2021 (3) TMI 186 - HC - VAT and Sales Tax

Service tax or VAT - Sale or service - Information Technology Service - petitioner had availed input tax credit on several goods purchased by the petitioner to pay VAT on sale of Information Technology Products (ITP) but had failed to pay tax on such sale - HELD THAT - Information Technology Software Services was specifically excluded from the definition of Business Auxiliary Services (BAS) in Section 65(19) of the Finance Act, 1994 when the definition of Business Auxiliary Services (BAS) was amended in the year 2003 - In the explanation appended to the definition of Business Auxiliary Services (BAS) in Section 65(19) of the Finance Act, 1994, it was clarified that Information Technology Software Service means any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. Information Technology Software Service was brought within the purview of taxable service with effect from Finance Act No.2 of 2009 with the introduction of Section 65(53a) and Section 65(105)(zzzze) in the Finance Act, 1994 - In 2009 vide Finance (No.2) Act 2009, the definition of taxable service of Information Technology Service in Section 65(105)(zzzze) of the Finance Act, 1994 was tweaked and amended with effect from 16.05.2008. When a software is copied on a CD or magnetic disk or other forms of transmission, a goods come into existence in such media. The sale of such CD or magnetic disk or in other forms of transmission of the software may license the user to use the software therein. However, there is goods which has come into existence and prima facie it appears the petitioner was liable to tax under the provisions of the Tamil Nadu Value Added Tax Act, 2006 - Therefore, it is for the petitioner establish that it was not engaged in sale of IT software of any Media and that it was providing only taxable service of Information Technology Software Service within the meaning of Section 65(105) (zzzze) of the Finance Act,1994. From a reading of the representation of the petitioner, it is clear that the petitioner was prima facie selling software license to its customer in a compact disc or other electronically readable format or through Internet. Such sale permitted the user a license to use the software contained therein - The representation of the petitioner on 3.9.2009 to the Central Excise Department indicates that the clarification was sought for as to whether software license in a compact disc or other electronically readable format or over the Internet, whereby its clients/customers are permitted to use the software for a specified period of time and sale of software licenses attracts VAT under the provisions of the Tamil Nadu Value Added Tax Act, 2006. The petitioner has to independently satisfy the respondent, that the transaction in questions were outside the purview of TN VAT Act 2006 by producing agreements and invoices. It is not answer to the impugned notice issued under Section 27 of the TN VAT Act, 2006 that the petitioner was not liable to tax in view of the letter of the Assistant Commissioner of Central Excise - The petitioner should therefore submit all the agreements signed with its client and invoices raised on its client during the period in dispute before the 2nd respondent and file written submissions before the 2nd respondent and demonstrate on facts how it was not liable to pay tax under the provisions of the Tamil Nadu Value Added Tax Act, 2006 under Entry 68, Part B of the Schedule I to the said Act within period of 45 days from the date of receipt of a copy of this Order. Petition dismissed.

Summary

Issues Involved:
1. Validity of impugned notices under Section 27 of the Tamil Nadu Value Added Tax Act, 2006.
2. Whether the sale of software licenses attracts VAT or Service Tax.
3. Applicability of previous judicial decisions and statutory provisions.

Issue-Wise Detailed Analysis:

Validity of Impugned Notices:
The petitioner challenged the impugned notices issued under Section 27 of the Tamil Nadu Value Added Tax Act, 2006, following a VAT audit conducted on 29.11.2013. The audit revealed that the petitioner had availed input tax credit on goods purchased between 01.08.2009 and 31.03.2014 but failed to pay VAT on the sale of Information Technology Products (ITP). The petitioner argued that they were liable to pay service tax as "Information Technology Service" under Section 65 (105) (zzzze) of the Finance Act, 1994, as amended by Finance (No.2) Act, 2009, and not VAT under the TNVAT Act, 2006. The court, however, emphasized that the petitioner should have sought clarification from the Commercial Tax Department rather than the Assistant Commissioner of Central Excise.

Whether the Sale of Software Licenses Attracts VAT or Service Tax:
The petitioner contended that with the amendment to Section 65(53a) of the Finance Act, 1994, the sale of software licenses was liable to service tax and not VAT. The court noted that "Information Technology Software Services" was specifically excluded from "Business Auxiliary Services" in Section 65(19) of the Finance Act, 1994, and later brought within the purview of taxable service with the introduction of Section 65(53a) and Section 65(105)(zzzze). The court referred to the decision in Tata Consultancy Services vs. State of Andhra Pradesh, where it was held that software programs, once marketed, become goods susceptible to sales tax. The court concluded that the petitioner was prima facie liable to pay VAT under the TNVAT Act, 2006, for the sale of "IT software of any media."

Applicability of Previous Judicial Decisions and Statutory Provisions:
The petitioner relied on various judicial decisions, including Infotech Software Dealers Association vs. Union of India, Sasken Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes, and The State of Karnataka vs. IBM India Private Limited, to support their claim that the transaction was liable to service tax. The court, however, distinguished these cases based on facts and emphasized that the petitioner must independently satisfy the respondent that the transactions were outside the purview of the TNVAT Act, 2006. The court also referred to the decision in Tata Consultancy Services, which held that software programs, when marketed, become goods susceptible to sales tax.

Conclusion:
The court dismissed the writ petitions, stating that the petitioner should submit all agreements and invoices to the 2nd respondent and demonstrate how it was not liable to pay tax under the TNVAT Act, 2006. The 2nd respondent was directed to consider the petitioner's representation and pass appropriate orders on merits within six months. The court clarified that no finding of facts was rendered in the order, and the observations were made only to conclude that the petitioner had not made out a case for interference with the reassessment proceedings.