TaxTMI 
TaxTMI 
2011 (4) TMI 566
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....or short). The assessee has been filing its VAT returns in Form VAT 100 in LVO - 045 regularly. The assessee is also registered under Section 69 of Chapter-V of the Finance Act, 1994 (hereinafter referred to as the 'Act') for the purpose of payment of service tax and has been paying service tax on its service turnover from the date of applicability. The place of business of the assessee was visited by the Commercial Tax Officer for the purpose of inspection on 8-6-2010. Subsequently the case was assigned for audit. The assessee produced all its books. The Commercial Tax Officer audited the books of account for the period from 2009-10, Subsequently a notice was issued under sections 39(1), 72(2) and 36 of KVAT Act. On 9-8-2010 in the course of verification of the monthly returns it was observed that the assessee has provided software development and claimed exemption on exports. In support of his case he had filed copies of invoices and the purchase orders for verification. In the course of verification it was found that in addition to export of software the assessee has also rendered services to one M/s. Alcatel-Lucent Technologies, (2) M/s. Motorola (3) M/s. Texas Instrume....
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....what it does not own. Hence there cannot be any transfer of property in goods. They contended that the assessee provides only services under the agreement and the service is solely related to information Technology software services. The assessee never owns at any point of time any intellectual Property or inventions or discoveries or new developments made during the course of the performance of the agreements. All the Intellectual Property or Inventions or discoveries or new developments are the exclusive property of the customer at all times. The assessee has contracted under the agreement to render services as per the specifications of the customer and hence did not have ownership of any software developed under the agreements. Their case squarely falls within the circumstances described in Part-(4) of the Circular No. 17/2006/07 issued by the Commissioner of Commercial Taxes. They have extracted the Circular. Therefore they sought for dropping of the proceedings. 4. However on consideration of the aforesaid material the assessing authority in the impugned order has held that whether the assessee Company is a software development-Company making deemed sale of software or they a....
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....ed into between the parties there is no sale of any goods or deemed sale. The reliance placed by the assessing authority on the balance sheet to contend that in execution of the contract, as the assessee has purchased the software and the said software is without any substance. Though in the balance sheet the software purchase is shown, the said software is used as a tool by the assessee in executing the contract and the said tools are not transferred. The agreement and the other material on record clearly shows the assessee has rendered its services to find a solution to the problem of the customer and even before the said solution is found, the assessee has given up his right in the copyright or the proprietary right in such goods, which may emerge as a final product and therefore seen from any angle there is no element of sale of goods which attracts sales tax. Therefore he submits that, the order of assessing authority levying sales tax is ex facie illegal, one without jurisdiction and liable to be set aside. 7. Per contra, the learned Government Advocate supporting the impugned order contended that software is now held to be goods. Though it is intangible or incorporeal, what....
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.... a lecture, it is not goods, but, when transcribed as a book, it becomes goods. That a computer program may be copyrightable as intellectual property does not alter the tact that once in the form of a floppy disc or other medium, the program is tangible, movable and available in the market place. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the definition includes "specially manufactured goods". Thereafter, at para 24, they proceeded to hold as under : "In our view, the terms "goods" as used in article 366(12) of the Constitution of India and as defined, under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. 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 he in the form of books or canvas (in case of painting) or computer discs or cass....
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....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. 13. In order to justify the imposition of value added tax, the revenue contends that it is a composite contract, a works contract. There is an element of service and transfer of goods, consequently a deemed sale. 14. The word 'works contract' has been defined under the Karnataka Value Added Tax Act, 2003 as under: "Works contract" includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property," 15. The revenue contends, works contract includes an agreement for improvement. In other words, their case is, the assessee has purchased software from the market. Then the said software is improved by rendering service according to specification to meet the requirements of the clie....
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....sp; ** &n....
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....nbsp; ** (e) "Services" shall mean software development and other services that the Vendor will provide to Motorola pursuant to this Agreement and the Work Orders. (f) Statement of Work shall mean a document (which may be entitled "Statement of Work" or "Scope of Work" or the like) that has been prepared by Motorola and mutually agreed in writing between the Parties, in relation to a specific requirement and provided to the Vendor that describes the Services required pursuant to a Work Order. The Statement of Work may include, among others, the following: ♦ Specifications ♦ Deliverables and schedules from MOTOROLA for each milestone ♦ Identified Milestones ♦&nbs....
