2011 (4) TMI 566 - HC - Service Tax

Information Technology Software services. - Business of software development and export - software services - Value added tax under KVAT - Works contract - Held that - The contracts in question are not works contract but contract for service simplicitor. In other words it is not a composite contract, consisting of contract of service and contract of sale of goods. It is an indivisible contract of service only. - The tax paid by the assessee in pursuance of the interim order passed in the writ petitions is ordered to be refunded to the assessee as it is declared that the assessee is not liable to pay any sales tax at all on the consideration received under the contract. - Decided in favor of assessee.

Issues Involved:
1. Whether the contract for software development constitutes a "works contract" and if the software developed is deemed to be a sale under Article 366(29A)(b) of the Constitution of India.
2. The applicability of sales tax on software development contracts.
3. The distinction between service contracts and works contracts in the context of software development.
4. The jurisdiction and competence of the State Legislature to levy sales tax on transactions already subjected to service tax under Central legislation.
5. The relevance and applicability of alternative remedies in challenging the assessment orders.

Issue-wise Detailed Analysis:

1. Whether the contract for software development constitutes a "works contract" and if the software developed is deemed to be a sale under Article 366(29A)(b) of the Constitution of India:
The court examined whether the software development contracts fall within the scope of a "works contract" as defined under the Karnataka Value Added Tax Act, 2003. The assessing authority's view was that the software development involved the sale of intangible goods, thereby constituting a works contract. However, the court found that the contracts were primarily for rendering services, with no element of sale involved. The software developed was the exclusive property of the customer from the inception, and the consideration paid was for the service rendered based on time or man-hours, not for any sale of goods. The court concluded that the contracts in question were service contracts and not works contracts, thus not attracting sales tax.

2. The applicability of sales tax on software development contracts:
The court analyzed the nature of the software development contracts and found that they did not involve the sale of any goods. The software developed was specific to the client's requirements and remained the client's property throughout the contract period. The court held that the consideration paid was for the service rendered, and there was no element of sale involved. Therefore, the imposition of sales tax on such contracts was deemed inappropriate and contrary to the material on record and constitutional provisions.

3. The distinction between service contracts and works contracts in the context of software development:
The court emphasized the need to distinguish between service contracts and works contracts. It noted that in a service contract, the primary objective is to render a service, whereas a works contract involves both service and the transfer of goods. The court found that the software development contracts were service contracts as the primary objective was to render a service, and there was no transfer of goods involved. The software developed was the client's property from the beginning, and the consideration paid was for the service rendered, not for any sale of goods.

4. The jurisdiction and competence of the State Legislature to levy sales tax on transactions already subjected to service tax under Central legislation:
The court highlighted that the Parliament has exclusive power to make laws with respect to any matter not enumerated in the Concurrent List or State List, including the imposition of service tax. The court noted that the software development contracts were already subjected to service tax under the Finance Act, 1994. It held that once the Parliament has made a law dealing with a particular aspect of service, the State Legislature cannot levy sales tax on the same transaction under the guise of it involving the sale of goods. The court concluded that the State Legislature had no jurisdiction to levy sales tax on the software development contracts, which were already subjected to service tax.

5. The relevance and applicability of alternative remedies in challenging the assessment orders:
The court acknowledged that normally, when a statute provides an alternative remedy by way of an appeal, the court declines to entertain a writ petition against such assessment orders. However, it noted that in cases involving the interpretation of constitutional provisions and where the authorities have already interpreted these provisions in a particular manner, approaching the appellate forum would make no difference. The court held that the issues raised in the case required interpretation by the court and had broader implications for similarly placed assessees in the State. Therefore, it decided to entertain the writ appeals despite the availability of alternative remedies.

Conclusion:
The court allowed the writ appeals, holding that the contracts in question were service contracts and not works contracts. It set aside the impugned order passed by the learned Single Judge and the assessment orders levying sales tax. The court ordered the refund of the tax paid by the assessee with interest, as the assessee was not liable to pay any sales tax on the consideration received under the contract.

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