M/S. Polaris Software Lab Ltd. ... vs Prl. Secy. Ct Hyd 2 Others
2023 Latest Caselaw 636 Tel

         THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN
                                    AND
             THE HON'BLE SRI JUSTICE N. TUKARAMJI


        WRIT PETITION Nos.13474 and 13482 of 2008

COMMON ORDER: (Per the Hon'ble the Chief Justice Ujjal Bhuyan)


        Issue raised in both the writ petitions is one and the

same. Parties are also the same. Therefore, both the writ

petitions have been heard together and are being disposed

of by this common judgment and order.


2.      Heard Mr. Kailashnath P.S.S., learned counsel for

the petitioner; Mr. V.Rajeshwar Rao, learned counsel

for respondents No.1 and 2; and Mr.B.Mukherjee, learned

counsel representing Mr. Gadi Praveen Kumar, learned

Deputy Solicitor General of India appearing for respondent

No.3.

3. In W.P.No.13474 of 2008 challenge made is to the

final assessment order dated 12.05.2008 for the

assessment period 2007-08 (up to 14.02.2008) under the

Central Sales Tax Act, 1956 (briefly, 'the CST Act'

hereinafter). On the other hand, in W.P.No.13482 of 2008

the challenge is to the final assessment order dated

12.05.2008 for the assessment period 2006-07 under the

CST Act.

4. Both the aforesaid orders have been passed by the

Commercial Tax Officer, Punjagutta Circle, Hyderabad

(briefly, 'Commercial Tax Officer' hereinafter). Additionally,

a prayer has been made to declare Entry 39(14) of

Schedule IV of the then Andhra Pradesh Value Added Tax

Act, 2005 (briefly, 'the VAT Act' hereinafter) insofar it

provides for levying of sales tax on customised Information

Technology (IT) software as ultra vires and

unconstitutional. Besides, petitioner has sought for a

declaration that Section 65(53)(a) read with Section

65(105)(zzzze) of the Finance Act, 1994, is ultra vires and

unconstitutional.

5. For the sake of convenience, we will refer to the

averments in W.P.No.13482 of 2008.

6. From a perusal of the final assessment order dated

12.05.2008 it is seen that petitioner is a dealer in domestic

sales of software and also export sales of software.

Business premises of the petitioner was visited by the

Commercial Tax Officer on 26.02.2008 for verification of

sale invoices and purchase invoices following the judgment

of the Supreme Court in Tata Consultancy Services v.

State of Andhra Pradesh1. Thereafter, authorised

representative of the petitioner appeared before the

Commercial Tax Officer on 21.03.2008 and produced

copies of sale invoices for the concerned assessment

period. On verification thereof, it was noted that major

portion of sale of software was in the course of export to

foreign countries while a portion related to domestic sale of

software taxable under the CST Act. Petitioner claimed

exemption on domestic sales in the returns filed on the

ground that sale of software represented software services.

Adverting to Entry 39(14) of Schedule IV of the VAT Act

read with the CST Act, Commercial Tax Officer took the

prima facie view that sale of customised IT software was

1 (2005) 1 SCC 308

liable to tax in terms of the aforesaid provisions at the rate

of 10%.

7. Accordingly, a show cause notice dated 25.03.2008

was issued to the petitioner. Petitioner submitted reply

dated 19.04.2008 stating that petitioner was engaged in

the development of software solutions tailored to cater to

the specific needs of customers. It provided the manpower

and software skills for implementation. This was in no way

connected to canned/uncanned software solutions. It was

also contended that the work of software application

depended on the needs, characteristics and methods of the

customer organisation. Consideration of such software

application work was measured in terms of manpower

hours and that ownership of the deliverables vested with

the client i.e., intellectual property of the software

remained with the client. Further, petitioner sought to

distinguish the judgment of the Supreme Court in Tata

Consultancy Services (supra).

8. However, Commercial Tax Officer did not accept the

explanation furnished by the petitioner. Adverting to the

decision of the Supreme Court in Tata Consultancy

Services (supra), it was held that customised software is

also a taxable good. As per the aforesaid decision, there is

no distinction between canned and uncanned software;

both canned and uncanned software are goods and liable

to tax. Commercial Tax Officer clarified that the nature of

work undertaken by the petitioner was development of

customised software. The mode and receipt of payment

i.e., whether on hourly basis or in lump sum towards

development of customised software would not decide the

nature of work. Development of customised software starts

from designing, continues through development and

implementation and ends with handing over the developed

software after successful execution. Therefore, the amount

collected from the clients is nothing but sale value of

customised software, which is exigible to tax under the

VAT Act.

8.1. Though petitioner had contended that it had paid

service tax to the consulting engineers or management

consultants, Commercial Tax officer opined that Finance

Act, 1994, and VAT Act are two different enactments

covering different fields. That apart, petitioner did not

produce any evidence to prove payment of service tax on

the goods sought to be taxed under the CST Act read with

the VAT Act. Therefore, Commercial Tax Officer held that

the amounts indicated in the show cause notices were

liable to be paid by the petitioner and confirmed the same.

9. Aggrieved, the writ petition has been filed.

9.1. This Court by order dated 26.06.2008 had admitted

the writ petition for hearing and passed an interim order

staying the impugned order dated 12.05.2008 on condition

of depositing 50% of the disputed tax within eight weeks.

10. Since considerable reliance has been placed by both

the sides on the Constitution Bench decision of the

Supreme Court in Tata Consultancy Services (supra) it

would be apt to advert to the same at the outset.