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....; ** &nbs....
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....ecessary to provide the Services, including all basic systems (hardware/software/networking equipment/connectivity, etc) required for development of any Software or performance of any Services requested by Motorola. MOTOROLA and the Vendor may identify in detail the hardware, software and infrastructure requirements for project execution in applicable Work Order and/or Statement of Work. The Vendor shall not implement any action or decision regarding such resources that would have an adverse impact on the Services (including, without limitation, changes in equipment software and systems configurations), service level specifications, the amounts payable to the Vendor under any Work Order or other Motorola, costs and expenses, without Motorola's prior written, consent, which consent may be withheld in Motorola's sole discretion. ** &n....
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....ork Order fails to provide all required, ordering information or incorrectly states prices or other material information, relative to the Work Order, the Vendor may reject the Work Order by promptly submitting written notice of rejection to MOTOROLA stating in detail the reasons for rejection and the modifications necessary to make the Work Order acceptable to the Vendor. The Vendor shall make no changes, amendments, modifications, additions or deletions to a Work Order without the prior written consent of MOTOROLA. Acceptance of a Work order shall bind the Vendor to comply with the terms and conditions set forth in such Work Order, including delivery dates, time schedules, amounts and other ordering information shown on the Work Order and other supplemental provisions contained therein. 12.3 The effective date of a Work Order shall be the date on which it is accepted, by the Vendor, which has to be either on or after the date the Work Order is released by Motorola. 12.4 Each Work order shall incorporate by reference, and shall be subject to, the terms and conditions of this Agreement This Agreement and each Work Order and the relevant Statement of Work shall be interpreted as a ....
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....tion for the Services, MOTOROLA shall pay Vendor the fees specified in the relevant Work Order and/or Statement of Work. Vendor, in connection with the Services to be performed hereunder, may incur travel expenses at the request of MOTOROLA. All necessary, reasonable and actual travel expenses of Vendor incurred for such travel shall be reimbursed by MOTOROLA, provided that Vendor has obtained MOTOROLA'S prior written approval before incurring any such expenses, and MOTOROLA receives from Vendor an itemized list of all expenses incurred, including the paid receipts therefor, which are to be reimbursed in accordance with the above. No additional costs of any kind may be incurred without the prior written consent of MOTOROLA Vendor shall submit, invoices to MOTOROLA's authorized representative upon completion of and acceptance by MOTOROLA of each, phase of the project as set forth in the relevant Work Order and/or Statement of Work. As specified in each Statement of Work, the parties will agree whether the work will be billed on a time and materials basis or on a fixed price. For time and materials based projects. Vendor shall bill MOTOROLA on a monthly basis. Payment is due ....
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....nbsp; ** ....
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.... ** 27. Risk Management Specific Risks related to project execution: The Vendor shall prepare a detailed Risk Plan document, assessing all risks associated with the given project under a Work Order and address each one of the identified Risks. MOTOROLA will approve all actions planned for the Risk management. The Vendor will be responsible for defining the schedules for periodic back up of program and documentation data. This backup plan would include adequate measures to protect development work from hazards like fire, theft and natural calamities to minimize damages. ** ....
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....rldwide Intellectual Property rights in and to the foregoing shall be owned by Motorola. 36.3 Both source code and object code versions of any Developed Software shall be included as deliverables to Motorola. 36.4 The Vendor acknowledges that all deliverables shall be considered "works made for hire", and Motorola will have all right title and interest, including worldwide ownership of all Intellectual Property rights, in and to each deliverable and all copies made from it. If any such deliverable is not considered a work-made for-hire for any reason, the Vendor hereby irrevocably assigns, transfers and conveys, and will cause all Vendor agents and employees to assign, transfer and convey, to Motorola without further consideration all of its and their right, title and interest in and to such Deliverable, including all worldwide Intellectual Property rights in such materials. The Vendor acknowledges that Motorola and the successors and assigns of Motorola will have the right to obtain and hold in their own names any worldwide Intellectual Property rights in and to any such deliverable. The Vendor shall execute any documents or take any other actions as may reasonably be necessary,....
