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TMI Blog2023 (12) TMI 838X X X X Extracts X X X X X X X X Extracts X X X X ..... f Commercial Taxes [2012 (ST2) GJX 0659 KAR] which directly and squarely apply to the facts and circumstances of the present case? (3) Whether the Tribunal, being the last fact-finding authority, erred in not taking into account the Affidavit dated 18.12.2014 as relevant evidence of conduct of the parties to the Agreement dated 1.1.2006 and to determine the nature of the services and the work performed thereunder to arrive at the correct factual position of the activity performed by the Appellant? (4) Whether the services provided by the Appellants to M/s. QAD India Private Limited under the Agreement dated 1 January 2006 for removing or fixing of bug/error within the basic software, which is in the nature of repair of the basic software, amounts to development/enhancement/customization of the existing software? 2. Appellant is engaged in providing services relating to repair and maintenance of software. Appellant holds Service Tax Registration bearing No. AAACO2461JST001. Appellant is also registered under the provisions of the Maharashtra Value Added Tax Act, 2002 (the MVAT Act) bearing TIN 27120364214V. 3. Appellant had executed an agreement with one QAD India Private L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at services provided by appellant to QAD are subject to VAT. 7. Impugning this order of Commissioner, appellant preferred an appeal before the Maharashtra Sales Tax Tribunal at Mumbai (the Tribunal). It was appellant's case that services provided by appellant to QAD cannot be construed as sale under the MVAT Act and no VAT should be applicable on the same. The appeal was rejected by the impugned order dated 3rd February 2015. The Tribunal also concluded, relying on various judgments and in particular in the case of Mastek Ltd. V/s. State of Maharashtra 2013-(ST1)-GJX-0239-ST MAH decided by the Tribunal on 15th March 2013, that the service rendered by appellant under the agreement with QAD would amount to sale under the provisions of Section 2(24) of the MVAT Act. 8. The Tribunal of course has accepted that when the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. The agreement in the case at hand is the agreement dated 1st January 2006 entered into between appellant and QAD. Therefore, the issue in the present case is whether the agreement dated 1st January 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a particular kind of mathematical formula is required to be inserted. The customer is not aware of the mathematical formula and this is provided by the qualified personnel to whom the work is entrusted. In this, using an application of a particular module, say Macros, to train Microsoft Excel for a particular need or a stepby- step process to get the desired report, may be viewed comparable to services of appellant, i.e., to remove bugs and make the software suitable for use by the concerned purchaser so that the existing ERP system developed by QAD delivers what is expected out of it for the end customer. Such work does not tantamount to development of new version of the software. 10. Mr. Shroff submitted as under : (a) Under the agreement entered into between appellant and QAD, appellant is merely required to provide its manpower to render services of maintenance and support of the said ERP. Under this agreement, appellant had been outsourced to provide support (that included fixing various bugs that might occur). Whenever the customer in India, who operates the base software (MFG/PRO) has some problem with the operation of the said software, a complaint is lodged with QAD, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h software developed/programed. The Karnataka Sales Tax Tribunal in the case of IBM India Private Limited, Bangalore V/s. State of Karnataka (2010) ST1 GJX 0761 T KAR has held that adding lines of codes into the ERP at places where the ERP software permits such additions/modifications to be made were not held to be software. Similarly, in the present case, the technical services provided by appellant to QAD, i.e., adding of lines of code within the base software itself to fix bug/error, would not amount to software or sale of software; (d) The lines of code, although added does not alter the character of the base software and it does not acquire any new form and as the instructions/lines of code added by appellant to the base software are not capable independently of being possessed, marketed or transferred to anyone else, it cannot be termed or treated as "software". Hence, in the present case the process of developing software does not take place; (e) Since no software is coming into existence, there cannot be transfer of the same. Hence, there are no goods which get sold; (f) The Hon'ble Supreme Court of India in the case of Vikas Sales Corporation V/s. Commissioner of Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 2007 (ST3) GJX 0247 ST MAH it was held that when intellectual services are rendered in the form of corrective actions to restore the original functionality, it is purely a service contract and is not exigible to tax under Sales Tax laws. In the present case, the intellectual services are provided by appellant to QAD technicians in the form of lines of codes/commands within the base software itself to remove a bug/error which does not qualify as "goods" as the same is not put on a medium for sale. Even if software/"good" is created it does not belong to appellant. The Commissioner has grossly erred in assuming that there is a transfer of intellectual property by appellant to QAD. Even if it is assumed that the goods come into existence, still there will be no liability of appellant; (i) Clause 4 of the agreement executed between appellant and QAD is reproduced below for ease of reference : Clause 4 - Ownership of work All rights of ownership in all materials, products and work produced and/or provided by AOI or its employees, including the rights to ideas or inventions and rights under patent, copyright, trademark, trade secret and other applicable laws for services pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellectual property rights in the course of rendering services. The Tribunal failed to appreciate that Clause 4 is restricted in its operation "for services performed under any works statement" and the expression "shall be deemed works made for higher of services performed hereunder" which clearly shows that the agreement is a contract for services and that the said