The next issue therefore will be the nature of development of software. Software development can be of two types. Software can be developed which is meant for free marketing. These are known as off-the-shelf or branded softwares. In case of Tata Consultancy Services v. State of A.P. and Others, (137 STC 620), the Hon. Supreme Court has held that such ‘off-the-shelf’ softwares are liable to sale tax as sale of goods. The Supreme Court observed as under:
“In our view, the term ‘goods’ as used in article 366(12) of the Constitution of India and as defined under the said Act are very wide and include 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. (2001) 4 SCC 593; (2001) 124 STC 59. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. 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 programme 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 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 transaction of 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 programmes have all these attributes.
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 ‘un-branded software’ is concerned, it is undoubtedly intellectual property, but may perhaps be outside the ambit of ‘goods’.”
Mr. Sorabjee submitted that the High Court correctly held that unbranded software was ‘un-doubtedly intellectual property’. Mr. Sorabjee submitted that the High Court fell in error in making a distinction between branded and un-branded 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 used. 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.”
In view of above observations, once the softwares are held to be sold, liable to Sales Tax, the question of attracting Service Tax cannot arise. Normally, branded softwares (off-the-shelf) will be liable to Sales Tax.
The other kind of softwares are customised softwares.
In case of customised software, there can be two situations. A developer can develop the software as per specification of customer as his property.
For example, the developer of software can develop the software as per customer’s specification, but copyright in the software remains with the developer. Subsequently, the developer will transfer the said software to the customer against agreed price. In this case though it is customised software, still it can be said to be sale of the goods. Though the Supreme Court has not directly resolved the above issue in case of Tata Consultancy Services v. State of A.P. and Others, (137 STC 620), there are observations which go to suggest that customised software can also be liable to Sales Tax. The relevant observations are already reproduced above.
Accordingly, the above type of customised software can be liable to Sales Tax. In this respect, reference can also be made to the determination order passed by the Commissioner of Sales Tax, Maharashtra State in case of Mastek Ltd. (DDQ 11-2001/ Adm-5/83/B-7 dated 31-8-2004).
In this case, it was held that though the software was a customised software, since the property in the software belonged to the developer, which was transferred against price, it was a taxable transaction under Sales Tax.
The other way by which customised software can be developed is that the software is developed as a property of the customer. In other words, in this kind of development, the copyright in the software remains with customer right from inception. The customised software is developed as property of the customer and copyright belongs to such customer. In such case, there is no question that the software first belongs to the developer and subsequently transferred to the customer against price. In this case, since the software belonged to the customer itself, there is nothing which the developer can transfer to him. Under above circumstances, the transaction will be that of rendering of software development services. It cannot be liable to Sales Tax and thus it may be liable to Service Tax.
However, the issue about the nature of transaction of software as to sale or service is very delicate. The above is a broad thinking on the subject. There may be various other possibilities. For example, a case may arise about modifying or improving the existing software. The developer in such a case may be providing further modules to already existing software. The module itself may be a kind of software. Under such circumstances, the issue will be whether the charges received by the developer are for sale of software or for rendering of services.
If above situation is tested in the light of earlier discussion, it has to be concluded that providing modules for improving the software is nothing but rendering of services. The module, though prepared separately, has to be merged into existing software to improve it. The existing software is belonging to the customer. Thus by providing module the developer is in effect improving the existing software. There is no question of independent existence of module prepared by developer so as to become ‘goods’ by itself. The charges will be for providing service and not sale of any goods. Thus there can be various kinds of situations. The nature of transaction is required to be ascertained by finding out the copyright status in the software so developed. It is expected that the discussion above will be useful for further deliberations on the issue.
Recent Amendments to Maharashtra VAT Rules
The Government of Maharashtra, vide Notification dated 14th March 2008, has made certain amendments to the Maharashtra VAT Rules, 2005 particularly in Rules 17, 18 and 81, pertaining to filing of returns by the dealers. The Commissioner of Sales Tax has also issued a Notification dated 14th March 2008, whereby certain dealers shall now file e_return for the periods commencing from 1st February 2008 onwards.
The existing return forms have been replaced by new return forms. The Commissioner of Sales Tax has issued a Trade Circular No. 8T of 2008, dated 19th March 2008, explaining above amendments and the procedure to be followed by dealers in respect of payment of taxes and filing of returns. Relevant portion of the Trade Circular is reproduced below for the benefit of our readers:
“(3) Introduction:
The Government, by Notification No. VAT/1507 / CR-94/Taxation-1, dated 14th March 2008, has carried out certain amendments to Rule 17 and Rule 18 of Maharashtra Value Added Tax Rules, 2005 pertaining to filing of return. The amendment also provides for filing of e-return by certain categories of dealers. The rule authorised the Commissioner of Sales Tax to notify the date for mandatory filing of e-return by certain categories of dealers. In pursuance of this delegation the Commissioner of Sales Tax has issued the Notification dated 14th March 2008. It has now been made mandatory for registered dealers whose tax liability in the previous year was Rs.1 crore or more to file returns electronically for the periods starting on or after 1st February 2008.
(4) Electronic filing of returns:
Sub-rule (5) of Rule 17 is substituted. The substituted sub-rule provides for filing of returns electronically. The registered dealer liable to file return electronically should first make the payment of tax along with interest, if any, in chalan 210 in the designated banks. As per the Notification, the registered dealers whose tax liability during the previous year was Rs. one crore or more, shall make payment and file electronic returns as provided in the said sub-rule (5). For the purposes of the Notification, the expression ‘tax liability’ has the same meaning as assigned to it in the Explanation-I to sub-rule (4) of the said Rule 17.
