2015 (11) TMI 328 - HC - VAT and Sales Tax

Levy of VAT - transfer of goods or not - integration process of the developed ERP software is undertaken by the assessee by deputing ERP implementation team to render ERP implementation service - tribunal observed that activities of business consultancy services and implementation of the Enterprises Re-source Planning software as pure services not involving any sale of goods or any transfer of property in goods in the execution of works contract - Held that - Integration process of the developed ERP software is undertaken by the assessee by deputing ERP implementation team to render ERP implementation service. What this team does is, they install the ERP software, integrate it and implement at the client s end. This implementation is performed not only by the assessee s personnel but also along with the employees of the client. The members of the ERP Software implementation team of the assessee play various roles in the ERP software implementation process depending on their skills. The team with the skill ensures that the ERP software is appropriately integrated in the system of the client. In the process the experts will take all necessary steps to provide functional data for the installation of the ERP software and it becomes useful for the client. In the process there is no transfer of any goods involved. Unless the goods is in existence and deliverable so that the right in the goods is transferred, VAT is not attracted. There is no marketable commodity in existence to be sold. Unless such a commodity, whether tangible or intangible, exists there cannot be a sale. The entire consideration received for providing services to the client have been subjected to service tax. Therefore, no portion of the consideration received could be attributed to sale of the software. Therefore, the finding recorded by the Tribunal is based on legal evidence and supported by the legal position as declared by the Apex Court in several judgments referred to in the order. In that view of the matter, we do not see any merits in this revision petition - Decided against Revenue.

Issues Involved:
1. Whether the Karnataka Appellate Tribunal is justified in finding that ERP software implementation services and business consultancy services do not involve any transfer of property in goods and cannot be considered as sale or deemed sale in the course of execution of works contract.
2. Whether the Karnataka Appellate Tribunal is right in setting aside the orders passed by the Assessing Authority and the First Appellate Authority, holding that the ERP software implementation and BCS services do not fall within the ambit of "sale" as defined under the KST Act.
3. Whether the services of software developed as per the requirements of the customers on the basic software constitute the development of software or not.

Detailed Analysis:

1. Justification of Tribunal's Finding on ERP Software Implementation and Business Consultancy Services:
The Tribunal concluded that the activities of business consultancy services (BCS) and ERP software implementation do not involve any sale of goods or transfer of property in goods. The Tribunal's decision was based on the nature of the services provided by the assessee, which involved examining customer requests, conducting Business Process Review (BPR), recommending suitable ERP software, and implementing it if requested by the customer. The ERP software was purchased by the customer from a vendor, and the assessee's role was limited to providing implementation services. The Tribunal found that these services did not constitute a sale or deemed sale under the KST Act, as no new software was developed, and the implementation process was purely a service contract.

2. Setting Aside Orders by Assessing Authority and First Appellate Authority:
The Tribunal set aside the orders of the Assessing Authority and the First Appellate Authority, which had levied tax on the ERP implementation and BCS services. The Tribunal held that the ERP implementation process involved configuring the client's existing software without developing new software. The Tribunal referenced the judgment of the CESTAT and the Supreme Court, which affirmed that the consideration received for providing these services was subject to service tax and not VAT. The Tribunal emphasized that the ERP implementation process did not involve the creation of marketable goods, and the deliverable materials were client-specific and not commercially available software.

3. Development of Software as per Customer Requirements:
The Tribunal addressed the argument that the assessee was involved in the development of software, as indicated by a letter stating that 25% of the work in ERP implementation constituted software development. The Tribunal clarified that this percentage did not represent a sale price but rather the portion of the contract related to ERP implementation. The Tribunal cited the Supreme Court's criteria in the TATA CONSULTANCY SERVICES case, which stated that for a works contract involving the transfer of property in goods to exist, there must be a marketable commodity. The Tribunal found that the ERP implementation process did not result in the creation of such a commodity, as the instructions added by the assessee were not independently marketable or transferable.

Conclusion:
The Tribunal's decision was supported by legal evidence and aligned with the legal position declared by the Apex Court. The Tribunal found that the ERP implementation and BCS services provided by the assessee were pure services and did not involve any transfer of property in goods. Consequently, the Tribunal set aside the orders of the lower authorities and granted relief to the assessee. The High Court upheld the Tribunal's findings, dismissing the revision petition and answering the questions of law in favor of the assessee and against the revenue. The High Court also noted that the entire consideration received for the services was subject to service tax, and no portion could be attributed to the sale of software.

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