2019 (4) TMI 579 - HC - VAT and Sales Tax

Nature of activity - sale or service? - Unbranded software/uncanned software - software developed according to the specification of the client tailor made to the customers particular requirement - whether comes under the scope of 'Goods' or not? - levy of tax - Held that - In the present case, it is not disputed that no agreement or contract was ever filed or brought to the notice of the assessing authority or the appellate authority by the assessee, despite the show cause notice given by the assessing authority. Argument of Sri Gulati to the extent that had the assessing authority called for further information or document, the assessee was ready to furnish the same does not have much force, as the entire case of the revisionist-assessee rest upon the fact that software so developed, is on the instructions and specification of client and after the software is developed it becomes the property of the client as per the contract or agreement so arrived between them, hence the agreement/contract is the basis of claim of the assessee, relying upon which his case falls apart from the definition of goods and immediately come within the purview of service. Where any assessee is carrying on both the work of sale of software and development of software, then the assessing authority has to distinguish and indentify between the two in such a harmonious way so as to uphold the right of both the Legislation to levy tax, which falls within their respective area for arriving at such conclusion the assessee is also duty bound, apart from submitting his return to produce such documents as may be necessary and demanded by the authority concerned to segregate between the two, so as to make it abundantly clear as to which Law i.e. the State Law or the Central Act will be applicable. In the present case, the moment assessee produces/submits work contract/agreement before the assessing authority so as to bring his case within the purview of software development, the case comes out of the purview of the State Taxing authority and the same becomes amenable to Service Tax under the Law enacted by the Parliament. There is no doubt as to the fact that the Company is dealing in two types of products, namely, the branded software which are sold off the shelf, which is not under dispute and the other unbranded software, which is developed according to the specification of the client. These softwares so developed are undoubtedly are for the clients and the same becomes the property of the client, the moment it is developed and the assessee Company has no right over the same, nor it can sell the same to the other clients as a branded item - But, in the present case during the assessment proceedings when the assessee Company was required by the assessing authority to substantiate the sale under the head 'unbranded software', it was the duty of the Company to have placed the basic material, i.e., the agreement or the contract so entered by it with its client to bring the said software out of the purview of the goods. The assessee failed to bring, not only before the Assessing Authority, First Appellate Authority as well as the Tribunal the agreement, which it is relying upon before this Court. The matter is remitted back to the Tribunal to record specific finding after going through the agreements/contract as to the claim of the assessee in regard to the application of software development and support service given to its client as unbranded software not covered under the definition of goods and is a service to the customers - Matter on remand.

Issues Involved:
1. Taxability of branded software versus unbranded software.
2. Classification of software development and support services as goods or services.
3. Admissibility of additional grounds in appellate proceedings.
4. Requirement of agreements/contracts to substantiate claims of software as services.

Detailed Analysis:

1. Taxability of Branded Software versus Unbranded Software:
The revisionist, a company engaged in software development and support services, contended that branded software sold off the shelf is taxable as goods under the U.P. Trade Tax Act, while unbranded software developed per client specifications is a service and not taxable as goods. The revisionist relied on the definition of 'goods' under Section 2(d) of the U.P. Trade Tax Act and argued that unbranded software does not fit this definition. The assessing authority, however, treated both branded and unbranded software as goods and imposed tax accordingly.

2. Classification of Software Development and Support Services as Goods or Services:
The revisionist argued that software developed according to client specifications (unbranded software) is a service, citing the Andhra Pradesh High Court's decision in Tata Consultancy Services vs. State of Andhra Pradesh, which distinguished between branded and unbranded software. The revisionist also referenced the Supreme Court's decision in Tata Consultancy Services (2005), which upheld the taxability of branded software but did not express an opinion on unbranded software. The Karnataka High Court's decision in Sasken Communication Technologies Ltd. further supported the revisionist's claim that software development for clients is a service, not goods.

3. Admissibility of Additional Grounds in Appellate Proceedings:
The revisionist sought to introduce additional grounds in the appeal, arguing that sales of computer hardware to PWD, U.P., were mistakenly shown as computer consultancy services and should be exempt from tax under Section 3-A of the Act. The appellate authority rejected this application, stating that it amounted to a contradiction. The revisionist contended that appellate authorities should allow new grounds, supported by various judgments of the High Court.

4. Requirement of Agreements/Contracts to Substantiate Claims of Software as Services:
The assessing authority issued a show cause notice requiring the revisionist to explain why no tax was deposited for software development sales. The revisionist replied, distinguishing between branded and unbranded software, but did not submit agreements/contracts to substantiate its claim that unbranded software is a service. The Tribunal upheld the assessment order, leading to the current revision. The revisionist argued that the assessing authority should have requested further details if needed, while the respondent contended that the revisionist failed to provide necessary agreements/contracts at any stage.

Conclusion and Remand:
The High Court concluded that the revisionist's claim regarding unbranded software as a service has merit but noted the absence of agreements/contracts before the assessing authority and appellate bodies. The Court emphasized that agreements/contracts are crucial to determine whether software development is a service. The Court remitted the matter back to the Tribunal to review the agreements/contracts and determine the taxability of the software development and support services. The Tribunal is directed to pass a reasoned and speaking order within three months, considering the judgments of the Supreme Court and various High Courts.

Order:
The revision is partly allowed, and the Tribunal's order dated 19.6.2006 is set aside. The matter is remitted back to the Tribunal for a fresh decision based on the agreements/contracts provided by the revisionist.

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