(4.1) These dealers shall file the return electronically in the respective form applicable to them. The templates of new return form are provided on the new website of the Sales Tax Department www.mahavat.gov.in. Every dealer to whom the above Notification applies shall download the relevant template of the form and after making data entry in the relevant field, upload it using his digital signature. The uploading shall be done on or before the due date prescribed for filing of the returns. The system shall generate an acknowledgement in duplicate.
(4.2) However, if the dealer does not have or has not used digital signature, then he shall submit a copy of the acknowledgement duly signed by an authorised person within 10 days from the uploading of the return to the respective authority specified in sub-rule (2). For the time being, if a dealer is with LTU, a copy of the acknowledgement may be submitted to their respective officer of the Large Taxpayers Unit (LTU),who is regularly in liaison with the dealer.
(4.3) To facilitate filing of e-return, detailed guidance note explaining the procedure to file of e- return is placed on the website www.mahavat.gov.in. If any dealer requires further assistance for filing of e-return, he may contact the respective liaison officer who has been assigned for this job. If the dealer requires further assistance in filing e-return, he or his authorised representative may visit respective Sales Tax authorities, wherein he will be guided regarding the e-filing of return. A dedicated help desk is also created in Mazgaon Office to answer the queries pertaining to e-returns. The dealer may contact the help desk at 022-23735621/022-23735816.
(4.4) Since this is the first month for filing of e-return, the dealers may face some difficulties in preparing and uploading the electronic return. Considering the likely difficulties faced by the dealers, a concession is provided only for this month to upload the e-return even after the due date i.e., 21st March 2008, but on or before 31st March 2008. The e-return uploaded up to 31st March 2008 shall not be treated as late, provided the payment of tax as per return is made on or before due date. This concession is applicable only for the first month and for the subsequent period the dealers will remain required to upload the return on or before the due date.
(5) Change in return Forms:
The earlier return Forms 221, 222, 223, 224 and 225 have been replaced with the new returns Forms-231, 232, 233, 234 and 235, respectively. These Forms are made available on the website of the Department (www.mahavat.gov.in and www.vat.maharashtra.gov.in). The dealer can download these Forms from the menu download section of the website. All the returns, including the returns for the earlier period, should now be filed in the aforesaid new return Forms.
(5.1) The new return Forms are applicable to all dealers including those who are not required to file electronic returns. The efforts are being made to make these Forms available at all the locations in the State. However, the dealers except the dealers required to file e-return may file returns in the old Forms 221 to 225. This facility will be available only in the respect of returns which are to be filed before 31st March 2008. Thus, all the returns filed after 1st April 2008 (including the returns for the earlier period, if any) should invariably be in the new return Forms.
(5.2) Another amendment is made to sub-rule (1) and sub-rule (3) of Rule (5) of the Central Sales Tax (Bombay) Rules, 1957 to provide for electronic return. The old return Form IIIB is now replaced by new Form IIIE. Therefore, dealers filing returns on or after 1st February 2008 shall file return in the new Form.
(6) Filing of returns by oil companies:
The first amendment to sub-rule (2) provides that notified oil companies shall file a copy of their return in Form 235 with the Joint Commissioner of Sales Tax (LTU), Mumbai within 3 days of filing of the return in Form 235.
7) Returns of dealers covered by Package Scheme of Incentives:
By this amendment a new procedure is prescribed for certain dealers under Package Scheme of Incentives. The amendment provides that if the dealer holds a certificate of entitlement under any Package Scheme of Incentives except the Power Generation Promotion Policy, 1998, then the dealer shall file return to the registering authority having jurisdiction over the respective place of business of the dealer, in respect of which he holds the certificates of entitlement.
The proviso appended to this clause states that if the deale, ‘has two or more entitlement certificates issued to him, then he shall file the required return with that registering authority which has jurisdiction over the place of business pertaining to the entitlement certificate whose period of entitlement ends later. This return should show aggregate figures of all sales and purchases pertaining to all the eligible units of the dealer. A complimentary amendment is also carried out in Rule 81.
(8) No separate return :
Earlier by clause (c) of sub-rule (2) of Rule 17 certain dealers were permitted to file separate returns for their respective places or constituents of the business. The said Rule is now deleted. Therefore, the permissions granted earlier, if any, stands automatically cancelled.
(9) Yearly return by deemed dealers:
The Explanation to clause (8) of S. 2 defines certain persons and authorities to be deemed dealers. These dealers were required to file return as per the regular periodicity applicable to dealers. By this amendment, it is provided that every dealer to whom the Explanation to clause (8) of S. 2 applies shall file annual return if his tax liability during the previous year is Rs.1 crore or less. The annual return is to be filed within 21 days from the end of the year. However, the facility to file annual return is not automatic. The dealer covered by the Explanation to clause (8) of S. 2 will have to apply to the Joint Commissioner of Sales Tax (Returns) in Mumbai and to the respective Joint Commissioner of Sales Tax (VAT Administration) in the rest of the State to be entitled to file annual return. There is no prescribed format of the application. The annual return can be filed only after the Joint Commissioner of Sales Tax concerned grants the required permission.
10. Change in periodicity for newly registered dealers:
Sub-rule (1) of Rule 18 has been amended. So far newly registered dealers were required to file quarterly returns. It is now provided that these dealers shall file six-monthly returns for the period starting from 1st April 2008.”
