2023 (7) TMI 1234 - HC - VAT and Sales Tax

Goods - Levy of Service Tax or Sales tax - activity of developing and supply of customised software to its clients - Levy of penalty - wilful suppression of facts or not - HELD THAT - Even a customised software will satisfy the definition of 'goods' for, it is evident that it has the attributes having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. Once the said attributes are seen satisfied in the software in question, then whether the software is treated as customised or non-customised, it would nevertheless be categorised as 'goods' for the purposes of levy of tax - The said view of the Supreme Court has since been followed in later decisions including a recent decision of the Supreme Court in COMMISSIONER OF SERVICE TAX DELHI VERSUS QUICK HEAL TECHNOLOGIES LIMITED 2022 (8) TMI 283 - SUPREME COURT . Merely because the software developed by the respondent/assessee in the instant case was customised for a particular user and was not sold to other users, the charges collected from the customer cannot escape the levy of sales tax under the KGST Act. This is more so because the mere fact that it was customised for a particular user did not lead to the software ceasing to be goods for the purposes of levy of sales tax. Issue in favour of the assessee and against the Revenue.

Summary

Issues involved:
The judgment involves issues related to sales tax on customised software and penalty imposed on the respondent/assessee for assessment years 2002-03, 2003-04, and 2004-05.

Assessment of Sales Tax on Customised Software:
The respondent/assessee, engaged in software business, did not register for sales tax on customised software sales assuming it was subject to service tax only. Penalty proposals were initiated for non-registration and non-payment of sales tax. Despite contentions that customised software was not goods and already subject to service tax, penalties were confirmed. The Tribunal initially upheld the penalties, and subsequent appeals were dismissed. However, in a de novo consideration, the Tribunal found that the sales tax liability on customised software and website development charges was not sustainable, leading to the success of the assessee against both assessment and penalty orders.

Levying of Penalty:
The High Court dismissed the State's revision petitions seeking to set aside penalties imposed on the assessee for the assessment years 2002-03, 2003-04, and 2004-05. The Court noted the ambiguity prevailing during the relevant period regarding the taxability of customised software. Given the multiple rounds of litigation favoring the assessee and the absence of contumacious conduct to evade tax, the Court found no grounds for upholding the penalties, emphasizing that penalties are typically imposed for willful suppression or evasion of due taxes.

Interpretation of Supreme Court Judgment:
The State filed revisions against the Tribunal's decision to set aside assessment orders for the same assessment years. The Tribunal had ruled that customised software did not fall under the purview of sales tax based on a Supreme Court judgment related to canned software. However, the High Court analyzed the Supreme Court's findings, emphasizing that the definition of 'goods' under the law includes intangible properties like software. Referring to specific paragraphs of the Supreme Court judgment, the High Court concluded that even customised software, meeting certain attributes, qualifies as 'goods' subject to sales tax. This interpretation was supported by subsequent Supreme Court decisions, leading to the dismissal of the State's revisions against the assessment orders.