2015 (9) TMI 738 - HC - VAT and Sales Tax

Constitutional validity of levy of VAT on pure services like implementation, customization and other support services in respect of software - legislative competence - Karnataka Value Added Tax Act, 2003 - packaged software Finacle a banking solution - Scope of the work i.e. Project management of the pilot project, initial systems study to understand Bank s requirements, core team education for a team of up to 25 members of bank s core team and installation of software at the Data Centre. The pilot implementation phase shall be deemed to be complete when software shall Go Live in Data Centre and 15 number of branches. Held that - in the instant case, as is clear from the invoice at Annexure-1, the price paid is for the customized Finacle software. The Annual Technical Support commences from the date of first branch GO LIVE. ATS fees specified is valid for 3 years from the effective date of the agreement and is subject to review thereafter. The contract also includes pilot implementation fees which is calculated for 2500 man days of customized efforts. Separate fee is also charged for core team education fee. This training fee includes the charges for two executive appreciation programme and one audit training. Professional services outside the scope of the agreed implementation can also be availed by the customer as per the assessee s professional services mentioned in the agreement. It is stated that, before pilot implementation programme commences, there should be installation of software. Therefore, the implementation of programme starts only after the installation of software which is the goods which is transferred under the agreement i.e., the customized copyrighted article finacle of the assessee. As only after the supply of packaged and customized software, service is required to integrate the system to make the software functional or useable under the contract if that function is also entrusted to the assessee, the assessee renders services for implementation of the project. It is in the nature of post sale activity. As there is no transfer of any goods at the time of implementation of the project, there is no direct sale or deemed sale. It is in the nature of service simplicitor. Therefore, irrespective of the timing of the contract and the payment of the money as consideration of the contract, even if it includes consideration for implementation of the project, the said payment is for post sale activity and it is for service to be rendered to integrate the system and implement the project. No VAT is required to be paid on this aspect. Though there is one composite contract, it is in different parts - one part deals with the contract of sale of customized software and another deals with the services to be rendered for implementation. Yet another agreement speaks about the technical service which is in the nature of a works contract. The assessee has paid VAT on the contract for sale of customized software. The assessee has also paid VAT in respect of the goods aspect in the works contract. Whereas the service contract does not involve sale of goods nor it is exclusively a contract for sale of goods but on the contrary it is an exclusive contract for rendering service. The contract for implementation, which is nothing but a service contract, is not liable to VAT. In view of the provisions contained in the Finance Act, 1994, contract for implementation specifically falls within the definition of service and is taxed, as such, under the said law. The same activity cannot be taxed under VAT, as rightly contended by the learned Counsel for Union of India. In that view of the matter, the order passed by the Assessing Authority is unsustainable. Accordingly, it is hereby set aside. - Decided in favor of assessee.

Summary

Issues Involved:
1. Validity of reassessment order and demand notice.
2. Constitutional validity of Section 3 of the Karnataka Value Added Tax Act, 2003, and Section 65 (105) (zzzze) of the Finance Act, 1994.
3. Taxability of implementation, customization, and other support services under VAT and service tax.
4. Refund of service tax paid by the petitioner.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Order and Demand Notice:
The petitioner challenged the reassessment order and demand notice issued under the Karnataka Value Added Tax (KVAT) Act, 2003, claiming that the reassessment was based on an incorrect interpretation of the nature of their services. The petitioner argued that the implementation of software, customization, and other support services are pure services and should not be subjected to VAT. The court examined the nature of the transactions and concluded that the implementation services provided by the petitioner do not involve any transfer of property in goods, and thus, are not liable to VAT under the KVAT Act. The reassessment order and demand notice were set aside.

2. Constitutional Validity of Section 3 of the Karnataka Value Added Tax Act, 2003, and Section 65 (105) (zzzze) of the Finance Act, 1994:
The petitioner sought a declaration that Section 3 of the KVAT Act and Section 65 (105) (zzzze) of the Finance Act, 1994, to the extent they seek to levy tax on pure services, are ultra vires Articles 246 and 265 of the Constitution of India. However, the court did not address the constitutional validity of these provisions as no arguments were presented on this issue. The court focused on the interpretation of the statutory provisions and concluded that the implementation services are not subject to VAT.

3. Taxability of Implementation, Customization, and Other Support Services under VAT and Service Tax:
The court analyzed the nature of the services provided by the petitioner, including the development, customization, and implementation of software. It was established that the petitioner owns the copyright to the software and provides a license for its use to the customers. The court distinguished between the sale of customized software, which is subject to VAT, and the implementation services, which are pure services and subject to service tax. The court relied on the definition of "goods" under Article 366(12) of the Constitution and the relevant provisions of the Finance Act, 1994, which classify implementation services as declared services and subject to service tax. The court concluded that the implementation services provided by the petitioner are post-sale activities and do not involve any transfer of property in goods, and thus, are not subject to VAT.

4. Refund of Service Tax Paid by the Petitioner:
The petitioner sought a refund of the service tax paid on the implementation services. The court held that since the implementation services are classified as declared services under the Finance Act, 1994, and are subject to service tax, the petitioner is not entitled to a refund of the service tax paid. The court directed the respondents to refund the amounts deposited by the petitioner pursuant to the interim order.

Conclusion:
The court allowed the writ petitions, setting aside the reassessment order and demand notice to the extent they levied VAT on the implementation services. The court clarified that the petitioner is not liable to pay VAT on the implementation services, which are post-sale activities and classified as declared services under the Finance Act, 1994. The petitioner was directed to file a regular appeal on other issues not dealt with in the writ petitions within 30 days, and the appellate authority was instructed to decide those issues on merits without considering the question of limitation. The court ordered the refund of amounts deposited by the petitioner in compliance with the interim order.