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2015 (9) TMI 738 - HC - VAT and Sales TaxConstitutional 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.
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