Dismissed

M/S. Polaris Software Lab Ltd. Hyd. v. Prl. Secy. (Ct) Hyd and 2 Others

Telangana HC8 Feb 2023WP/13474/2008

Case brief

AI extract

What is this about?

This judgment dismissed two writ petitions challenging the levy of sales tax on customized software. Upholding the Central Sales Tax and VAT Acts, the court held that neither cans nor uncanned software constitutes a 'service' but rather 'goods' taxable under Indian law, following the Tata Consultancy Services precedent.

What did the court decide?

Writ petitions were dismissed, declaring no merit in the challenge to the impugned assessment orders.

M/S. Polaris Software Lab Ltd. Hyd. Vs Prl. Secy. (Ct)… — Customs and Excise | Telangana HC (2023)

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[3311 ]

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HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD_ (Special Original Jurisdiction)

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WEDNESDAY, THE EIGHTH DAY OF FEBRUARY N/VO THOUSAND AND TWENTY THREE

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PRESENT

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THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HONOURABLE SRI JUSTICE N.TUKARAMJI

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WRIT PETITION Nos.13474 and 13482 of 2008

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WRIT PETITION NO: 13474 OF 2008

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Between:

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M/s. Polaris Software Lab Limited, rep. by its Executive Vice President, Mr. Kedarnath Udiyavar, The Capital, 203/Patt, Manikonda lT Park, Hyderabad 500 0'19.

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...PETITIONER

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AND

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1 . State of Andhra Pradesh, Rep. by Principal Secretary (Commercial Taxes) Government of Andhra Pradesh, Hyderabad.

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The Commercial Tax Officer, Punjagutta Circle, Hyderabad.

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The Union of lndia, Rep. by the Secretary to Government, Ministry of Finance, Department of Revenue' New Delhi

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...RES'.NDENTS

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Petition under Article 226 of the Constitution of lndia praying that in the circumstances stated in the affidavit filed therewith, the High Court may be pleased to issue directions or orders more in the nature of a writ of Certiorarised Mandamus i) declaring Entry 39(14) of lV Schedule of APVAT Act 2005 in so far as it provides for levy of sales tax on customozed lT Software as ultravires Entry 54 of List ll of the Seventh Schedule to and Article 14, 19(1Xg) and 245 of the Constitution of lndia ii) declaring Section 65(53)(a) read with Section 65(105)(zzzze) of the Finance Act 1994 as ultravires Entry 54 of List ll of the Sevzenth Schedule to and Article 1a, 19(1Xg) and 245 of the Constitution of lNdia and iii) to call for the records on the file of the second respondent relating to the Final Assessment Order for the year 200647 under CST Act, 1956 dt. 125-2008 and quash the same as ultra vires Entry 54 of List ll of the Seventh Schedule to and Article 1a, 19{1)(g) and 245 of the Constitution of lndia.

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LA. NO: 1 OF 20 08(WPMP. NO: 1:'376 OF 2⁰⁰⁸⁾

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Petition under Section 151 CPC^praying that in the circumstances stated in the affidavit filed in support of the^petition, the High Court may be^pleasedto grant an order of interim stay of:he operation of Entry 39(14) of lV of Schedule to the Andhra Pradesh VAT Ac, in so far as it^provides for levy of VAT on customized Software as far as the^petitioner is concerned^pending disposal of the above writ^petition.

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l.A. NO: 2 OF 2008( '/VPMP. NO:^{'l t394} OF 2008)

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Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the^petition, the High Court may be^pleased to grant an order of interim stay of all further proceedings of the assessment made vide impugned order dated 12.C5.2008^passed by the 2nd respondent for the Asst. year 2007-08 under the IST Avt, 1956, including any^proceeding for recovery of tax of Rs.29,85,2001, pending disposal of the writ petition.

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t.A. NO: 3 OF 2008{WPMP. NO: 1/395 OF 2008 )

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Petition under Section^'15' CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be^pleased to grant an order of nterim stay of the operation of Section 65(53)(a) read with section 65(105) (zzzze) ol the Finance Act 1994 as ultravires Entry 54 of List ll of the Seventh Schedule to and Ar icle 14, 19(1)(g) and 245 of the Constitution of lndia.

