2020 (8) TMI 346 - HC - VAT and Sales Tax

Valuation - inclusion of consultancy charges in the assessable value - assessee took the contention that the software was sold for a particular price and the consultancy services are with respect to the modifications made in the software to adapt it to the purchaser's requirements - imposition of penalty at double the tax amount - HELD THAT - The learned Senior Government Pleader invited us to the records to point out that the invoices produced would clearly demonstrate the manner in which the transaction was carried out, making the entire turnover taxable under the KVAT Act. We are, however, not looking at the facts in the above revisions and have to confine ourselves to determination of questions of law. We have stated the law and the facts have to be examined by the statutory authorities. The statute provides for adjudication by the original authority and then two stages of appeals; the forums enjoined with the power to so adjudicate have been empowered to look into the facts. The matter has to be remanded back to the fact finding authority - revision allowed by way of remand.

Issues Involved:
1. Inclusion of consultancy charges and AMC in taxable turnover.
2. Nature of the transaction: sale of goods vs. service.
3. Application of legal precedents and clarifications.
4. Determination of taxable value for customized software.

Issue-wise Detailed Analysis:

1. Inclusion of Consultancy Charges and AMC in Taxable Turnover:
The Intelligence Officer issued notices to the assessee for not including consultancy charges and amounts received for annual maintenance contracts (AMC) in their taxable turnover for the assessment years 2006-07 and 2007-08. The officer argued that both components should be included in the sales turnover based on a clarification by the Commissioner of Commercial Taxes. The assessee contended that the consultancy services and AMC involved only labor and no sale of goods, and thus should not be included in the taxable turnover.

2. Nature of the Transaction: Sale of Goods vs. Service:
The Intelligence Officer found that the agreement for the software and its customization was composite, indicating a sale of goods with customization incorporated into the software. The dominant object was the sale of the software on a Compact Disc (CD), with the customization forming part of the taxable turnover. The assessee argued that the software was sold as goods, but the customization services provided after the sale were purely labor services and should not be taxed as goods.

3. Application of Legal Precedents and Clarifications:
The first appellate authority relied on the case of Gannon Dunkerley and Co. v. State of Rajasthan to remand the matter for fresh consideration. The Tribunal affirmed this decision without further discussion. The State sought reversal of these orders, arguing that both appellate authorities failed to apply the law correctly. The court noted that the clarification referred to by the Intelligence Officer was not applicable as it pertained to works contracts, which was not the case here. The court also referenced several legal precedents, including Associated Cement Companies Ltd. v. Commissioner of Customs and Tata Consultancy Services v. State of A.P., to analyze whether the transaction involved the sale of goods or services.

4. Determination of Taxable Value for Customized Software:
The court examined whether the customization of software should be included in the taxable turnover. It highlighted that if the customization is imperative for the software's operation, it would be considered a sale of goods. The court referenced the decision in ESSAR Gujarat Ltd., which held that the value of goods includes necessary components like licenses and technical know-how. The court concluded that the AMC would be taxable only if it involved the sale of goods, and consultancy charges for post-sale customization would not be included in the taxable turnover.

Conclusion and Remand:
The court found that both appellate authorities failed to consider the facts properly. It emphasized the need to determine whether the customization was essential for the software's operation. The court allowed the revisions and remanded the issue back to the Tribunal for fresh consideration, instructing it to specifically examine the documents evidencing the transactions. The parties were left to bear their respective costs.

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