follows :

The Appellants provide consultancy services including Computer Consultancy Services. As part of their business they prepare and load on customers' computers custom made software (for sake of convenience hereinafter referred to as 'uncanned software') and also sell Computer Software Packages off the shelf (hereinafter referred to as "canned software"). The canned Software Packages are of the ownership of companies/persons, who have developed those software. The Appellants are licensees with permission to sub-license these packages to others. The canned software programmes are programmes like Oracle, Lotus, Master Key, N-Export, Unigraphics, etc.

3. In respect of the canned software the Commercial Tax Officer, Hyderabad, passed a provisional Order of assessment under the provisions of the Andhra Pradesh General Sales Tax Act, 1957 (hereinafter called 'the said Act') holding that the software were goods. The Commercial Tax Officer accordingly levied sales tax on this software. The Appellate Deputy Commissioner of Commercial Taxes also held that the software were goods and liable to tax. However, the matter was remanded back for purposes of working out the tax.

5. The question raised in this Appeal is whether the canned software sold by the appellants can be termed to be "goods" and as such assessable to sales tax under the said Act.

27. In our view, the term "goods" 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 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 attributes.

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."

19. He further relied upon the judgments in the case of Sasken Communication Technologies Ltd. (supra). The relevant paragraph nos.12, 19, 29, 31, 37, 39, 43, 44 and 50 of the said judgment reads as under:

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.

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 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 would be deprived of obtaining any tax whatsoever under the Finance Act, 1994, it is possible to arrive at a conclusion that no tax at all would be payable as the tax has been held to be an indivisible one. A distinction must be borne in mind between an indivisible contract and a composite contract If in a contract, an element to provide service is contained, the purport and object for which the Constitution has to be amended and Clause (29A) had to be inserted in Article 366, must be kept in mind.

30. We have noticed hereinbefore that a legal fiction is created by reason of the said provision. Such a legal fiction, as is well known, should be applied only to the extent for which it was enacted. It, although must be given its full effect but the same would not mean that it should be applied beyond a point which was not contemplated by the Legislature or which would lead to an anomaly or absurdity.

31. The Court, while interpreting a statute, must bear in mind that the Legislature was supposed to know law and the legislation enacted is a reasonable one. The Court must also bear in mind that where the application of a parliamentary and a legislative Act comes up for consideration; endeavours shall be made to see that provisions of both the 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.....

31. Therefore, if computer programming and providing of computer software 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 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 to levy tax which fall within their respective sphere.

37. The Apex Court in the case of Bharat Sanchar Nigam Ltd v. Union of India MANU/SC/1091/2006 : (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 purposes of entry 54 of List II in particular except to the extent that the clauses in Article 366(29A) operate. By introducing separate categories of "deemed sales", the meaning of the word "goods" was not altered. Thus the definitions of the composite elements of a sale such as intention 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 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 document, and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.

46. The reason why these services do 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 MANU/ SC/ 0152/1958 : (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.

** ** **

50. We agree, after the 46th Amendment the sale elements of those contracts which are covered by the six sub-clauses of clause (29A) of Article 366 are separable and may be subjected to sale tax by the States under entry 54 of List II and there is no question of the dominant nature test applying.

51. What are the "goods" in a sales transaction, therefore, 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 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 requested by issue of a valid work order together with a statement of work. As compensation for the service rendered to the customer, the fees specified in the relevant work order or in the statement of work is payable and billing is done on a time and material basis or on a fixed price on a monthly basis. Pricing for time and material projects shall be fixed at a rate set forth in Annexure-A to the agreement.

43. In the agreement or from any other material on record, there is nothing to indicate that the assessee purchases the software from the market, improves the same according to the specification of the client and then delivers the same to the client. On the contrary, the agreement clearly discloses that the assessee's technicians either work at their office or go to the place of the client, carry out the project work and find solutions and if at the end of the day, any software emerges, same is embedded on a CD. The software so developed, from the inception is the property of the customer. At no point of time the said software is the property of the assessee. Even before the software/goods came into existence, it was the property of the customer. The terms of the contract as set out above, do not indicate sale of any software. On the contrary, those terms make it very clear that the agreement is a simple service contract, where under the assessee provided its staff and its employees who are well trained in the field and who would develop the software according to the specification of the customer.

44. In fact, a careful reading of the agreement shows that, the employees of the assessee and the employees of the customer have to work hand in hand, consult at every stage, have interactions 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 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 software. He further emphasized that revionist-assessee himself in its reply to the show cause notice had stated that in view of the judgment of the Andhra Pradesh High Court the software so developed by the assessee as per its client specification cannot be termed as goods, amenable to tax. But, the assessing authority wrongly interpreted the said provision of law and held otherwise. He further emphaised that the Tribunal also fell in the trap and wrongly interpreted the judgment of both Andhra Pradesh High Court as well as the Apex Court in the matter of assessee itself where the issue was in regard to the branded software, which is sold off the shelf and falls within the definition of goods for which the assessee had already paid the tax.

21. He laid stress on the judgment of Karnatka High Court in the case of Sasken Communication Technologies Ltd. (supra) wherein the Court had held that when the assessee's technicians worked at their office or go to the place of client, carry out the project work and finds solutions and, if at the end of the day, any software emerges, same is embedded on C.D. and the software so developed from the inception is the property of the customer. At no point of time the said software is property of the assessee. Further, it was held that before the software came into existence, it was the property of the customers as set out in the terms of the contract, which do not indicate sale of any software and it is clear that the agreement is a simple service contract.

