2023 (2) TMI 771 - HC - VAT and Sales Tax

Court affirms software sales as taxable goods under Sales Tax Act

The High Court upheld final assessment orders under the Central Sales Tax Act, 1956, determining that the sale of software, whether canned or uncanned, ... Levy of Sales Tax - customised Information Technology (IT) software - constitutional validity of Entry 39(14) of Schedule IV of the then Andhra Pradesh Value Added Tax Act, 2005 - whether declaration that Section 65(53)(a) read with Section 65(105)(zzzze) of the Finance Act, 1994, is ultra vires and unconstitutional? - HELD THAT:- 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. The Supreme Court in TATA CONSULTANCY SERVICES VERSUS STATE OF ANDHRA PRADESH [2004 (11) TMI 11 - SUPREME COURT] has held that 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 the above attributes are present. 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 - 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. The question which fell for consideration of the Division Bench of the Karnataka High Court in SASKEN COMMUNICATION TECHNOLOGIES LTD. VERSUS JOINT COMMISSIONER OF COMMERCIAL TAXES (APPEALS) -3 BANGALORE [2011 (4) TMI 566 - 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? - 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. The decision of the Supreme Court in Tata Consultancy Services 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. There are no merit in the challenge to the impugned orders dated 12.05.2008 - petition dismissed. Issues Involved:1. Challenge to final assessment orders under the Central Sales Tax Act, 1956.2. Constitutionality of Entry 39(14) of Schedule IV of the Andhra Pradesh Value Added Tax Act, 2005.3. Constitutionality of Section 65(53)(a) read with Section 65(105)(zzzze) of the Finance Act, 1994.Issue-wise Detailed Analysis:1. Challenge to Final Assessment Orders under the CST Act:In W.P.No.13474 of 2008, the petitioner challenged the final assessment order dated 12.05.2008 for the assessment period 2007-08 under the Central Sales Tax Act, 1956 (CST Act). Similarly, in W.P.No.13482 of 2008, the challenge was to the final assessment order dated 12.05.2008 for the assessment period 2006-07 under the CST Act. Both orders were passed by the Commercial Tax Officer, Punjagutta Circle, Hyderabad.The petitioner, a dealer in domestic and export sales of software, claimed exemption on domestic sales, arguing that the sale of software represented software services. The Commercial Tax Officer, however, took the view that the sale of customized IT software was liable to tax at the rate of 10% under Entry 39(14) of Schedule IV of the VAT Act read with the CST Act. Despite the petitioner's contention that the software solutions were tailored to customer needs and thus not taxable as goods, the Commercial Tax Officer, relying on the Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh (2005) 1 SCC 308, held that both canned and uncanned software are goods and liable to tax.Upon review, the High Court found that the Commercial Tax Officer's view was consistent with the Supreme Court's decision, which held that the term 'goods' includes all types of movable properties, whether tangible or intangible, and that software, whether canned or uncanned, meets this definition. The High Court thus upheld the assessment orders, finding no merit in the petitioner's challenge.2. Constitutionality of Entry 39(14) of Schedule IV of the VAT Act:The petitioner sought a declaration that Entry 39(14) of Schedule IV of the Andhra Pradesh Value Added Tax Act, 2005, which provided for levying sales tax on customized IT software, was ultra vires and unconstitutional. However, the High Court did not find it necessary to address this issue in detail within the scope of the present proceedings, given the findings on the primary issue regarding the classification and taxation of software under the CST Act.3. Constitutionality of Section 65(53)(a) read with Section 65(105)(zzzze) of the Finance Act, 1994:The petitioner also challenged the constitutionality of Section 65(53)(a) read with Section 65(105)(zzzze) of the Finance Act, 1994. Similar to the previous constitutional challenge, the High Court chose not to delve into this issue within the current proceedings, focusing instead on the primary matter of taxability under the CST Act.Conclusion:The High Court dismissed both writ petitions, upholding the impugned assessment orders dated 12.05.2008, and did not find it necessary to address the additional constitutional challenges raised by the petitioner. The court emphasized that the decision of the Supreme Court in Tata Consultancy Services (supra) supported the view that the development of software solutions by the petitioner constituted a sale of goods, thereby making it exigible to sales tax under the VAT Act read with the CST Act.Consequently, both writ petitions were dismissed, and all miscellaneous applications pending were closed, with no order as to costs.