Kerala High Court
State Of Kerala vs M/S. Muziris Softech (P) Ltd on 4 August, 2020
Bench: K.Vinod Chandran, T.R.Ravi
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN
&
THE HONOURABLE MR. JUSTICE T.R.RAVI
TUESDAY, THE 04TH DAY OF AUGUST 2020 / 13TH SRAVANA, 1942
O.T.Rev.No.171 OF 2015
AGAINST THE ORDER IN TA(VAT) NO.885/2011 DATED 30-03-2015
OF KERALA VALUE ADDED TAX APPELLATE TRIBUNAL, ERNAKULAM
[ASSESSMENT YEAR 2006-07]
REVISION PETITIONER/ APPELLANT/RESPONDENT/REVENUE:
STATE OF KERALA,
REPRESENTED BY THE DEPUTY COMMISSIONER (LAW),
COMMERCIAL TAXES, ERNAKULAM
BY SR.GOVERNMENT PLEADER SRI.MOHAMMED RAFIQ
RESPONDENT/ RESPONDENT/APPELLANT/ASSESSEE:
M/S. MUZIRIS SOFTECH (P) LTD.,
KOCHI, PIN 682015
BY ADV. SRI.HARISANKAR V. MENON
BY ADV. SMT.MEERA V.MENON.
THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON
29-06-2020, ALONG WITH OT.Rev.No.175/2015, THE COURT ON 04-08-2020
PASSED THE FOLLOWING:
O.T.Rev.171/2015 & - 2 -
175/2015
IN THE HIGH COURT OF KERALA AT ERNAKULAM
PRESENT
THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN
&
THE HONOURABLE MR. JUSTICE T.R.RAVI
TUESDAY, THE 04TH DAY OF AUGUST 2020 / 13TH SRAVANA, 1942
O.T.Rev.No.175 OF 2015
AGAINST THE ORDER IN TA(VAT) NO.886/2011 DATED 30-03-2015
OF KERALA VALUE ADDED TAX APPELLATE TRIBUNAL, ERNAKULAM
[ASSESSMENT YEAR 2007-08]
REVISION PETITIONER/ APPELLANT/RESPONDENT/REVENUE:
STATE OF KERALA,
REPRESENTED BY THE DEPUTY COMMISSIONER (LAW),
COMMERCIAL TAXES, ERNAKULAM
BY SR.GOVERNMENT PLEADER SRI.MOHAMMED RAFIQ
RESPONDENT/ RESPONDENT/APPELLANT/ASSESSEE:
M/S.MUZIRIS SOFTTECH (P) LTD.,
KOCHI, PIN-682015.
BY ADV. SRI.HARISANKAR V. MENON
THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON
29-06-2020, ALONG WITH OT.Rev.171/2015, THE COURT ON 04-08-2020
PASSED THE FOLLOWING:
O.T.Rev.171/2015 & - 3 -
175/2015
K. Vinod Chandran & T.R.Ravi, JJ.
-----------------------------------
O.T.Rev.Nos.171 & 175 of 2015
-----------------------------------
Dated, this the 04th day of August, 2020
ORDER
Vinod Chandran, J.
The revisions are with respect to assessment years 2006-07 and 2007-08. The assessee is a software developer, who submitted their returns for the relevant assessment years. The Intelligence Officer issued notice on the ground that the assessee has not included the consultancy charges and the amounts received for annual maintenance contract (AMC) in the relevant assessment years. The Intelligence Officer also relied on a clarification issued by the Commissioner of Commercial Taxes, wherein it was held that if the agreement executed is inclusive of the consultancy charges, it will form part of the taxable turnover. The books of accounts and agreements were verified to find that both the components have to be included in the sales turnover, which the assessee failed to do. The 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 O.T.Rev.171/2015 & - 4 -
175/2015it to the purchaser's requirements. Such adaptation made in the software involved only labour of IT professionals and there is no sale of goods. The AMC also is with respect to the repair, maintenance or modifications made in the software after the sale, which again involves only labour and no transfer of property in goods. The work carried on in the software sold to the purchaser is customization as per the requirement of the purchaser.
