Goods Vis-À-Vis Intellectual Service

Introduction

Under
Sales Tax Laws tax could be levied on sale/purchase of goods. The term ‘goods’
is defined in the Constitution and it is also normally defined in the State
Sales Tax Laws. For example, the definition of ‘goods’ under MVAT Act is as
under in section 2(12):

“(12)
“goods” means every kind of movable property not being newspapers, actionable
claims, money, stocks, shares, securities or lottery tickets and includes live
stocks, growing crop, grass and trees and plants including the produce thereof
including property in such goods attached to or forming part of the land which
are agreed to be severed before sale or under the contract of sale;”

This
term is also discussed and interpreted in various judgements. The landmark
judgement is in case of Tata Consultancy Service (137 STC 620)(SC).
Regarding ‘goods’, Hon. Supreme Court has observed as under:

“17.
Thus this Court has held that the term ‘goods’, for the purposes of sales tax,
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 sale tax. The submission of Mr. Sorabjee that this authority is not of any
assistance as a software is different from electricity and that software is
intellectual incorporeal property whereas electricity is not, cannot be
accepted. In India the test, to determine whether a property is ‘goods’, for
purposes of sales tax, is not whether the property is tangible or intangible or
incorporeal. The test is whether the concerned, item is 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 un-canned, all of these are possible.”

Inspite
of Supreme Court’s interpretation of the term ‘goods’ still the controversies
keep up coming from time to time.

Judgement of Tribunal in case of Sungrace Engineering Projects Pvt. Ltd.
(Second Appeal No.198 of 2015 dt.2.9.2016). 

Hon.
Maharashtra Sales Tax Tribunal had an occasion to deal with similar issue in
above judgment. 

Facts

The
facts are narrated by Tribunal as under:

“Appellant
is a Private Limited Company carrying on the business of sale of software,
conducting surveys, preparing reports and consultancy in various fields.
Appellant is duly registered under B.S.T. Act. Company is assessed under
Section 33 for the period 01/04/1999 to 31/03/2000 on 07/08/2002. Assessment
had resulted in Nil tax demand. Later on, the Deputy Commissioner of Sales Tax
(Adm.) M-61, Pune Division, Pune (in brief, “The Revision Authority”) took
this case for revision u/s. 57 of BST Act after noticing that, professional
receipts shown in the balance-sheet worth Rs.1,13,23,186/- are received on
account of sale of technical know-how i.e. preparing lay outs, surveys and
submitting report to the customers, Government which according to Revisional Authority
is one of the types of transfer of knowledge or transfer of technology; that
falls within the purview of Schedule entry C-I-26 (7) of the B.S.T. Act.
Technical know-how is taxable @ 4%. Assessing Authority failed to levy tax on
Rs.1,13,23,186/-.”

In
course of argument, appellant further elaborated the facts as under:

“4. On
merits of the case, Mr. Gandhi, Ld. Chartered Accountant further, explained
that appellant has collected amount of Rs.1,13,23,186/- stated above from
different Government Authorities and Private Agencies. The nature of services
rendered is mainly preparation of designs, drawings of all components of dam
under Maharashtra Krishna Valley Development Corporation in brief, ”MKVDC “) of
irrigation projects, consultancy services for survey of pipe lines alignments,
soil investigation, consultancy services for survey preparing financial
estimates, preparing reports including detail designs and drawings as mutually
agreed between the parties. Major work is done as a contractor client to the
Executive Engineer, Irrigation Department of Government of Maharashtra, and
there are some sub-contracts regarding government works but done on behalf of
other private parties. He further, explained that by no stretch of imagination,
the nature of work conducted by the appellant can be termed “sale of technical
know-how,” as prescribed in entry C-I-26(7) of the B.S.T. Act. He further,
explained that running bills clearly explains what was the nature of work done.
According to him, the Revision Authority and the First Appellate Authority have
wrongly held that the transactions were in the nature of sale of technical
know-how by applying one or two criteria without confirming that the
transactions confirm all necessary ingredients is illegal or cannot be sustained.
The said condition is as below:-

“All
the studies layouts, drawings, design notes which have been submitted to the
Maharashtra Krishna Valley Development Corporation shall become the absolute
property of MKVDC under the Copyright Act and the consultant shall not use the
same in whole or part thereof elsewhere for any purpose without explicit
written permission from MKVDC.”

The
department reiterated the contentions as per revision order and further relied
upon the judgement of Tribunal in case of I. W. Technologies Pvt. Ltd.
vs. The State of Maharashtra (SA No.429 of 2004, decided on 22/10/2008).

Hon.
Tribunal considered the arguments of both the sides and also referred to entry
C-I-26 of the BST Act and held
as under:

“9.  Heading of the said entry itself clearly
states that the goods are incorporeal or intangible characters are covered
under this entry, then question before us is whether the services rendered by
appellant are goods of intangible nature. We have to see the authorities referred
from both sides. M/s I.W. Technologies Pvt. Ltd. (cited supra).
The dealer was carrying on the business of selling water purification systems
and components and parts thereof. It used to undertake engineering and
consultancy services. It undertook work from M/s. Sudarshan Chemical Industries
Ltd. for upgrading their Effluent Water Treatment Plant at Roha. M/s. Sudarshan
Chemical Industries Ltd. carried out the work with their contractor as per
models, designs, drawings, specifications of civil works, electrical works
under the guidance and technical knowledge of M/s I.W. Technologies Ltd.
Therefore, it was held that there was sale of technical know-how. But in the
present case, surveys and reports, designs, drawings of the dam and the
irrigation projects are prepared as per specifications provided by the
employer. Appellant prepared reports, drawings, designs, etc., with the
help of their technical expertise in the field.

10.  The tender condition mentioned above, and
relying on the same departmental authorities levied tax as property is covered
under Copyright Act, there is sale of “Copy right .”

11.  Provision under Copyright Act, in section
17(d) it is prescribed that-

Section
17. “Subject to provisions of this Act the author of work shall be the first
owner of the Copyright therein provided that

(a) to
(c) not relevant

(d) in
the case of Government work, Government shall in the absence of contract to the
contrary be the first owner of the Copyright therein.”

In
view of this provision it is clear that whatever work, done by the appellant,
was owned by the Government and therefore there was no question of sale of
technical know-how.

Observing
as above Hon. Tribunal held that the levy of tax is not sustainable as it is
not sale of goods but rendering of services. Tribunal set aside the revision
order.

Conclusion     

The
judgement throws light on the nature of “goods”. Normally, the goods are first
produced and then delivered. However, when the transaction is for intellectual
service which is also not transferable to other parties, it will amount to
service and not goods. The judgement will be useful for making distinction
between goods and intellectual service.