Madras High Court
M/S Inforsys Technologies Ltd vs The Special Commissioner & on 25 July, 2008
Author: K.Chandru
Bench: K.Chandru
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated 25..7..2008 Coram: The Hon'ble Mr. Justice K.CHANDRU W.P. Nos. 38544 to 38546 of 2005 and W.P.M.P No. 41269 of 2005 in W.P. No. 38544 of 2005, W.P.M.P. No. 41270 & 41271 of 2005 in W.P. No. 38545 of 2005 and W.P.M.P. No. 41273 of 2005 in W.P. No. 38546 of 2005 M/s INFORSYS TECHNOLOGIES LTD. No. 138 Old Mahabalipuram Road Sholinganallur Chennai .. Petitioner in all W.Ps. vs. 1. The Special Commissioner & Commissioner of Commercial Taxes Chepauk, Chennai ..R1 in W.P. Nos. 38544 & 38545 of 2005 2. The Commercial Tax Officer Tiruvanmiyur Assessment Circle No. 98 A.V. Church Road Chennai .. R2 in W.P. Nos. 38544 & 38545 of 2005 & R1 in W.P. No. 38546 of 2005 W.P. No. 38544 of 2005 filed under Article 226 of the Constitution of India seeking for issuance of writ of Declaration declaring that unbranded / customized software developed and sold by the petitioners whether with or without obligation, for system upgradation, repairs and maintenance or employee training is 'Goods' within Art. 366(12) of the Constitution of India, Sec. 2(d) of the Central Sales Tax Act 1956 and corresponding to Sec. 2(j) of the Tamil Nadu General Sales Tax Act, 1959 and that the petitioners are producers and precessors of such software for export are entitled to the beneficial provisions of Sec. 8(3) of the Central Sales Tax (Registration and Turnover) Rules, 1957 and the proceedings to the contrary initiated / intended to be instituted by the respondents by way of refusal to issue the Form 'C' Declarations or maintaining the penalty proceedings under Sec.10-A of the Central Sales Tax Act, 1956 are illegal, unconstitutional and without jurisdiction. W.P. No. 38545 of 2005 filed under Article 226 of the Constitution of India seeking for issuance of writ of Certiorarified Mandamus calling for the records of the impugned proceedings in Proc. No. Acts Cell IV/55742/05 dated 31.10.2005 from the file of the first respondent, quash the same as illegal and direct the respondents herein to issue blank 'C' Form declaration under Rule 10-A of the Central Sales Tax Act (Tamil Nadu) Rules, 1957. W.P. No. 38546 of 2005 filed under Article 226 of the Constitution of India seeking for issuance of writ of Certiorarified Mandamus calling for the records in Memorandum in Ref. No. R.C. No. 13904/2005/A5 dated 15.11.2005 from the file of the respondent herein and direct the respondent to issue the blank 'C' Form. For Petitioners : Mr. C. Natarajan, SC for Mrs. Apartna Nandakumar For Respondents : Mr. Haja Nazurudeen, Spl. GP (Taxes) C O M M O N O R D E R
The three writ petitions are filed by the same Company. W.P. No. 38544 of 2005 is filed seeking for a Declaration declaring that unbranded / customized software developed and sold by the petitioner with or without obligation, for system upgradation, repairs and maintenance or employee training are 'Goods' within Art. 366(12) of the Constitution of India r/w Sec. 2(d) of the Central Sales Tax Act 1956 [for short, 'CST Act'] and corresponding to Sec. 2(j) of the Tamil Nadu General Sales Tax Act, 1959 [for short, 'TNGST Act'] and, therefore, the petitioner is producer and processors of such software for export are entitled to the beneficial provisions of Sec. 8(3) of the CST Act r/w Rule 13 of the Central Sales Tax (Registration and Turnover) Rules, 1957. In the light of the declaration, they sought for a restrained order to the respondents from refusing to issue Form 'C' Declaration and initiating penalty proceedings under Sec.10-A of the CST Act as illegal, unconstitutional and without jurisdiction.
2. In W.P. No. 38545 of 2005, the challenge is to the order dated 31.10.2005 passed by the first respondent pursuant to the direction issued by this Court. Earlier, the petitioner moved this Court with W.P. No. 30101 of 2005 and this Court, vide order dated 17.9.2005, set aside the earlier order dated 01.9.2005 passed by the first respondent and directed the first respondent to consider the report of the petitioner dated 01.7.2005 in the light of the judgment of the Supreme Court and other relevant materials. The first respondent, after considering the request of the petitioners, rejected the plea of the petitioner, which is under challenge in this writ petition.
3. In W.P. No. 38546 of 2005, the challenge is to the consequential order dated 15.11.2005 issued by the Commercial Tax Officer [CTO], Thiruvanmaiyur Assessment Circle informing the petitioners that the request for 'C' Form will not be considered.
