Customised Software developed for specific users are "goods" for purpose of tax levy: Kerala High Court

The Kerala High Court recently clarified that software developed and customised for a specific user falls under the category of “goods” and not "service" for the purpose of taxation [State of Kerala v VC Vinod]..A division bench consisting of Justices AK Jayasankaran Nambiar and Mohammed Nias CP explained that a customised software satisfies the definition of ‘goods’ under Article 366 (12) of the Indian Constitution since it has the attributes of utility, that is being capable of being bought and sold and of being capable of transfer, transmission, delivery, storage and possession..“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 Court held..As such, customised software cannot escape levy of sales tax under the Kerala General Sales Tax Act (KGST), the Court held. .The High Court passed its ruling in view of the Supreme Court's judgment in Tata Consultancy Services v. State of Andhra Pradesh, wherein the top court had said that canned or non-customised software should be treated as goods for taxation purposes.The High Court clarified that the Supreme Court's findings would also be applicable to uncanned or customized software.The bench held that merely because the software was customized for particular user, it does not mean the software ceases to be goods for the purpose of levy of sales tax.“Merely because the software developed by the respondent/assessee in the instant case was customized 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,” the judgment stated..The High Court passed the ruling on a batch of Sales Tax Revision pleas filed by the State government. The State had challenged the decision of the Kerala State Tax Appellate Tribunal to allow appeals filed by a software provider (assessee), who had been aggrieved by the imposition of sales tax on the sale of customised software. .The assessee had not taken any registration in respect of the supply of its software on being under the impression that the sale of its customised software was a service. As such, the assessee assumed that the sale of its software service only attracted service tax and not sales tax (which is applied on goods)..The revenue department, however, treated the software sale as a sale of goods. Hence, it initiated penalty proceedings against the assessee for not taking registration under the KGST Act or paying sales tax. .The dispute went through multiple rounds of litigation before the Kerala Sales Tax Appellate Tribunal eventually ruled in favour of the assessee, to hold that the assessee's software sale was a service and not the sale of a good. .The Tribunal based its ruling on the premise that the Supreme Court's ruling in the Tata Consultancy Services case had no application on uncanned or customised software.This prompted the State authorities to approach the High Court..The High Court concluded that the Tata Consultancy Services case also applies to customised software. This means that customised software would be treated as goods and its sale would attracted sales tax. On this aspect, the High Court ruled in favour of the State revenue authority..However, the Court set aside the penalty sought to be imposed on the assessee for not paying sales tax earlier, considering that there was no deliberate or contemptuous attempt on the assessee's part to evade the payment of any tax. The Court reasoned there was confusion earlier as to whether service tax or sales tax should be paid for the supply of customised software, leading to the assessee's failure to pay the sales tax. Therefore, the Court concluded that the penalty orders issued against the assessee should be set aside. .The State was represented by Special Government Pleader, Mohamad Rafique. The assessee was represented by advocates CM Andrews, Boby M Sekhar and Syam Padman..[Read Judgment]