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2015 (11) TMI 328 - KARNATAKA HIGH COURT

2015 (11) TMI 328 - KARNATAKA HIGH COURT - TMI - 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 - .....

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ementation 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. The .....

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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. - STRP No. 215/2011 - Dated:- 18-9-2015 - N. Kumar And B. Manohar, JJ. For the Petitioner : By Prof Ravivarma Kumar, Adv. General, along with Sri K M, Shivayogiswamy, Govt. Adv For the Respondents : Sri Madhavarao, For Smt Vani H, Advs ORDER The revenue has preferred this Revision Petition against the order passed by the Karnataka Appellate Trib .....

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ncluded by the assessing authority by accepting the declared turnover. The reassessment proceedings were initiated by the assessing authority noticing that there was under-assessment in the order concluded on 23.11.2006 and, therefore, passed the re-assessment order on 27.2.2008. The assessee preferred a Writ Petition in W.P.No. 5028/2008 before this Court challenging the re-assessment order. By an order dated 27.3.2008 the Writ Petition was partly allowed by setting aside the re-assessment orde .....

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uthority by its order dated 5.3.2009. Challenging the said order, the assessee preferred a second appeal before the Karnataka Appellate Tribunal in STA No. 943/2009. The Tribunal has passed the impugned order on 9.12.2010 setting aside the order passed by the assessing authority as well as the first Appellate Authority and setting aside the levy of tax on the activities of business consultancy services and Enterprises Re-source Planning software holding that the said activities are pure services .....

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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 - the First Appellate Authority holding that the ERP software implementation and BCS services of the respondent does 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 .....

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e's team of business consultants examine the request of the customers and then conduct Business Process Review (hereinafter for short referred to as 'BPR') under Business Consultancy Services (hereinafter for short referred to as 'BCS') programme, and identify and recommend a suitable ERP (Enterprise Resource Planning) software to the customer. Then the necessary ERP software is purchased by the customer, on the result of the BPR performed by the assessee. The customer purcha .....

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RP implementation service together. When ERP software is purchased by the client such software needs to be installed, integrated and implemented at the client's end. The installation of ERP software is performed by the project implementation team comprising of the personnel of the assessee company, 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. .....

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mplementation, the assessee provides only services and no transfer of property in goods is involved. Service tax on ERP implementation services (which is attracted with effect from 16.5.2008) has been paid on such services. BCS does not involve transfer of property in goods. Service tax is also paid on BCS receipts. In both only the service is provided and these two services involve no transfer of property in goods. 7. Prof. Ravivarma Kumar, the learned Advocate General, relying on clause 2 of t .....

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that the finding recorded by the Tribunal ignoring the specific provision in the agreement is erroneous and requires to be set aside. He further submitted that the agreement for providing service on which reliance is placed by the assessee includes code writing involvement. The said code writing constitutes sale of software which is exigible to tax under the provisions of the Act if the assessee is terming this transaction as services. Further, he pointed out the letter dated 19.06.2008 of the a .....

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nder separate agreements. The deliverable materials are not marketable. They are not goods available in the market. It is client specific and they intend making the Baan ERP functional to meet the requirements of the client. As the ownership of these deliverables vest with the client, in order to see that he does not prevent them from using that knowledge while attending to other clients, these clauses 2.2, 2.21 are entered into. Otherwise, there was no necessity to introduce those clauses. He f .....

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terference. 9. In so far as the argument that they have admitted by their letter 25% represents the sale is concerned, he submits when they were called upon to state what portion of the said consideration relates to the contract in ERP implementation they have answered by saying '25%'. It is not a payment which represents the sale price. The Tribunal on consideration of the entire material on record has recorded a finding of fact that, whether tangible or intangible, there cannot be a sa .....

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s under which the developed software purchased by the client is loaded to the system of the client to install the same. In this process certain codification are made to the client's software, so that the client's system accepts it and that codification is done to the existing system of the client and no new software is developed. It held that software cannot be developed without following the 10 stages as referred to in the written submission of the learned State representative. In the i .....

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cannot be transferred to others nor it can be sold to others. There are a variety of branded software relating to ERP in the market. SAP software is one such. Such software is not designed exclusively for use by a particular type of enterprise/business. Such software is designed to use by a large variety of different types of enterprises. By its very nature such a software needs to be made suitable for use by the concerned purchaser of such software. To do so, the software has built in gaps whic .....

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ng more than fill up those gaps in a branded standard software. The writing up of a code and insertion thereof in the existing gaps in the branded software is all that is done by the assessee's employees in the course of implementation of ERP software. The job description exists of what the assessee is required to do with the software already purchased by the concerned customer. User rights over that software vest in the customer. The codes which the assessee's professionals insert in th .....

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r may purchase and transfer it on to the ERP software already purchased by him. In the instant case, the customer does not have goods in the form of a branded ERP software purchased from the market which is embedded in a tangible medium like a C.D. But unless what the assessee adds or accretes thereto are also having the attributes of goods on the basis of the criteria laid down by the Supreme Court in the case of TATA CONSULTANCY SERVICES VS. STATE OF A.P. reported in (2005) 1 SCC 308, it is in .....

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he customer to anyone else. On the contrary ERP software installed could be deleted at a click of button needs to be considered at this juncture. There is no marketable commodity in existence to be sold and unless such commodity whether tangible or intangible exists there cannot be a sale or works contract. Therefore, they proceeded to set aside the order passed by the lower authorities and granted the relief. 11. In this regard this Court had an occasion to consider almost identical issue in th .....

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to packaged software, where the copyright owned software is put on the media and delivered by way of transfer of right to use, will also be goods and is liable to VAT. In the case of customized software, the customized portion is embedded to the original software so as to become the customized software, the copyright of the entire software including the customized portion is exclusively owned by the developer of the software. Therefore, in both packaged and customized software, where copyright i .....

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he copyright in such software belongs to the customer, as it is developed, and the developer of the software does not retain any copyright in such software. In such a situation, since there is no transfer of property in goods and what is provided is only a pure service, there can be no liability to VAT. The consideration in such cases is liable only to service tax. 26. In the case of Annual Technical Support (ATS), if the agreement of the contract includes the annual maintenance involving both s .....

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software is with the software developer, the implementation process is a pure service rendition and does not involve any transfer of property. If any source coding or scripting is done during the process of implementation, the ownership or copyright or any proprietary right would not vest with the software developer. It works purely as a hired labour. The ownership vests at all point of time with the employer who had issued the assignment. In those circumstances, since there is no transfer of ow .....

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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 .....

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