Client-specific software taxation turns on contract character; tribunal must examine agreements and related factual material before sustaining demand.

Tailor-made software developed for a client under contractual arrangements was held not to be automatically taxable as "goods" under the U.P. Trade Tax Act; the decisive inquiry is whether the transaction is a sale of marketable software or a service contract, to be determined from the agreement and surrounding factual material. The Tribunal, as final fact-finding authority, was required to examine the agreements and record findings on the nature of the software transaction, and it also had to deal specifically with the additional ground relating to exempt hardware sales. The matter was remitted for fresh consideration on those issues.

---

---

Issues: (i) Whether software developed for a client according to specific requirements and transferred under the governing arrangements was taxable as "goods" under the U.P. Trade Tax Act; (ii) whether the Tribunal ought to have examined the agreements and the additional grounds concerning exempt hardware sales before affirming the tax demand.

Issue (i): Whether software developed for a client according to specific requirements and transferred under the governing arrangements was taxable as "goods" under the U.P. Trade Tax Act.

Analysis: The distinction between off-the-shelf branded software and tailor-made software developed for a particular client was central to the dispute. Branded software marketed as a standard product was treated in the earlier decisions relied upon as goods, but the Supreme Court had not finally ruled upon the service character of unbranded software developed to client specifications. The judgment further noted that where the software is created pursuant to a contract, belongs to the client from inception, and is not sold as a marketable standard product, the transaction may fall on the service side rather than as a sale of goods. The constitutional and statutory allocation of taxing power was also recognised, with sales tax and service tax operating in distinct fields and the character of the contract being decisive.

Conclusion: Unbranded, client-specific software could not automatically be treated as goods; its taxability depended on the contract and surrounding material, and the assessee's contention was accepted for further factual examination.

Issue (ii): Whether the Tribunal ought to have examined the agreements and the additional grounds concerning exempt hardware sales before affirming the tax demand.

Analysis: The assessee had sought to rely on agreements to show that the software activity was a service contract, and also raised an additional ground that certain hardware sales were exempt under the relevant provision. The judgment held that the Tribunal, being the final fact-finding authority, should consider the agreements and record findings on the nature of the transaction, instead of sustaining the demand without doing so. It was also held that the additional ground could not be ignored and required a specific finding.

Conclusion: The Tribunal's order was set aside and the matter was remitted for fresh consideration of the agreements and the additional grounds.

Final Conclusion: The revision succeeded only to the extent of reopening the factual inquiry on the character of the software transactions and the additional ground, while the levy itself was not finally upheld on the existing record.

Ratio Decidendi: In disputes involving software development, the decisive inquiry is whether the transaction is a sale of marketable goods or a service contract; tailor-made software created for a client under contract does not become taxable as goods without examining the agreement and the surrounding factual material.

---