Clause has been inserted to put potential dispute, if any, to rest and out of abundant precaution between the parties. But Clause 4 does not have the effect of changing the basic structure of the agreement. To further substantiate the above view, reference can be made to the judgment pronounced by the Karnataka High Court in the case of Sasken Communication Technologies Limited V/s. Joint Commissioner of Commercial Taxes (Appeals)-3 Bangalore and Anr. 2012 (ST2) GJX 0659 KAR wherein the Karnataka High Court held that in case the assesse had, even before development of software, given up all rights and claims of software to be developed and had expressly agreed that such a software which may come into existence at the end of contract period was absolute property of customer, such a contract did not indicate a sale of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for development, enhancement and customization is an agreement to sell and purchase of software, which would come into existence by employing the skill of employee of appellant. Since the agreement is for sale and purchase of modified, developed and customized software, the Tribunal was right in holding that the transaction would fall within the meaning of Section 2(24) of the MVAT Act; (e) As rightly stated by the Tribunal, the entire subject matter as to whether there is a sale under the provisions of MVAT Act would depend on the terms and conditions of the agreement dated 1st January 2006. 12. Let us examine the provisions of the agreement which read as under : xxxxxxxxxxxxx WHEREAS, QAD desires to obtain services and AOI agrees to provide these services in accordance with Work Statements (substantially in the form of Exhibit A) that QAD and AOI may enter into subject to this Agreement. THEREFORE, in consideration of the terms and conditions set forth in this Agreement, QAD and AOI agree as follows : 1.0 Services - 1.1. AOI agrees to provide to QAD its employees as expressly requested by QAD under and identified in the attached Work Statements to perform the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perfect the rights set forth in this Section. Upon the completion of services under any Work Statement and subject to full payment due and payable to QAD, AOI shall immediately deliver to QAD all materials and deliverables developed in connection with the services rendered under any such Work Statement. xxxxxxxxxxxxx 7.2. AOI warrants that the services performed and/or any works or deliverables provided by AOI hereunder will conform to the specifications of the applicable service description. For the period (30) days, AOI will remedy, without charge to QAD or QAD's customer, any and all parts of the works or deliverables which QAD or its customer find to be non-conforming. xxxxxxxxxxxxx Description of Service to be performed : 1) Resolving Problem Reports in the form of Service Requests or Incidents, necessitating modification of the Standard Product of MFG/PRO as per QAD Development Standards. 2) Development for Just in Time/Sequencing Products (JIT/S). 3) Development/enhancement/customization in any QAD product(s). Other Considerations : Atos Origin to provide : Personnel - For Standard Product Support : A team of 9 with the following q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of all logs, analysis reports, paperwork, etc. and not in the nature of software as the software issues (bugs) have to be resolved on time and the work was done on QAD's servers situated in the USA. It is this clause that has been totally misunderstood and misread by both the Commissioner as well as the Tribunal. The lower authorities have purported to hold that the said clause shows that there is a transfer of software that has come into existence. On the contrary the aforesaid clause appears to be, when the contract is read as a whole, a standard clause inserted into such contracts for repair and service and is a clause, it appears, to have been inserted by way of abundant precaution to overcome a situation where the service provider would misuse the QAD software or claim ownership over the same. In fact, this clause shows that appellant had neither any ownership of the original software nor ownership of anything that came into existence whilst resolving customer issues. The said clause, on the contrary, shows that from the very inception everything belongs to QAD and the moment anything comes into existence by virtue of any work done by appellant's employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no new or saleable software comes into existence. Appellant's employees had merely worked on the old software remotely as the same is located on QAD USA's server situated in the USA. The alteration in such software is to meet the requirements of the QAD India's customer, which at all times belonged to the QAD India. There is no sale to QAD India, and no sale was involved in the contract. In fact, the terms of the contract makes it clear that the contract was one for rendering service. In fact, even before rendering any service, appellant had given up their right to any development to the software. The consideration involved is not for the sale of any software but for the services rendered by appellant's employees. All IT property rests with QAD India. 15. In Sasken Communication Technologies Limited V/s. Joint Commissioner of Commercial Taxes (Appeals)-3 Bangalore and Anr. Writ Appeal Nos.90-113 and 118-129 of 2011 (T-RES) paragraphs 39 to 50 read as under : 39. From the aforesaid Clauses; it is abundantly clear that the parties have entered into an agreement whereby the assessee renders service to the client for development of software, i.e., for software devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the service rendered, based on time or man hours. Once the project is developed, all rights in respect of the said project including the Intellectual Property rights vest with the customer and be is at liberty to deal with it in any manner he likes. The assessee has agreed to execute all such documents which are required for the exercise of such absolute rights over the software developed by the assessee. 