22. Further, the First Appellate Authority committed error in not allowing the application of the revisionist for the additional grounds in the appeal, as the assessee can move such application and the same was supported by 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 argued and submitted that the revisionist-assessee 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 assessee firm and submits that nowhere it has been stated or any document appended so as to substantiate the claim of development of software for its client. He also submits that the notice dated 13.2.2004 issued by the assessing authority categorically stated that the assessee was required to submit the sales made by it within and outside the Uttar Pradesh to its client.

25. Sri Pandey had invited attention of the Court to paragraph 29 of the judgment of the Apex Court in the case of Tata Consultancy Services (supra) wherein it was stated that even unbranded software when it is marketed/sold may be goods and as the Apex Court was not dealing with this aspect as such it did not express any opinion in regard to unbranded software because question like situs of contract of sale and/or whether the contract is a service contract may arise.

26. He emphasised that as the Apex Court had also not gone into this question of unbranded goods as there was no material before it and the same was based upon the agreement or contract between the assessee and its client. While in instant case, no agreement or contract was brought into the knowledge of either the assessing authority, first appellate authority as well as before the Tribunal by the assessee, as such no relief can be granted.

27. Sri B.K. Pandey in his usual fairness submits that the assessee though had brought the bank account and the bills, and relevant documents before the assessing authority, but the claim of the assessee could have been substantiated from the contract/agreement so entered between him and his client, and whether the goods claimed as unbranded software developed for client being a service and not amenable to tax. He submits that as for the first time assessee has 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 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 Court held that burden to prove the fact regarding the sale was upon the Department. He submitted that if the assessing authority did not accept the contention of the assessee it should have recorded a finding that the software development and support services rendered by the assessee came under the heading of branded goods. He further relied upon the judgment of this Court in the case of Virendra Kumar Trading Co. vs. Commissioner of Commercial Tax, 2017(100)VST192 (All) wherein the Court while dealing with re-assessment proceedings held that onus to establish that the disclosure was incorrect was upon the Department and could not be shifted upon the assessee.

30. It is not in dispute that the assessee Company is engaged in the business of software. The revisionist provides consultancy services including computer consultancy services and prepare a load on customers' software and also sell computer software packages off the shelf.

31. The sole dispute is in relation to the unbranded software also known as uncanned software, which is being made liable to tax on the ground of it being goods and covered under the branded software.

32. The revisionist Company, which has number of units through out the country, and in one of its unit at Hyderabad the dispute arose in the year 1996 in regard to the branded software (canned software), which was decided by the Andhra Pradesh High Court in the case of revisionist Company, i.e., Tata Consultancy Services(supra) holding that the branded software was covered under the definition of goods and liable to be taxed. The Court, however, in its judgment made distinction between the branded and the unbranded software. However, it decided the matter in regard to the branded software. The said judgment was challenged 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 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 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.

37. As it is clear that Service Tax and U.P. Trade Tax Act operate in different areas and unless the work contract involves an elements 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 the sale of goods, if by including in the Finance Act, development of Information Technology Software, study, analysis, design and programming and various other aspects touching softwares, if it involves sale of goods. In both the enactments they specify the type of activity, which are liable for tax. Thus, 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.

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 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 'unbranded software', it was the duty of the Company which was relying upon the judgment of the Andhara Pradesh High Court and was claiming difference between the unbranded software and the branded software, should have placed the basic material, i.e., the agreement or the contract so entered by it with its client to bring the said software out of the purview of the goods. The assessee failed to bring, not only before the Assessing Authority, First Appellate Authority as well as the Tribunal the agreement, which it is relying upon before this Court.

41. In the case of Sasken Communication Technologies (supra) the agreement was placed before the assessing authority, as such it was after the consideration of the agreement that the High Court came to the conclusion that it was the service provided and was not covered under the definition of 'goods' as it being unbranded software. The decision so relied upon is distinguishable in the present case as agreement so executed between the assessee and its clients are being placed for the first time before this Court in exercise of revisional jurisdiction.

42. As far as challenge to the additional grounds not considered by the first appellate court as well as by the Tribunal in regard to the sale of computer hardware to P.W.D. which is exempted under Section 3-A of the Act, the Tribunal had not recorded any finding and has only upheld the order passed by the First Appellate Authority. It is well settled law that additional grounds can be raised in the appeal and the Tribunal being the last fact finding Court should have taken note of this fact and recorded a specific finding.

43. In view of the above, the order passed by the Tribunal dated 19.6.2006 is set aside and the matter is remitted back to the Tribunal to record specific finding after going through the agreements/contract as to the claim of the assessee in regard to the application of software development and support service given to its client as unbranded software not covered under the definition of goods and is a service to the customers.

43. The assessee shall place all the agreements/contract so executed by it with its client during the relevant assessment year before the Tribunal, who shall consider the same in the light of the judgment of the Apex Court as well as various High Courts and pass a reasoned and speaking order preferably within a period of three months from the date of production of a certified copy of this order.

44. The revision is partly allowed.

Dated:4.4.2019

AKJ