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WRIT PET TION NO: 13482 OF 2008

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Between:

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M/s. Polaris Software Lab Limited, Rep. by its Executive Mce President Mr. Kedarnath Udiyavar The Capital, 203/Part, Manikonda lT Pa*, Hyderabad.

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...PETITIONER

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AND

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State of Andhra Pradesh, Rep. by Principal Secretary (Commercial Taxes) Government of Andhra Pradesh, Hyderabad.

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The Commercial Tax Office-, Punjagutta Circle, Hyderabad.

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The Union of lndia, Rep. by the Secretary to Government, Ministry of Finance, Department of Revenue Ne w Delhi. ...RESPONDENTS

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Petition under Arlicle 226 of the Constitution of lndia praying that in the circumstances stated in the affidavit filed therewith, the High Court may be pleased to issue directions or orders more in the nature of a writ of Certiorarised Mandamus i) declaring Entry 39(14) of lV Schedule of APVAT Act 2005 in so far as it provides for levy of sales tax on customozed lT Software as ultravires Entry 54 of List ll of the Seventh Schedule to and Article 14, 19(1)(9) and 245 of the Constitution of lndia ii) declaring Section 65(53)(a) read with Section 65(105)(zzzze) of the Finance Act 1994 as ultravires Entry 54 of List ll of the Sevzenth Schedule to and Article 1a, 19(1)(g) and 245 of the Constitution of lNdia and iii) to call for the records on the file of the second respondent relating to the Final Assessment Order for the year 2006-07 under CST Act, 1956 dt. 12-5-2008 and quash the same as ultra vires Entry 54 of List ll of the Seventh Schedule to and Article 14, 1 9(1 Xg) and 245 of the Constitution of lndia.

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l.A. NO: 1 OF 2008(WPMP. NO: 17386 OF 2008

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Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the^petition, the High Court may be^pleased to grant an order of interim stay of the operation of Entry 39(14) of lV of Schedule to the Andhra Pradesh VAT Act, in so far as it provides for levy of VAT on customized Software as far as the petitioner is concerned^pending disposal of the above writ petition.

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l.A. NO: 2 OF 2008ffiPM P: NO: 17387 OF 2008)

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Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the^petition, the High Court^may be^pleased to^grant an order of interim stay of the operatron of Section 65(53Xa) read with section 65(105)(zzzze) of the Finance Act 1994 as ultravires Entry 54 of List ll of the Seventh Schedule to and Article 1a, 19(1)(g) and 245 of the Constitution of lndia.

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I.A. NO: 3 O F 2008lWPMP. NO: 1⁷³⁸ 8 0F 2008)

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Petition under Section 151 CPC^praying that in the circumstances statedⁱⁿ the affidavit filed in support of the^petition, the High Court may be^pleased to^grant an order of interim stay of all further^proceedings of the assessment made vice impugned order dt. 12-5-08^pass,ed by the 2nd Respondent for the Asst. Year 2006-07 under the CST Act,^'1956 including any proceedings for recovery of tax of Rs. 12,54,6971 pending disposal^{)f the writ petition.

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Counsel for the Petitioner in both W.Ps.: SRI KAILASHNATH P.S.S., FOR SRI. T. BALA MOHAN REDDY

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Counsel for the Respondent Nos.1 & 2 in both W.Ps.:

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SRI V. RA.]ESHWAR RAO, AGP FOR GP FOR COMMERCIAL TAX

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Counsel for the Respondent No.:i in both W.Ps.: SRI B. MUKHERJEE FOR SRI GADI PRAVEEN KUMlrR, DEPUTY SOLICITOR GENERAL OF INDIA

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The Court made thc following: COMMON ORDER

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THE HON'BLE THE CHIEF JUSTICE UJJAL BHTryAN AND

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THE HON'BLE Szu CE N, TUKARAMJI

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WRIT PETITION Nos. 13474 and L34a2 of 2OO8

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COMMON ORDER: (Per the Hon'ble the Chtef Justice Ujjol Bhuyan)

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Issue raised in both the writ petitions is one and the same. Parties are also the same. Therefore, both the writ petitions have been heard together and are being disposed of by this common judgment and order

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Heard Mr. Kailashnath P.S.S., learned counsel for the petitioner; Mr. V.Rajeshwar Rao, Iearned counsel lor respondents No.l and 2; and Mr.B.Mukherjee, learned. counsel representing Mr. Gadi Praveen Kumar, learned Deputy Solicitor General of India appearing for respondent No.3.

