STATE OF KERALA Vs. MUZIRIS SOFTECH (P) LTD.

JUDGEMENT

(1.) The revisions are with respect to assessment years 2006-07 and 2007-08. The assessee is a software developer, who submitted their returns for the relevant assessment years. The Intelligence Officer issued notice on the ground that the assessee has not included the consultancy charges and the amounts received for annual maintenance contract (AMC) in the relevant assessment years. The Intelligence Officer also relied on a clarification issued by the Commissioner of Commercial Taxes, wherein it was held that if the agreement executed is inclusive of the consultancy charges, it will form part of the taxable turnover. The books of accounts and agreements were verified to find that both the components have to be included in the sales turnover, which the assessee failed to do. The assessee took the contention that the software was sold for a particular price and the consultancy services are with respect to the modifications made in the software to adapt it to the purchaser's requirements. Such adaptation made in the software involved only labour of IT professionals and there is no sale of goods. The AMC also is with respect to the repair, maintenance or modifications made in the software after the sale, which again involves only labour and no transfer of property in goods. The work carried on in the software sold to the purchaser is customization as per the requirement of the purchaser.

(2.) The Intelligence Officer found that the price quoted as also the agreement executed is a composite one for the software and the customization carried out. The dominant object was the sale of the software with the customization incorporated in the Compact Disc (CD), which contains the software. Only a meagre amount was conceded as price of software and the lion's share was shown as consultancy charges, thus disclosing a willful intention to evade tax. Penalty was imposed at double the tax sought to be evaded, at the maximum, in both the assessment years.

(3.) In appeal, the first appellate authority extracted the contentions of both sides and relied on Gannon Dunkerley and Co. v. State of Rajasthan [(1993) 1 SCC 364] to remand the matter for fresh consideration. The Tribunal, without any discussion, affirmed the order of the first appellate authority, in an appeal filed by the State. The State is before us seeking reversal of the orders of both the appellate authorities on the ground of total absence of application of mind by both the appellate authorities. The question of law raised is also specifically on the lack of application of mind with reference to the law on the subject and the facts coming out from the records as to the nature of the transaction.