2. The Intelligence Officer found that the price quoted as also the agreement executed is a composite one for the software and the customization carried out. The dominant object was the sale of the software with the customization incorporated in the Compact Disc (CD), which contains the software. Only a meagre amount was conceded as price of software and the lion's share was shown as consultancy charges, thus disclosing a willful intention to evade tax. Penalty was imposed at double the tax sought to be evaded, at the maximum, in both the assessment years.
3. In appeal, the first appellate authority extracted the contentions of both sides and relied on Gannon Dunkerley and Co. v. State of Rajasthan [(1993) 1 SCC 364] to remand the matter for fresh consideration. The Tribunal, without any discussion, affirmed the order of the O.T.Rev.171/2015 & - 5 -
175/2015first appellate authority, in an appeal filed by the State. The State is before us seeking reversal of the orders of both the appellate authorities on the ground of total absence of application of mind by both the appellate authorities. The question of law raised is also specifically on the lack of application of mind with reference to the law on the subject and the facts coming out from the records as to the nature of the transaction.
4. The learned Senior Government Pleader Sri.Mohammed Rafiq, on the basis of the records produced before us, argued that the sale itself was of the customized software. The records indicate that there is no written agreement as such, but the proposal for development and implementation of the software called 'Muziris Textile Trade IS' shows the price of the CD at a nominal charge and the IT consultancy charge at more than ten times the sale price of the CD. There is a separate component for additional locations and additional customization for new locations. The payment terms are also at percentages in each stage without any distinction drawn of the different components. The sale price, hence, involves the price quoted by the assessee and it cannot be said that the customization is on the product sold to the purchaser, O.T.Rev.171/2015 & - 6 -
175/2015after its sale. The sale itself is occasioned with the customization is the argument. The learned Government Pleader relies on the decision in Associated Cement Companies Ltd. v. Commissioner of Customs [(2001) 4 SCC 593] and Tata Consultancy Services v. State of A.P. [(2004) 137 STC 620 (SC)]. The learned Government Pleader also relies on the decision in Girish Kumar, K.E. v. Sales Tax Appellate Assistant Commissioner [(2001) 122 STC 546 (Ker.)] to argue for a remand, since both the appellate authorities, enjoined upon to look at the facts and adjudicate on it, have not considered the issue in the proper perspective.
5. The learned Counsel for the assessee-respondent, however, argues that the product is one developed by the assessee, which is sold to various institutions. The software as such may not satisfy the requirements of the individual purchasers. It requires a customization, which can be done only with reference to the requirements of a client. What is sold is only the software in a CD and the customization is one as per the requirements of the client after the sale, for which consultancy charges are received. The consultancy charges do not involve any transfer of property in goods and, hence, there could be no sales tax O.T.Rev.171/2015 & - 7 -
175/2015charged on the same. The assessee has been paying service tax on the consultancy charges, is the specific contention taken. The learned Counsel for the assessee relies on the decision in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes & Others [(2008) 12 VST 371 (SC)] as also a Division Bench decision of this Court in State of Kerala v. Techsmith Software (P) Ltd. [2016 (3) KLT 260].
6. We do not think that the clarification referred to by the Intelligence Officer is in any manner applicable to the facts of this case. The clarification referred to is insofar as the consultancy charges paid by the Kerala State Construction Corporation Limited. Obviously the clarification is issued in the context of a works contract. Likewise, the reliance placed by the first appellate authority on Gannon Dunkerley is also irrelevant. Gannon Dunkerley was again in the context of works contracts. Briefly delving upon the background of the said decision, the attempt of the State to tax an indivisible works contract was struck down by the Hon'ble Supreme Court along with an attempt to tax certain other transactions. Later by the 46th amendment, Article 366(29A) was brought into the Constitution inter alia deeming the transfer of property in goods involved in an indivisible works contract, as a sale O.T.Rev.171/2015 & - 8 -
175/2015of goods, taxable as such. The amendment made and the subsequent taxation provisions were upheld by the Hon'ble Supreme Court. The specific question raised in Gannon Dunkerley cited hereinabove was as to whether the State Legislature in exercise of its legislative power flowing under Entry 54 of the State List read with Article 366(29A)(b) could levy tax in respect of transactions under works contract which are in the nature of sales in the course of inter-State trade and commerce, sales outside the State or sales in the course of import, since all these are beyond the legislative competence of the State Legislature. The question raised therein has no application to the case before us and here neither the assessee or the Department has a contention that the subject transaction is a works contract. The assessee admits that the sale of software in a CD is a sale of goods but argues for the position that the customization made is purely a service rendered, after the sale, the consideration for which cannot be taxed as sale value of the goods. The Department asserts that the sale of CD, with the customization is a sale of goods. The transaction in any event is admitted to be a sale of goods the value of which is the bone of contention.