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.... code such as job control language and scripts to control compilation and installation) and /or object code, enhancements, applications as well as any other materials, media and documentation which shall be prepared, written and/or developed by the Developer for Nokia under this Agreement and/or Project Order. "Development" shall mean any development and/or consultancy work as well as other services to be supplied by the Developer, including but not limited to, the development programming, or modification of existing or new software or systems or any part thereof, as well as any services, applications, enhancements, documentation, materials, or other Deliverables as defined herein, which Developer performs or is obliged to perform for Nokia or on behalf of Nokia under a Project Order. "Development Price" shall mean the aggregate price payable by Nokia to the Developer for the Development and the deliverable provided by the Developer to Nokia a separate Project Order. 3. Scope of supply of the developer. 3.1 The Developer shall perform the Development and provide the deliverables to Nokia in accordance with the term and conditions of this Agreement The content of the Development....
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....el. The Developer warrants that such personnel are subject to the supervision of the Developer, notwithstanding the obligation of such personnel to comply with any regulations or requirements of Nokia. 3.8 The Developer is responsible for fulfilment of any and all obligations and tasks as an employer that are provided for by any applicable laws or regulations. This includes but it is not restricted to liability to fulfil and take care of all work permit issues, company and individual tax liabilities as well as social security and pension contributions. The Developer's employees shall be properly insured in accordance with any applicable laws and regulations. Nokia shall in no way be responsible for insuring the employees of the Developer. The Developer shall upon request of Nokia provide Nokia at any time during the term of this Agreement with proof of fulfilment of above mentioned employer's obligations." 18. The assessing authority after going through the contracts entered into by the assessee with the customers viz., M/s Alcatel Lucent Technologies, M/s Motorola, M/s Texas Instruments and M/s Nokia, has held as under: - "1. There is a requirement from the comp....
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....y the Senior Manager, narrates as under: Sasken offers a unique combination of research and development consultancy, wireless software products and software services, and works with Network OEMs, Semiconductor Vendors, Terminal Device OEMs and Operators across the world. Global fortune 500 and Tier 1 companies in these segments are part of Sasken's customer profile, Sasken offers a suite of outsourcing service offerings - new product development, test services, porting services and sustenance and support-for Data Network Equipment vendors and Management Software Vendors. Committed to innovation, Sasken works with customers to held them get to market ahead of the competition, and stay focused on new product development and manufacturing. With deep understanding of the communications industry, access to current and emerging technologies, mature development processes, global resources and a proven track record, Sasken creates complete solution to help clients succeed. Clients choose Sasken for the comprehensive range of application solution and services backed by a proven reputation for expert support and high quality." 19. From the aforesaid reasons of the assessing authority....
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....ny matter not enumerated in Concurrent List of the State Laws. Such power shall include the power to make laws, imposing tax not mentioned in either of these lists. Therefore, in fact once the Parliament makes a law, it excludes the other Legislatures to make a law in respect of which the Parliament has made law. 22. Article 254 deals with the inconsistency between the laws made by Parliament and laws made by the Legislatures of the States which reads as under:- "(1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by the Parliament which Parliament is competent: to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of Clause(2), the law made by the Parliament whether passed before or after the law made by the Legislature of such State, or. as the case may be, the existing law shall prevail and the law made by the Legislature shall, to the extent of the repugnancy to be void. (2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent list contains any provision repugnant to....
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....spect of the same including imposing of tax. It is in furtherance of such a power conferred under Article 248 read with Entry 97 of List-1 the said service has been inserted in the Finance Act, 1994. 25. The Karnataka Value Added Tax Act, 2003 is enacted by the State Legislature by virtue of Entry No. 54 in List II of Schedule VII which reads as under: - "54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92A of List I." 26. The word "goods" is defined under the Constitution of India at Article 366(12) as under: "Goods includes all materials, commodities, and articles." 27. In the Karnataka Value Added Tax Act, 2003, Section 2 (15) defines the term "Goods" as under:- "Goods" means all kinds of movable property (other than newspaper, actionable claims, stocks and shares and securities) and includes livestock, all materials, commodities and articles (including goods, as goods or in some other form) involved in the execution of a works contract or those goods to be used in the fitting out, improvement or repair of movable property, and all growing crops, grass or things attached to, or forming part of the land which are agreed to....
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.... 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. [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 (29-A) 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 ....
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....lve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects. The true nature and character of the legislation must be determined with reference to a question of the power of the Legislature. The consequences and effect of the legislation are not the same thing as the legislative subject-matter. What matters is the nature and character of the legislation and not its ultimate economic results that matters. 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....
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.... ** &....
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....ertain the precise connotation which it possess in law. In India, to constitute a transaction of sale there should be an agreement, express or implied, relating to goods to be conveyed by passing on title in those goods. It is the essence of this concept that both the agreement and the sale should relate to the same subject-matter. Where the goods delivered under the contract are not the goods contracted for, the purchaser has a right to reject them, or to accept them and claim damages for breach of condition. Therefore, in law, there cannot be an agreement relating to one kind of property and sale of different property. On the other hand there must be a definite agreement between the parties for the sale of the very 'goods' in which eventually property passes. To sum up, the expression "sale of goods" in Entry 54 is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. 35. The essential test, to be satisfied before an article is said to be 'goods' is the test of marketability. In the market, the said goods is to be known as a commodity which is useful to a customer. In othe....
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..... 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 trans....
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....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. ** &n....
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.... **  ....
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....or 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 setforth in Annexure-A to the agreement. 40. The assessee agrees, that all patentable and unpatentable, inventions, discoveries and ideas which are made or conceived as a direct or indirect result of the programming or other services performed under the agreement shall be considered as works made for hire and shall remain exclusive property of the client and the assessee shall have no ownership interest therein. Promptly; upon conception of such an invention, discovery, or idea the assessee agrees to disclose the same to the client and the client shall have full power and authority to file and prosecute patent applications there....
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....he deliverables and the final product. No doubt at the end of the day, this software which is developed is embedded on the material object and only then the customer can make use of the same. The software so developed even before it is embedded on the material object or after it is embedded on a material object exclusively belongs to the customer. In the entire contract there is nothing to indicate that the assessee after developing the software has to embed the same on a material object and then deliver the same to the customer so as to have title to the project which is developed. The title to the project/software to be developed lies with the customer even before the assessee starts rendering service. 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 softwar....
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.... deal with that software in the manner he wants without further reference to the assessee. The consideration paid is not for transfer of any goods. The consideration paid is calculated in terms of time such as man days, man hours and man months. As on the dale of entering into the contract, both the parties are not clear how much time the contract would ultimately take and when the end product, i.e., the software is produced. 46. Intellectual property comprises of all those things which emanate from the exercise of the human brain, such as ideas, inventions, poems, designs, etc. The word 'property' comes from the Latin word proprius, which means "ones own". Intellectual property means, the legal rights which may be asserted in respect of a product of human intellect. The fruits of intellect, would exist even if they enjoyed no legal protection. 47. Intellect is not property by itself. Through intellect, you can create intellectual property. It is that intellectual property that will become "goods" once put on a medium for sale. Intellectual property does not exist in the mind of the technician. What exists in his mind is the intellect. Using that intellect, a technician c....
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....right to exploit the intellect, according to his needs and requirements and he pays for the services rendered. He is not purchasing any intellectual property for the purpose of exploiting the same, as none exists on the date of contract of employment. When an employer hires technicians and pays them salary, a relationship of employer and employee comes into existence. The employer may utilise the services of the technicians for his personal use. He may also lend their services to others, who are in need of them. He may also employ them in the job he has undertaken to execute. In all these cases the technicians are rendering their service by applying their intellect. They are paid for the services rendered. In consideration of the remuneration received they are not selling any intellectual property to any one. They are not in the business of sale of intellectual property. Similarly their employer is also not in the business of sale of any intellectual property. On the other hand they are in the business of rendering service to develop intellectual property or software. Therefore, there is no element of sale involved at any stage of the transaction. The intellectual property develope....