42. The 'deliverables' has been defined under the agreement to mean all materials in whatever form generated, treated or resulting from the development including but not related to the software modules or any part thereof, the source code and or object code, enhancement applications as well as any other materials media and documentation which shall be prepared, written and or developed by the developer for the client under this agreement and/or Project Order. If the customer agrees to provide any hardware, software and other deliverables that may be required to carry out the development and provide the deliverables he may do so. Otherwise the assessee has to make or provide all those hardware and software to develop the deliverables and the final product. No doubt at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of service providers. In fact, the material on record discloses that the customers have engaged the services of several service providers, who have expertise in different fields and all of them put their mind and hands together and find a solution to the problem of the customer. The end product, i.e., the ultimate software, is not necessarily the work of any one such service provider. It is a collective effort. Nobody can claim that the end product exclusively belongs to them except the customer who has paid for the service rendered by the various service providers. 45. As clear from the terms of the agreement, on the day they entered into agreement, there was no software in existence. In other words, there was no goods in existence. The agreement is not for transfer of software. The agreement is for development of software. Even before the software comes into existence, the assessee has given up all the rights and claims of the software to be developed and has expressly agreed that such a software which may come into existence in the end of the contract period is the absolute property of the customer. The customer is at liberty to deal with that software in the manner he want ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son possesses in his head a good idea, there is no risk that any one will see or find it, and thereby appropriate it. Such intellectual property may be preserved thus until its owner chooses to divulge it. If the idea consists of a process of doing some thing, it even remains securely in the possession of its owner if he performs that process when no one sees him performing. The possessor of such property can take it to the grave with him, safe in the knowledge that no one will inherit it. There is relatively little potential for the commercial exploitation of intellectual property while it remains in his head. This is because the keeping of an idea to oneself and the commercial utilisation of that idea are inherently contradictory notions. The acquirer of an intellectual property right can derive no financial benefit from it except by using it commercially. He will gain advantage only by making a product and selling it or by charging others who wish to exploit his intellect. When he offers his services or intellect to an employer, he is not selling any intellectual property as none exists on the date of contract of employment. The employer gets a right to exploit the intellect, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of software. The agreement is for appellant to provide its manpower to render services for maintenance and support to QAD. Even before (assuming appellant has developed a software) the software comes into existence, appellant has given up all the rights and claims of the software to be developed and has expressly agreed that such a software, which may come into existence, is absolute property of QAD. The consideration paid is not for transfer of any goods but is calculated at US $ 4200 per person per month for all categories of appellant's employees. Appellant was to provide a team of 9 personnel for resolving problem reports in the form of service requests or incidents, necessitating modification of the standard product of MFG/PRO as per QAD development standards. 17. Mastek Limited (Supra) relied upon by the Tribunal is not applicable to the facts and circumstances of the case. In the case of Mastek Limited (Supra), Mastek was required to use its professional intelligence to solution the requirements of HDFC for its Home Loan Applications; evolve a software programme to meet the requirement of the HDFC and encode a programme on its medium. HDFC's source codes were shared, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing these services, the source codes remain intact. It does not tantamount to development of new version of the software. The activity performed by appellant is essentially for providing manpower on hire and does not entail any value for assignment or transfer of any new or upgraded software. This is also evident from the invoicing under by appellant for the period under considerations. 19. It has been clarified by appellant that other activities captured side agreement development of Just in Time Sequencing Product or development of any other OAD product was never undertaken by appellant. The Karnataka Appellate Tribunal in IBM India Private Limited, Bangalore (Supra) when discussing levy of VAT by activity performed by ERP Implementation Specialists noted that the codes which such Professionals insert in that software are not proprietary codes, having a marketability of their own which the concerned customer can possess or transfer or sell. In other words, 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 a works contract. This aspect was summarily dismissed by the Tribunal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the software, which is the intellectual property will become goods only if its has been put on a medium for sale. In the present case, there is no saleable medium as the work has been carried out on the original software itself which exists only the US servers of QAD. As stated above, even if there were no bugs reported during a month, QAD would be liable to pay appellant under the agreement at the rate of US $ 4200 per month. This itself shows that this was not a contract of sale but was a contract for service. The pith and substance of the contract or true nature of the transaction shows that the contract is a contract for service simplicitor and is not a works contract or composite contract consisting of 2 contracts - one for service and one for sale, but is an indivisible contract for service only. On examination of the contract as a whole, it becomes obvious that the contract is essentially an agreement to render service. The theory of works contract or the concept of aspect theory is not attracted. 21. In the circumstances, the questions of law as framed by this Court on 8th December 2015 are answered in favour of appellant. The agreement dated 1st January 2006 between a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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