4. Pending the writ petitions, this Court in W.P. No.38546 of 2005, vide order dated 21.01.2006, directed 'C' Forms to be given to the petitioner. An interim injunction was also granted from proceeding to levy penalty.
5. In the light of the inter-connectivity between the three writ petitions, they were heard together and a common order is being passed.
6. The petitioner is a dealer registered under the CST Act and TNGST Act and they moved the first respondent seeking for a clarification under Section 28-A of the TNGST Act for determining the purchase of Insulated Flexible Copper Wire, Diesel Generators to use for the development of unlicenced software. They requested whether they can issue Form XVII for the purchase of the same and avail concessional rate at 3% provided under Section 3(5) of the TNGST Act. The authority, by his Clarification No. 6/2002 dated 10.01.2002, observed as follows:-
"'Unlicenced software' are not 'goods' as decided by the High Court of the Andhra Pradesh in the case of Tvs. Tata Consultancy Services Vs. State of Andhra Pradesh. Therefore, it is clarified that the petitioners are not eligible to issue Form XVII for the purchase of Insulated Copper Wire and Diesel Generator, to avail the concessional rate at 3% provided under Section 3(5) of the TNGST Act, 1959, since they are not used for manufacture of any goods."
7. Thereafter, several correspondence took place between the petitioner and the CTO. The petitioner was informed by a letter dated 01.9.2005 by the first respondent as follows:-
"The petitioners are informed that they are not entitled to make purchase of goods using 'C' form for use in preparation of uncanned software."
8. It was thereafter, they moved this Court to set aside the order and to consider their request in accordance with law. The petitioner was once again informed by an order dated 31.10.2005 that the petitioner is not entitled to use 'C' Form for their purchases for use in their service contract relating to uncanned software which are not amenable to the sales tax law.
9. In passing the order dated 10.01.2002, the Department relied upon the judgment of the Andhra Pradesh High Court in Tata Consultancy Services v. State of Andhra Pradesh [(1997) 105 STC 421]. Subsequently, the matter was taken to the Supreme Court. The Supreme Court decided the issue vide its judgment in Tata Consultancy Services v. State of Andhra Pradesh [2005 (1) SCC 308 = (2004) 137 STC 620]. The Constitution Bench of the Supreme Court, by its judgment, held that the branded software is 'goods'. They were also in agreement with the submission made by the petitioner in that case that there was no distinction between branded and unbranded software. But the majority opinion in the said judgment held that as they were not dealing with the unbranded software when it is marketed / sold as a good and are not expressing any opinion on that issue.
10. However, S.B. Sinha, J., in his concurring opinion in the very same judgment in paragraph 81, observed as follows:-
Para 81: "It is not in dispute that when a program is created it is necessary to encode it, upload the same and thereafter unload it. Indian law, as noticed by my learned Brother, Variava, J., does not make any distinction between tangible property and intangible property. A goods may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customised or non-customised satisfies these attributes, the same would be goods. Unlike the American courts, the Supreme Court of India has also not gone into the question of severability."
11. Therefore, when the authority passed the order pursuant to the direction of this Court dated 21.01.2006, he held that the judgment of the Supreme Court did not decide the question of uncanned / unbranded software as to whether they were goods or not. The following passage found in impugned order may be usefully reproduced:-
"Any decision of a Court is binding on Lower Courts only when that decision is given to resolve the dispute before that Court and the opinions of the Court in respect of matters that are not related to the disputes resolved in that case are only obiter dictum and they do not create any binding precedent.
The question before the Supreme Court in the case "Tata Consultancy Services vs. State of A.P." (137 STC 620) was whether canned software were 'goods'. The Supreme Court answered that question in the affirmative. The question whether uncanned software (unbranded software) were 'goods' or not was not at all an issue before the Supreme Court in that case. That is why the Supreme Court in the concluding part of its judgment in the above case has stated - "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".
It is thus clear that all comments given by the Supreme Court in that judgment about uncanned software do not create any binding precedent and hence the petitioner is not entitled to make any legal claim on the basis of those comments. Nevertheless, the remarks of the Supreme Court in the above Judgment are given respectful consideration as follows :
The Supreme Court has observed - "In India the test to determine whether a property is 'goods', for purpose of sales tax, is not whether the property is tangible or intangible or incorporeal."
[Emphasis added]
12. It is clear from the said order that the authority went only by the opinion expressed by the majority and except for referring to it did not give due consideration to the concurring opinion made by S.B. Sinha, J. Be that as it may. The said question once again, came up before the Supreme Court in the judgment relating to Bharat Sanchar Nigam Ltd. and another v. Union of India and others [2006 (3) SCC 1 (2006) 145 STC 91] wherein the Supreme Court categorically affirmed the opinion of Sinha, J. and paragraphs 56 and 57 in this regard may be reproduced below:-
Para 56: "This view was adopted in Tata Consultancy Services v. State of A.P. for the purposes of levy of sales tax on computer software. It was held: (SCC p. 342, para 81) A goods may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customised or non-customised satisfies these attributes, the same would be goods. Para 57: This in our opinion, is the correct approach to the question as to what are goods for the purposes of sales tax. We respectfully adopt the same."