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In W.P.No.13474 of 2008 challenge made is to the final assessment order dated 12.05.2008 for the I assessment^{period2OO7-08(up} to^{14.02.2008) under} the / Central Sales Ta-x Act, 1956^(briefly, 'the^CSTAct'

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hereinafter. On tl're othcr hand, in W.P.No.13482 of 2008 the challenge is to the final assessment order dated 12.05.2008 for the asriessment period 2006-07 under the CST Act.

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Both the aforesa d orders have been passed by the Commerciai Ta-r Officer, Punjagutta Circle, Hyderabad (briefly,'Commercial Tax Officer' hereinafter). Additionally, a prayer has been rnade to declare Entry 39(14) of Schedule IV of tl-re therr Andhra Pradesh ValLre Added Tax Act, 2O05 1briefly, 'thr: VAT Act' hereinafter) insofar it provides for ler,ying of sales tax on customised Information Technologr (IT) soltrvare as ultra uires and unconstitutional. Besicles, petitioner has sought for a declaration that Secti:n 65(53)(a) read with Section 65(1O5(zzzze) of the Fir:rnce Act, 1994, is ultrq. uires and unconstitutional.

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For the sake of c onvenience. we will refer to the averments in W.P.No.13482 ol 2OO8

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From a perusal of the final assessment order dated 12.05.2008 it is seen that^petitioner is a dealer in domestic sales of software and also export sales of software. Business premises of the petitioner was visited by the Commercial Tax Officer on 26 .02.2008 for verification of sale invoices and purchase invoices following the judgment of the Supreme Court in Tata Consultancy Services v. State of Andhra Pradeshl. Thereafter, authorised representative of the petitioner appeared before the Commercial Tax Officer on 21.03.2008 and produced copies of sale invoices for the concerned assessment period. On verification thereof, it was noted that major portion of sale of software was in the course ol export to foreign countries while a portion reiated to domestic sale of software taxable under the CST Act. Petitioner claimed exemption on domestic sales in the returns filed on the ground that sale of software represented software services. Adverting to Entry 39(1a) of Schedule IV of the VAT Act lead with the CST Act, Commercial Tax Officer took the \ prima facie view that sale of customised IT software was

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i (2005) I scc 308

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Iiable to tax in terms of the aforesaid provisions at the rate of 10%.

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Accordingll', a shx, cause notice dated 25.03.2008 was issued to the petitioner. Petitioner submitted reply dated 19.04 2008 stati rg t.hat petitioner was engaged in the development of softu,are solutions taiiored to cater to the specilic needs of customers. It provided the manpower and softlr,are skills lor irnplementation. This w,as in no way connected to canned/uncanned software solutions. It was also contended that the u'ork of software application depended on the needs, characteristics and methods of the customer organisation. Consideration of such software application n ork u'as inr:asured in terms of manpower hours ancl that olr.'nerslrrp of the deliverables vested with the client r .€. , intelle:tual property of t he software remained u,ith the client. Further, petitioner sought to distinguish the judgment of the Supreme Court in Tata Consultancy Services (s lr pra).

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However, Commercia.l Tax Officer did not accept the explanation furnished b1' the petitioner. Adverting to the

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decision of the^{Supreme Court inTata Consultancy} Services^(supra), it^{was held that customised softwareis} a-lso a taxable^{good. As per the aforesaiddecision,} there is no distinction^betureen canned and uncanned software; both canned and uncanned software are^goods and liable to tax. Commercial^Tax Officer clarified that the nature of u,ork undertaken by the petitioner was development of customised software. The mode and receipt of payment i.e., whether on hourly basis or in lump sum towards development of customised software would not decide the nature of work. Development of customised software starts from designing, continues through development and implementation and ends with handing over the developed software after successful execution. Therefore, the amount collected from the clients is nothing but sale vaiue of customised software, which is exigible to tax under the VAT Act.

