Referring to the decision of the Supreme Court in Commissioner of Service Tax, Delhi v. Quick Heal Technologies Limited [(2023) 5 SCC 469], the Kerala High Court reversed the decision of the Sales Tax Tribunal in deleting the penalty imposed upon the assessee and held that charges collected from the customer cannot escape the levy of sales tax under the KGST Act simply because the software was transferred to a particular customer as per customization.

A Single Judge Bench of Justice Mohammed Nias C.P observed that “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”.

The mere fact that it was customized for a particular user did not lead to the software ceasing to be goods for purposes of levy of sales tax, added the Bench.

Government Pleader Mohammed Rafiq appeared for the Revisionist Petitioner, whereas Advocate C.M Andrews appeared for the Respondent.

The brief facts of the case were that the respondent (assessee) was doing business in software. During the relevant period, computer software attracted tax @ 4% ad valorem in terms of Entry 56A of the First Schedule to the Kerala General Sales Tax Act [KGST Act]. The respondent had not taken any registration in respect of the sale of software affected by it, for it was under the impression that the tax liability in respect of the activity of developing and supply of customized software to its clients would only attract the levy of service tax and not sales tax. For not taking out the necessary registration under the KGST Act and paying tax in respect of the sale of customized software to its clients, penalty proposals were initiated by the Sales Tax Department. Since the Tribunal also confirmed the penalty, the respondent approached the High Court, which remitted the matter back to the Tribunal for a de novo consideration on merits. In the de novo proceedings, the Tribunal found in favour of the respondent both on the aspect of the liability of sales tax on customized software as also on website development charges charged by the assessee on its customers. On finding that the assessments done against the assessee in respect of the said charges was not legally sustainable, the Tribunal deleted the penalty. Hence, the Revenue Department approached the High Court.

After considering the submission, the Bench noted that since the very issue of taxability of customized software under the KGST Act was in a state of flux as, during the relevant time, there was an ambiguity that prevailed in the trade as to whether it was service tax or sales tax that would be payable on the supply of customized software to clients, and further on account of the several rounds of litigation that ensued whereby the adjudicating authorities including the Appellate Tribunal found in favour of the assessee there is sufficient cause for deleting the penalty imposed on the assessee in the instant cases.

As is well settled, the Bench elaborated that penalty under a taxing Statute is normally levied for willful suppression or other like contumacious conduct on the part of the assessee in evading tax that is due to the Government.

“In a case like this, we cannot find the assessee guilty of any contumacious conduct that would warrant the imposition of a penalty on it”, added the Bench.

The High Court clarified that even customized software will satisfy the definition of 'goods', observing 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 purposes of levy of tax”, added the Court.

Cause Title: State of Kerala v. V.C Vinod

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Kerala High CourtJustice Mohammed Nias C.P

Pankaj Bajpai