13. In the light of the subsequent pronouncement of the Supreme Court, the first respondent's reasoning in the impugned will have to be necessarily set aside. The subsequent binding precedent compels this Court to set aside the order dated 31.10.2005 passed by the first respondent.
14. Even though Mr. C. Natarajan, learned Senior Counsel appearing for the petitioners, took pains to produce the Technical Consultant Agreement to show the various terms for the purpose of indicating that it was a sale, this Court considers that it is unnecessary to go into the details of the contract at this juncture.
15. The ground by which the impugned order dated 31.10.2005 came to be passed was based on the judgment of the Supreme Court in State of Karnataka v. B.M. Ashraf and Co. [1997 (8) SCC 468 = (1997) 107 STC 571]. It was to show that subject to the provisions of Section 5(5) of the CST Act, no tax under Section 5 is liviable on the sale price of such goods and (i) either consumes such goods in the manufacture of other goods for sale or otherwise (or consumes, otherwise) or dispose of such goods in any manner other than by way of sale in the State, or (ii) despatches them to place outside the State except as a direct result of sale or purchase in the course of inter-State trade or commerce shall be liable to pay tax on the purchase price of such goods at the same rate at which it would have been liviable on the sale price of such goods under section 5.
16. However, Mr. C. Natarajan, learned Senior Counsel relied upon the judgment of the Supreme Court in Polestar Electronic (Pvt.) Ltd. v. Additional Commissioner, Sales Tax and another [1978 (1) SCC 636 = (1978) 41 STC 409] and more particularly, referred to paragraph 15 in which it was observed as follows:-
Para 15: "Similarly, for the same reasons which we need not repeat again, manufacture and sale in Section 5(2)(a)(ii) and the second proviso mean manufacture and sale anywhere without any geographical limitation and neither manufacture nor sale is restricted to the territory of Delhi. There are no words like inside the Union Territory of Delhi to qualify manufacture or sale and there is no cogent or compelling reason for reading such words in Section 5(2)(a)(ii) and the second proviso. The use of the goods purchased as raw materials in the manufacture of goods may, therefore, take place anywhere and not necessarily inside Delhi and equally the sale of the goods so manufactured may be effected anywhere, whether inside or outside Delhi. The only end-use of the goods purchased required to be made for attracting the applicability of Section 5(2)(a)(ii) is that the goods must but utilised by the purchasing dealer as raw materials in the manufacture of goods and the goods so manufactured must be sold, irrespective whether the manufacture or sale takes place inside Delhi or outside. If the purchasing dealer does not use the goods purchased as raw materials in the manufacture of goods or having manufactured the goods does not sell them, he would commit a breach of the intention expressed by him in the declaration furnished to the selling dealer and the second proviso would immediately be attracted and the price of the goods purchased by him would be liable to be included in his taxable turnover. But so long as he carries out the intention expressed in the declaration and uses the goods purchased as raw materials in the manufacture of goods, whether inside or outside Delhi, and sells the goods so manufactured in Delhi or outside, he would not fall within the second proviso and the sale to him would not be taxable in his hands."
Learned Senior Counsel relied upon the said passage to show that his case was squarely covered by the said decision.
17. A counter affidavit dated 21.7.2008 was filed by the second respondent CTO. However, in the counter affidavit, there is neither discussion about the concurring judgment of the Tata Consultancy Services case (cited supra) not the subsequent BSNL case (cited supra), which are binding on them.
18. The learned Senior Counsel also took this Court to the meanings of various words in the Software Industry and referred to passages from the Computer Encyclopedia as well as from the decisions of the Supreme Court and the Andhra Pradesh High Court . There is no necessity to reproduce those meanings in the present case as the Supreme Court has categorically held that the concurring opinion of S.B. Sinha, J. is the correct position of law and that if the software whether customized or non-customized satisfies the Rules as a 'goods', it will also be 'goods' for the purpose of Sales Tax.
19. In the light of the above, W.P. No. 38544 of 2005 seeking for a declaration will stand allowed. The order dated 31.10.2005 passed by the first respondent authority challenged in W.P. No. 38545 of 2005 will stand set aside and the consequential order dated 15.11.2005 passed by the CTO also will stand set aside.
20. In the light of the common order passed by this Court in these three writ petitions, the respondents are directed to act as per the dicta laid down by the Supreme Court and pass appropriate orders on the request made by the petitioners in accordance with law. No costs.
gri To
1. The Special Commissioner & Commissioner of Commercial Taxes Chepauk Chennai
2. The Commercial Tax Officer Tiruvanmiyur Assessment Circle No. 98 A.V. Church Road Chennai