High Court of Karnataka Adjudicates Writ Petitions Against Re-Assessment Order Under KVAT Act on Software Implementation Services and Sales Tax. The Assessee Challenged a Demand of Rs.49 Crore and Sought Declarations of Unconstitutionality for Sections of KVAT Act and Finance Act, 1994, but Constitutional Arguments Were Not Pressed Before the Court.

Writ petition under Article 226 of the Constitution challenging a re-assessment order and demand notice issued under the Karnataka Value Added Tax Act, 2003 and Central Sales Tax Act, 1956, and seeking declarations of constitutional invalidity of certain provisions of the KVAT Act and Finance Act, 1994.

Quashing of re-assessment order dated 23.11.2013 and demand notice; direction for refund of amounts; declaration that Section 3 of the KVAT Act to the extent it levies tax on pure services is ultra vires; alternatively, declaration that Section 65(105)(zzzze) of the Finance Act, 1994 is ultra vires; direction to refund service tax collected.

The Revenue issued a re-assessment order treating software implementation as a works contract and sale of software as a licence sale, raising a demand of approximately Rs.49 crore, despite earlier acceptance of returns and a favorable Tribunal order holding that the implementation was a pure service and the sale was of software, not licence.

The assessee had obtained a clarification order in 2002 from the Authority for Clarification and Advance Ruling under KST Act. Returns were accepted. In 2007, audit orders under KVAT Act accepted the exemption for implementation services. After re-assessment in 2009, writ petitions were filed and disposed of with liberty to appeal. The appellate Tribunal partly allowed the appeal, holding that Finacle sale was software sale and implementation was pure service. Subsequently, the Revenue issued the impugned re-assessment order dated 23.11.2013.

Whether the implementation, customization, and support services provided by the assessee along with software sale constitute pure services not involving transfer of property in goods, and thus are exempt from VAT. Whether the sale of Finacle software should be treated as sale of software or as sale of software licence for the purpose of determining the applicable rate of tax under the KVAT Act. Whether the denial of input tax credit on the ground that part of the export turnover related to onsite services is valid. Whether Section 3 of the KVAT Act and Section 65(105)(zzzze) of the Finance Act, 1994 are ultra vires the Constitution.

The assessee contended that sale of software and provision of implementation services were covered by separate contracts, and implementation involved mere configuration and installation using existing software, with no transfer of property in goods, hence a pure service not liable to VAT. The assessee relied on the 2002 clarification order and the fact that returns and audit orders for earlier periods had accepted the exempt nature of such services. The assessee argued that Finacle was sold as a product, not as a licence, and the higher tax rate for software licences introduced in 2007 could not be applied retrospectively. The Revenue argued that the sale of Finacle amounted to a sale of software licence, attracting higher tax at 12.5% under Third Schedule of KVAT Act. The Revenue treated the implementation contract as a works contract involving transfer of property in goods, liable to tax at 12.5% after deduction of labour charges. The Revenue sought to disallow input tax credit on exports to the extent of 50% or 45%, attributing it to onsite services provided outside India.

The Authority for Clarification and Advance Ruling passed an order dated 12-11-2002 clarifying that the sale of software would be exigible to tax at the rate of 4% under Entry 20(v) of Part C of the Second Schedule to the KST Act. Further, they clarified that the annual technical support services and the activity of training, installation, implementation, onsite support, customization, online software support, parameterization etc., are not liable to tax unless it involved any transfer of property in goods. The Tribunal, after hearing the parties, partly allowed the appeals filed by the petitioner. It held that sale of Finacle is a case of sale of software and not sale of software licence as contended by the revenue and, therefore, the authority was wrong in levying higher rate of tax. It further held that implementation service does not involve any transfer of property in goods and, therefore, not liable to tax under the KVAT Act.

The assessee applied for clarification under KST Act in 2001; order dated 12.11.2002 clarified tax rates and service exemption. Returns for KST and KVAT periods were filed and accepted; audit orders dated 23.02.2007 under Section 38(1) of KVAT Act accepted exemption for implementation. On 13.03.2009, enforcement wing visited and issued notice under Section 52 proposing higher tax on software as licence and treating implementation as works contract. Further notices under Section 39 were issued proposing re-assessment for April 2005 to March 2009. Re-assessment order passed raising demand of Rs.68,02,44,801, later rectified to Rs.49,08,43,982 on 05.12.2009. Assessee filed W.P.Nos.37456-37458 & 37649-37693/2009, disposed of with liberty to appeal. Tribunal partly allowed appeal, holding sale as software and implementation as pure service. The Revenue issued the present impugned re-assessment order dated 23.11.2013 under Section 39(1) of KVAT Act and Section 9(2) of CST Act for April 2005 to March 2009. These writ petitions were filed against that order.

• Karnataka Value Added Tax Act, 2003: 3, 38, 39, 52, 69, Third Schedule Sl.No.34
• Central Sales Tax Act, 1956: 5, 9(2)
• Karnataka Sales Tax Act, 1957: 4, Second Schedule Part C Entry 20(v)
• Finance Act, 1994: 65(105)(zzzze), 66
• Constitution of India: 226, 246, 265
• Companies Act, 1956: