2005 (8) TMI 648 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Assessment of software consultancy charges under entry 22 of the Sixth Schedule to the KST Act.
2. Interpretation of the law regarding transfer of property in goods in the context of software development services.
3. Application of legal precedents from apex court judgments to determine tax liability on software development charges.

Issue 1: Assessment of Software Consultancy Charges

The case involved an appeal against the order passed by the Additional Commissioner of Commercial Taxes, challenging the reassessment orders for the assessment years 1989-1990 and 1990-91. The assessing authority initially allowed exemptions on certain turnover, but later modified the orders to tax consultancy charges under entry 22 of the Sixth Schedule to the KST Act. The first appellate authority ruled in favor of the appellant, stating that software development did not involve transfer of property in goods. However, the revisional authority disagreed, canceling the first appellate authority's orders and reinstating the reassessment orders. The legal issue was whether software consultancy charges were taxable under entry 22 of the Sixth Schedule to the KST Act.

Issue 2: Interpretation of Transfer of Property in Goods

The appellant argued that developing software for customers did not constitute transfer of property in goods, hence not taxable under the Act. The assessing authority and revisional authority contended otherwise, relying on the law declared by the apex court in the Tata Consultancy Services case. The apex court's decision clarified that software, once marketed, constituted goods subject to sales tax, regardless of whether branded or unbranded. The court emphasized that the buyer purchased intellectual property, not just the media, making software a tangible good for tax purposes. The revisional authority's findings highlighted the nature of the dealer's work, demonstrating that the software development charges were indeed for programming and developing software, falling under the purview of taxable goods.

Issue 3: Application of Legal Precedents

The court, considering the apex court's ruling in the Tata Consultancy Services case, found that the software development activities of the appellant aligned with the definition of taxable goods under the KST Act. Based on the factual findings of the revisional authority and the material in the assessment records, the court concluded that the consultancy charges were indeed for software development programs, making them taxable under entry 22 of the Sixth Schedule. Consequently, the court rejected the appeal, confirming the revisional authority's order to tax the software consultancy charges for the assessment years 1989-90 and 1990-91 under the Karnataka Sales Tax Act, 1957.

In summary, the court upheld the taxability of software consultancy charges under entry 22 of the Sixth Schedule to the KST Act, based on the interpretation of transfer of property in goods and the application of legal precedents from apex court judgments. The decision aligned with the understanding that once software is marketed, it constitutes goods subject to sales tax, emphasizing the purchase of intellectual property rather than just the media.