O.T.Rev.171/2015 & - 9 -
175/2015
7. Associated Cement Companies Ltd considered the question whether drawings, designs, etc. relating to machinery or industrial technology were goods, leviable to duty of customs on their transaction value at the time of import. It was argued that transfer of technology or know-how though valuable was intangible. The technology when transmitted to India on some media does not get converted from an intangible thing to tangible thing or chattel and that in a contract by supply of services there is no sale of goods, was the argument. Reading Section 2(22) of the Customs Act which defines the word "goods", including clause (c) "baggage" and clause (e) "any other kind of moveable property", it was held that any moveable article brought into India by a passenger as part of his baggage can make him liable to pay customs duty as per the Customs Tariff Act. Any media whether in the form of books or computer disks or cassettes which contain information technology or ideas would necessarily be regarded as goods under the aforesaid provisions of the Customs Act, these items being moveable goods, covered by Section 2(22)(e) of the Customs Act. What was transferred was technical advice on information technology. But the moment the information or advice is put on a media, whether paper or diskettes or O.T.Rev.171/2015 & - 10 -
175/2015any other thing, the supply is of a chattel. It is in respect of the drawings, designs, etc. which are received that payment is made to the foreign collaborators. The question whether the papers or diskettes etc. containing advice and/or information are goods for the purpose of the Customs Act was answered in the affirmative. Their Lordships clearly held that "intellectual property when put on a media would be regarded as an article on the total value of which customs duty is payable" (sic para 41).
"When technical material is supplied whether in the form of drawings or manuals the same are goods liable to customs duty on the transaction value in respect thereof" (sic para
43). It was concluded so in paragraph 46:
"46. The concept that it is only chattel sold as chattel, which can be regarded as goods, has no role to play in the present statutory scheme as we have already observed that the word "goods" as defined under the Customs Act has an inclusive definition taking within its ambit any moveable property. The list of goods as prescribed by the law are different items mentioned in various chapters under the Customs Tariff Act, 1997 or 1999. Some of these items are clearly items containing intellectual property like designs, plans, etc".
{Underlining by us for emphasis} O.T.Rev.171/2015 & - 11 -
175/2015We immediately notice that the definition of "goods" under Section 2(xx) starts with "means all kinds of moveable property".
8. Apposite for our purpose would be the decision of the Hon'ble Supreme Court in Collector of Customs (Preventive) v. ESSAR Gujarat Ltd. [(1997) 9 SCC 738]; relied on in Associated Cement Companies Ltd. The question raised was whether the licence fees paid to a foreign company should be added to the invoice value of a plant bought by the respondent-EGL. The plant was originally installed in Germany, which Company went into liquidation, upon which the Bank which was appointed as a Receiver sold it to one Investment Company. EGL entered into a contract with the Investment Company to purchase the 'Direct Reduction Iron Plant' which operated on the basis of a process developed by one Midrex International B.V. The agreement of the respondent with the Investment Company required the latter to obtain the operational licence from Midrex. The agreement stipulated not only the Midrex process licence, but also some technical services provided by Midrex, for which respectively DM 20,00,000 and DM 1,01,00,000 were payable. A further sum of DM 2,31,00,000 was also payable to the Investment Company on account of O.T.Rev.171/2015 & - 12 -
175/2015engineering and consultancy fees. The Hon'ble Supreme Court held that the amounts payable for the process licence as also the technical consultancy provided by the licensor has to be included in the valuation of goods under Section 14 of the Customs Act. It was held so in paragraph 18:
"18. The entire purpose of Section 14 is to find out the value of the goods which are being imported. The EGL in this case was purchasing a Midrex Reduction Plant in order to produce sponge iron. In order to produce sponge iron, it was essential to have technical know-how from Midrex. It was also essential to have an operating licence from them. Without these, the plant would be of no value. That is why the precondition of a process licence of Midrex was placed in the agreement with TIL. It will not be proper to view that agreement with TIL in isolation in this case. The plant would be of no value if it could not be made functional. EGL wanted to buy the plant in a working condition. This could only be achieved by paying not only the price of the plant, but also the fees for the licence and the technical know-how for making the plant operational. Therefore, the value of the plant will comprise not only the price paid for the plant but also the price payable for the operation licence and the technical know-how. Rule 9 should be construed bearing this in mind".