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B. 1 . Though petitioner had contended that it had paid service tax to the consulting engineers or management consyltants, Commercial Tax officer opined that Finance

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Act, 1994, and VAT Act are tn,o different enactments covering diflerent lield,;. That apart, petitroner did not produce anr evidence t o pro\re payment of service tax on the goods sc,ught to be taxr:d under the CST Act read with the VAT Act Therefore . Commercial Ta.x Officer held that the amounts indicated in the shou, cause notices were liable to be paid by the petitioner and confirmed the same.

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Aggriered, the u-r'it petition has been filed

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9.1. This Court by order dated 26.06.2OO8 had admitted the writ petition for hezrnr-rg and passed an interim order staying the irnpugned order dated 12.05.2008 on condition ol depositing 50% of the drsputed tax within eight weeks

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Since considerable reliance has been placed by both the sides on the Con stitution Bench decision of the Supreme Court in Tata Consultancy Services (supra) it would be apt to advert to the same at the outset.

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10.1. Tata Consultancy Services provides consultancy gervices, including computer consultancy services. As part of their business they.,prepdfe and load on customers,

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computers custom-made software (uncanned software) and also seil computer software packages off the shelf (canned software). The canned software packages are of the ownership of companies/persons who have developed those software. Appellant was a licensee with permission to sub-licence these packages to others. The canned software prograrns are prograrns like Oracie, Lotus, Master Key etc. In respect of canned softr.r,are, Commercial Ta-x Officer, Hyderabad, had passed a provisional order of assessment under the provisions of the Andhra Pradesh General Sales Tax Act, 1957 , holding that the software were goods and accordingly, saies tax was levied thereon. This was affirmed by the appellate authority. Ultimately, after traversing through several rounds ol litigation, the matter landed up in the Supreme Court. Question for consideration before the Supreme Court was whether the canned software sold by the appellant couid be termed as "goods" and thus exigible to sales tax under the Andhra Pradesh General Sales Tax Act, 1957?

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10.2. After referring to relevant provisions of the aforesaid Act and several decisions, including in the case of CST v. M.P. Electricity Board2, Supreme Court held that the term "goods" for the purposes of imposition of sales tax cannot be gir en a narrov., meaning. It u'as held as follow-s:

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Thus this Court has heid that tl-e term "goods", lor the purposes of sales ta-, cannot be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc. are "goods" for the purposes of sales tax. The submission of Mr Sorabjee that this authority is not of any assistance as a software is different from electrrcitv and that software is intellectual incorporea.l property whereas elect ricity is not, cannot be accepted. In India the test to determine whether a property is "goods", lor purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whethcr the item concerned is capable o[ abstraction, consumption and u se and whether it can be transmitted, transferrr:d, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible.

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10.3. Thus, Supreme Corrrt held that the test to determine

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whether a pr()perty is "g ods" for purposes of sales tax is

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'?(1969)^{1 scc 2o()}

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not whether the^{property is tangible or intangibleor} incorporeal.^{The test is whether the item concernedis} capable^{of abstraction, consumption and use and whether} it can be^{transmitted, transferred, delivered, stored,} possessed etc. Admittedly, in the case of software, both canned^{and uncanned,all the above attributesare present.}

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10.4. Supreme Court referred to the definition of the term "goods" appearing in Article^366(121 of the Constitution of lndia and held as follorn's:

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2?.ln our view, the term "goods" as used in Articie 366(12) of the Constitution and as dehned under the said Act is very wide and includes aIl 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 Companles Ltd. u, Commissioner o3t Customs [(20O1) 4 SCC 5931 A software^progr.rm may consist of various commalds 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 diflerence between a

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sale of a soft^,are proflriun on a CD/floppy disc from a sale of music on a cassettc/CD or a gale of a film on a video cassettelCD. In all such cases, the intellectual property has been incc'rporated on a media lor purposes of transfer. Sale is not Just of the media which b-v itself has very little value, The software and the media cannot be split up. What the buyer purchases and pays for is not the rlisc or the CI). As in the case of paintings or books or music or hlms the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or^(lD. Thus a transaction / 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 nraterials, articles and commodities" includes both tangible and intangib Le / in corporeal property which is capable of abstraction, consumption and use and rvhich can be transmitted, transferred, delivered, storcd, possessecl, etc. The scftware prograrns have all these attributes.