10.1. Tata Consultancy Services provides consultancy

services, including computer consultancy services. As part

of their business they prepare and load on customers'

computers custom-made software (uncanned software) and

also sell computer software packages off the shelf (canned

software). The canned software packages are of the

ownership of companies/persons who have developed

those software. Appellant was a licensee with permission

to sub-licence these packages to others. The canned

software programs are programs like Oracle, Lotus, Master

Key etc. In respect of canned software, Commercial Tax

Officer, Hyderabad, had passed a provisional order of

assessment under the provisions of the Andhra Pradesh

General Sales Tax Act, 1957, holding that the software

were goods and accordingly, sales tax was levied thereon.

This was affirmed by the appellate authority. Ultimately,

after traversing through several rounds of litigation, the

matter landed up in the Supreme Court. Question for

consideration before the Supreme Court was whether the

canned software sold by the appellant could be termed as

"goods" and thus exigible to sales tax under the Andhra

Pradesh General Sales Tax Act, 1957?

10.2. After referring to relevant provisions of the

aforesaid Act and several decisions, including in the case of

CST v. M.P. Electricity Board2, Supreme Court held that

the term "goods" for the purposes of imposition of sales tax

cannot be given a narrow meaning. It was held as follows:

19. Thus this Court has held that the term "goods", for the purposes of sales tax, cannot be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc. are "goods" for the purposes of sales tax. The submission of Mr Sorabjee that this authority is not of any assistance as a software is different from electricity and that software is intellectual incorporeal property whereas electricity is not, cannot be accepted. In India the test to determine whether a property is "goods", for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the item concerned is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible.

10.3. Thus, Supreme Court held that the test to determine

whether a property is "goods" for purposes of sales tax is

(1969) 1 SCC 200

not whether the property is tangible or intangible or

incorporeal. The test is whether the item concerned is

capable of abstraction, consumption and use and whether

it can be transmitted, transferred, delivered, stored,

possessed etc. Admittedly, in the case of software, both

canned and uncanned, all the above attributes are present.

10.4. Supreme Court referred to the definition of the term

"goods" appearing in Article 366(12) of the Constitution of

India and held as follows:

27. In our view, the term "goods" as used in Article 366(12) of the Constitution and as defined under the said Act is very wide and includes 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. v. Commissioner of Customs [(2001) 4 SCC 593] 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 programs have all these attributes.

10.5. Thus, according to the Supreme Court, the word

"goods" as defined in Article 366(12) of the Constitution of

India is very wide and includes all types of movable

properties, whether those properties be tangible or

intangible. In case of software or sale of computer software

it is clearly a sale of goods. Even an intellectual property,

whether it be in the form of canvas or computer discs or

cassettes and marketed, would become goods. Supreme

Court thereafter agreed with the submission of Mr. Soli

J.Sorabjee that there is no distinction between branded

and unbranded software. In both the cases the software is

capable of being abstracted, consumed and used. In both

cases the software can be transmitted, transferred,

delivered, stored, possessed etc. Thus, unbranded

software when it is marketed/sold may be goods. However,

Supreme Court did not express final opinion on this aspect

as this was not the issue before it.

11. In our considered opinion, the view taken by the

Commercial Tax Officer is in consonance with the view

taken by the Supreme Court in Tata Consultancy

Services (supra).

12. Learned counsel for the petitioner made a valiant

effort to contend that what was being construed to be

goods was in fact a service provided by the petitioner and

therefore, not exigible to sales tax. In this connection, he

has placed reliance on a Division Bench decision of the

Karnataka High Court in Sasken Communication

Technologies Ltd. v. Joint Commissioner of

Commercial Taxes (Appeals)-33.

13. However, on going through the aforesaid judgment we

find that the question which fell for consideration of the

Division Bench of the Karnataka High Court was whether a

contract for development of a software falls within the

mischief of a "works contract" and whether upon

development of the software it is vested with the customer

from day one in which event whether it would amount to

deemed sale under Article 336(29A)(b) of the Constitution

of India?

14. Karnataka High Court examined various agreements

entered into by the parties and observed that on the day

when the parties had entered into agreement there was no

software in existence; in other words, there was no goods

in existence. The agreement was not for transfer of

software. The agreement was for development of software.

As per the agreement, the dealer had given up all the rights

MANU/KA/2245/2011

and claims of the software which would be the absolute

property of the customer.

15. In the light of the above analysis, it was held by the

Karnataka High Court that the contracts in question were

not works contract but contract for service simplicitor.

Consequently, the orders passed by the taxing authority

levying sales tax were set aside.

16. We are afraid, the aforesaid decision of the Karnataka

High Court is clearly distinguishable from the facts and

circumstances of the present case and not at all applicable.

17. As already discussed above, decision of the Supreme

Court in Tata Consultancy Services (supra) clearly

supports the contention of the Commercial Tax Officer that

the development of software solutions carried out by the

petitioner was nothing but sale of goods and therefore,

exigible to sales tax under the VAT Act read with the CST

Act.

18. We, therefore, do not find any merit in the challenge

to the impugned orders dated 12.05.2008.

19. Insofar the other prayers made by the petitioner are

concerned, we are of the view that the same are not

required to be gone into in the present proceedings.

20. Consequently, both the writ petitions are dismissed.

Miscellaneous applications pending, if any, shall

stand closed. However, there shall be no order as to costs.

______________________________________ UJJAL BHUYAN, CJ

______________________________________ N. TUKARAMJI, J 08.02.2023 vs