{underlining by us for emphasis} O.T.Rev.171/2015 & - 13 -
175/2015
9. The contention of the respondent that the requirement for obtaining process licence fee before the sale and delivery was only an exit gate available to the purchaser was negatived. It was held in paragraph 23 that without the licence and various other technical information provided by Midrex it would not be possible to operate the plant at all. It was essential for the respondents to have the licence to make the plant operational with Midrex technology. The amounts payable for process licence as also technical services provided by Midrex was held to be includible in the valuation. However, DM 22,00,000 payable for theoretical and practical training by the Investment Company was held to be not includible in the value of the plant. With respect to payment of DM 2,31,00,000 as cost of technical services for engineering and consultancy fee to the Investment Company, the same was found to be expenditure for dismantling the plant, making it ready for delivery and so on and so forth. Finding the various services offered under the said clause to be not clear, it was held that only 10% of the amount can be added to the value of the plant.
10. Tata Consultancy Services was a case in which the specific issue of computer software packages, was O.T.Rev.171/2015 & - 14 -
175/2015considered as is the concern in the present case also. There was, however, a distinction drawn insofar as 'uncanned software' and 'canned software' alternatively termed as 'unbranded' and 'branded'. The distinction is in that a 'canned software' contains programmes which can be used as such by any person purchasing it, while an 'uncanned software' is one prepared for a particular purchaser's requirements by tweaking the original software to adapt to the specific requirements of a particular entity. While a 'canned software' could be sold over the shelf an 'uncanned software' is programmed to specific and particular needs and requirements. Their Lordships held that in India the test, to determine whether a property is 'goods', for the purpose of sales tax, is not confined to whether the goods are tangible or intangible or incorporeal. The correct test would be to determine whether an item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. It was held that both in the case of 'canned' and 'uncanned' software all these are possible (sic para 16). Associated Cement Companies Ltd was heavily relied on. It was held so in paragraphs 27:
O.T.Rev.171/2015 & - 15 -
175/2015
"27. In our view, the term "goods" as used in Article 366(12) of the Constitution and as defined under the said Act is very wide and includes all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. A software program may consist of various commands which enable the computer to perform a designated task. The copyright in that program may remain with the originator of the program. 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 be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software program on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD. Thus a O.T.Rev.171/2015 & - 16 -
175/2015transaction/sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. The term "all materials, articles and commodities" includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. The software programs have all these attributes".
11. The learned Counsel for the respondent-assessee in fact stressed on the further observations of the Court in the concluding paragraphs, which we extract here-under:
"28. At this stage it must be mentioned that Mr Sorabjee had pointed out that the High Court has, in the impugned judgment, held as follows:
"... In our view a correct statement would be that all intellectual properties may not be 'goods' and therefore branded software with which we are concerned here cannot be said to fall outside the purview of 'goods' merely because it is intellectual property; so far as 'unbranded software' is concerned, it is undoubtedly intellectual property but may perhaps be outside the ambit of 'goods'."
(emphasis supplied)
29. Mr Sorabjee submitted that the High Court correctly held that unbranded software was O.T.Rev.171/2015 & - 17 -
175/2015
"undoubtedly intellectual property". Mr Sorabjee submitted that the High Court fell in error in making a distinction between branded and unbranded software and erred in holding that branded software was "goods". We are in agreement with Mr Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted, consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even unbranded software, when it is marketed/sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise".
The declaration made in the said decision only applies to 'uncanned software' is the submission. It does not apply to a software though canned but adapted to the specification and requirements of the individual client, asserts learned Counsel. We are unable to accept the said contention and immediately notice that it was never declared that an 'uncanned software' or an 'unbranded' one, is not 'goods' and the finding is to the contrary. Their Lordships did not O.T.Rev.171/2015 & - 18 -
175/2015make any observation on unbranded software on the reasoning that in case of sale of unbranded software, the questions like 'situs of contract of sale and/or whether the contract is a service contract may arise'.
