Customised Software Designed For Specific User Is Also Taxable As 'Goods'

Cause Title : State Of Kerala vs Sri. V. C. Vinod, Kerala High Court, St. Rev. No.2 Of 2016

Date of Judgment/Order : 24/7/2023

Corum : Justice Mohammed Nias C. P. & Justice A. K. Jayasankaran Nambiar

Citied: 

1. Tata Consultancy Services v. State of Andhra Pradesh – [(2005) 1 SCC 308]
2. Commissioner of Service Tax, Delhi v. Quick Heal Technologies Limited – [(2023) 5 SCC 469]

Background

The respondent/assessee was doing business in software. Computer software attracted tax @ 4% ad valorem was introduced into the KGST Act with effect from 1.4.2002. As the respondent/assessee had not taken any registration or paid tax in respect of the sale of software  to its clients under the KGST Act, penalty proposals were initiated by the Sales Tax Department for each of the assessment years,  against which the assessee argued that customised software was not goods and sales tax could not be demanded from it for the supply of customised software to its clients. When the first and second appeals preferred by the assessee before the Appellate Authority were dismissed, the assessee approached the High Court. The High Court remitted the matter back to the Tribunal for a de novo consideration on merits. This time the Tribunal observed that the judgment of the Supreme Court on this issue in Tata Consultancy (supra), was rendered in the context of “canned software”(or software available off the shelf) and has no application in cases of uncanned software which referred to software that was developed for a particular customer. The Tribunal therefore ordered in favour of the assessee. This revision petition was preferred by the State agains the said order.

Judgment

The High Court observed that the reasoning given by the Tribunal is that customised software developed and supplied to its clients by the assessee could not be brought to tax under the KGST Act since the Constitution Bench judgment of the Supreme Court in Tata Consultancy [supra] dealt only with canned software or software that was available off the shelf and not customised software. However on a reading of the judgment of the Supreme Court in Tata Consultancy [supra], the High Court held  that the findings therein are clearly applicable not only to canned software but also to uncanned or customised software. 

The High Court therefore held that -

As per the findings of the Supreme Court there is no doubt 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 Quick Heal Technologies Limited (supra). We are therefore of the view that 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.