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10.5. Thus, according t,r the Supreme Court, the lr,ord "goods" as delined in Arlicle 366(121 of the Constitution of India is ven, wide ancl includes all types of movable properties, whether those properties be tangible or intangible. In case of software or sale of computer soft\ rare it is clearly a sale of goods. Even an intellectual property, whether it be in the forrn of canvas or computer discs or cassettes and marketed, would become goods. Suprerne -

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Court thereafter^{agreed with} the submission ol Mr. Soli J.Sorabjee that^{there is no} distinction^{betweenbranded} and unbranded software. In both the cases the software is capable of being abstracted, consumed and used. In both cases the software can be transmitted, transferred, delivered, stored,^possessed etc. Thus, unbranded software when it is marketed/so1d may be goods. However, Supreme Court did not express final opinion on this aspect as this was not the issue before it

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1 1 . in our considered opinion, the view taken by the Commercial Tax Olficer is in consonance with the view taken by the Supreme Court in Tata Consultancy Services (supra).

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L2. Learned counsel for the petitioner made a valiant effort to contend that what was being construed to be goods was in fact a service provided by the petitioner and therefore, not exigible to sales tax. In this connection, he has placed reliance on a Division Bench decision ol the Karnataka High Court in Sasken Communication

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r.l

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Technologies Ltd. ,. Joint Commissioner of Commercial'[axes (Appr:als]-33.

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However, on going through the aforesaid judgment we lind that ttre question wl-rich feli for consideration of the Division Bench of the Karnataka High Court was whether a contract for rlevelopmen t of a software falls within the mischief of'a "works contract" and whr:ther upon developmer-rt c,f the softw;rre it is vested u,ith the customer from day one in r.l,hich event rvhether it woulcl amount to deemed sale rrnder Article 336(29A)(b) of the Constitution ol India?

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Karnatal<a High Co rrt examined various agreements entered into try the parties and observed that on the dav when the parties had entarecl into agreement there was no software in existence: in other words, there was no goods in existence. The agr( ement was not for transfer of sottware. The agreement was for development of software. As per the agrr:ement, the dealer had given up ztll the rights

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' MANU/KA/2245l 201 1

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and claims of the software which would be the absolute property of the customer.

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In the light of the above analysis, it was held by the Karnataka High Court that the contracts in question were not works contract but contract for service simplicitor. Consequently, the orders passed by the taxing authority ler,ying sales tax were set aside.

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We are afraid, the aforesaid decision of the Karnataka High Court is clearly distinguishable from the facts arld circumstances of the present case ar-rd not at all applicable

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As already discussed above, decision of the Supreme Court in Tata Consultancy Services (supra) clearl1, supports the contention of the Commerciai Tax Officer that the development of software solutions carried out by the petitioner was nothing but sale of goods and therefore, exigible to sales tax under the VAT Act read with the CST Act.

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lB. We, therefore, do not find any merit in the challenge to the impugned orders dated 12.05.2008.

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Insofar the other F)rayers made by the petitioner are

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concerned. \ e are ol the view that the same are not

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required to be gone irrto in the present proceedings.

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Conseqr.rently, both the writ petitions are dismissed.

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Miscellaneor.rs applications per-rding, if any, shall

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stand closed. However, trere shall be no order as to costs.

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SD/.K.VENKAIAH ASSTSTANI SEGISTRAR

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To,

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/,TRUE COPY// sect8u oFFrcER

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One CC to Sr' T^{Bala l\iloha'r Reddy, Advocate} [OPUCI

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z. i*o CCtto GP^for Commercial^{Tal, High Court for the Stateof Telangana at} Hyderabad [OUT] 3. d;-bC 6 S'r, Grbi^{Prareen Kumar, Deputy Solicitor Generalof lndia[oPUC]} 4. Two CD Copies

CHR BS V

HIGH COUR'"

DATED:0810'i.12023

COMMON ORDER W.P.Nos.13474 and^{13482 of 2008}

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