12. Imagic Creative Pvt. Ltd is not applicable to the facts of the above case. In Imagic Creative Pvt. Ltd., the Hon'ble Supreme Court was concerned with the services carried out by an advertising agency by creating original concept and design for advertising and supply of design brochures, annual reports, etc. The development of the concept and design was held to be a service distinguished from a sale of goods. The transaction was held to be a works contract involving both service as well as supply of goods, the latter alone constituting a sale of goods. At the outset, we notice that in the present transaction there is no works contract involved of goods and computer services. The Division Bench decision of this Court in Girish Kumar, K.E.U also has no application since it has been recorded therein that customization charges were received by the assessee therein after the delivery of goods. It is in this context that ESSAR Gujarat Ltd assumes significance.
O.T.Rev.171/2015 & - 19 -
175/2015
13. The factual situation has to be considered
looking at ESSAR Gujarat Ltd and Tata Consultancy Services. The software is one developed by the respondent-assessee, which has to be modified and adapted as per the requirements of the individual purchaser. Without such modification and adaptation, the software has absolutely no utility for the purchaser. As has been found in ESSAR Gujarat Ltd, the mere purchase of the machinery does not make it operational. Without the operation licence and the technical know-how from the entity which developed the specific process of 'Direct Reduction of Iron', there could be no operational function for the machine purchased. The licence and the technical know-how are imperative components for the goods purchased to be effectively utilized, which makes the amounts payable for obtaining such licence and technical know-how includible in the value of the goods on which tax or duty on the goods can be levied. Both the appellate authorities have not looked at this specific issue. If the customization carried out is imperative for the operation of the software necessarily it would be a sale of goods with the software on which the customization is incorporated. However we are of the opinion that the AMC would be taxable only if there is any O.T.Rev.171/2015 & - 20 -
175/2015sale of goods. Even if consultancy charges are received to tweak the customized software to the changing requirements of the client or to extend it to more premises, then necessarily it is occasioned after the sale
14. 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. In the above circumstances, we are of the opinion that the matter has to be remanded back to the fact finding authority. Considering the long lapse of time, we are of the opinion that the Tribunal can consider the issue by specifically looking into the documents as relied on by the State, which are the documents produced by the assessee evidencing the transactions.
O.T.Rev.171/2015 & - 21 -
175/2015
We, for the reasons indicated above, allow the
revisions finding no consideration of facts by both the authorities and remand the issue for fresh consideration, to the Tribunal. Parties are left to suffer their respective costs.
Sd/-
K.VINOD CHANDRAN JUDGE Sd/-
T.R.RAVI JUDGE Vku/-
O.T.Rev.171/2015 & - 22 - 175/2015 APPENDIX OF OT.Rev 171/2015 PETITIONER'S/S ANNEXURES: ANNEXURE A A TRUE COPY OF THE ORDER PASSED BY THE INTELLIGENCE OFFICER (IB), ERNAKULAM DATED 03.10.2009 ANNEXURE B THE COMMON ORDER DATED 11.01.2011 PASSED
BY THE ASSISTANT COMMISSIONER (APPEALS), COMMERCIAL TAXES, ERNAKULAM DATED 11.01.2011 IN KVATA NO.2685/09 AND 2678/09 ANNEXURE C A CERTIFIED COPY OF THE COMMON ORDER PASSED BY THE TRIBUNAL IN TA(VAT) NO. 885/11 AND 886/11 ANNEXURE C(A) A TRUE COPY ANNEXURE C. O.T.Rev.171/2015 & - 23 -
175/2015APPENDIX OF OT.Rev 175/2015 PETITIONER'S/S ANNEXURES:
ANNEXURE A A TRUE COPY OF THE ORDER PASSED BY THE INTELLIGENCE OFFICER (IB)ERNAKULAM DATED 03.10.2009.
ANNEXURE B THE COMMON ORDER DATED 11.01.2011 PASSED BY THE ASSISTANT COMMISSIONER (APPEALS) COMMERCIAL TAXES, ERNAKULAM DATED 11.01.2011 IN KVATA NO.2685/09 & 2678/09.
ANNEXURE C A TRUE COPY OF THE COMMON ORDER PASSED BY THE TRIBUNAL IN TA(VAT) NO.885/11 & 886/11.
[TRUE COPY]