2022 (3) TMI 1313 - HC - VAT and Sales Tax

Levy of tax - renewal of software licences - whether renewal of the license has the characteristics of sale or not? - demand under Section 39(1) of the Act - levy of interest and penalty as well - HELD THAT - The software licences are taxable as per Entry 34 of the III Schedule to the Act. The stance of the department that the respondent has effected transfer of right to use the software as paid subscription, hence liable to tax under the provisions of the VAT Act, cannot be countenanced in view of the amendment brought to Section 65(105)(zzzze) with effect from 16.5.2008 which has been considered in the judgment of this Court in SASKEN COMMUNICATION TECHNOLOGIES LTD. VERSUS JOINT COMMISSIONER OF COMMERCIAL TAXES (APPEALS) -3 BANGALORE 2011 (4) TMI 566 - KARNATAKA HIGH COURT . In the case of Bharath Sanchar Nigam Limited and another v. Union of India and others, 2006 (3) TMI 1 - SUPREME COURT , the Hon ble Apex Court has considered the mutual exclusivity reflected in Article 246(1) of the Constitution and has held that sales tax and the service tax are mutually exclusive of each other. The reasoning of the authorities that the original software which was sold was still the property of the respondent and later versions developed or upgraded are also software which is again transacted by allowing access to the customers for a consideration and hence, the transaction is transfer of right to use the upgraded version of the said software by renewal of licence, is wholly misconceived. The renewal of software licences are not routed through the respondent - Once the original software is sold, the same would not continue to be the property of the respondent. The post sale activity relating to renewal of software licence is directly from the foreign vendors to the end customers electronically through e-mail. Thus, the service tax collected on this transaction of renewal of software licence at 10.30% and remitted to the Central Government cannot be construed as transfer of right to use the goods, more particularly, when the goods are not available with the respondent. When the original goods are not available with the respondent, the aspect theory and the divisibility of the contract in furtherance of deemed sale as envisaged under Article 366 (29-A) of the Constitution, is only a myth and is not valid in the eye of law - Sales Tax Revision Petition stands dismissed.

Summary

Issues:
Challenge to reassessment of tax on renewal of software licenses under the Karnataka Value Added Tax Act, 2003.

Detailed Analysis:
Issue 1: Challenge to reassessment of tax on renewal of software licenses
The State of Karnataka filed a Sales Tax Revision Petition challenging the Karnataka Appellate Tribunal's order regarding the reassessment of tax on the turnover related to the renewal of software licenses for the period April 2009 to March 2011. The respondent, a dealer engaged in trading computer software and hardware, had paid tax on software licenses sales but not on renewals. The assessing authority reassessed the respondent, levying tax, interest, and penalty. The Tribunal allowed the respondent's appeals, setting aside the reassessment orders, leading to the State raising the question of law on whether the renewal of software licenses is taxable under the KVAT Act.

Issue 1 Analysis:
The State argued that renewal of software licenses is akin to the sale of goods and should be taxable under the Act as deemed sales. The respondent contended that since the transaction was subject to service tax under the Service Tax Act, it should not be considered a transfer of right to use goods for VAT taxation. The Court examined the nature of the transaction involving anti-virus software and renewal of licenses, noting that the renewal involved service tax invoices. It referred to relevant provisions of the Finance Act, 1994, and previous judgments to determine the taxability of software licenses and renewals.

Issue 1 Conclusion:
The Court found that the renewal of software licenses did not constitute a transfer of right to use goods under the VAT Act, especially when the original goods were not available with the respondent. It emphasized the distinctiveness of sales tax and service tax, citing the mutual exclusivity principle. The Court dismissed the Sales Tax Revision Petition, ruling in favor of the assessee and against the revenue, confirming the Tribunal's decision.