2015 (9) TMI 738 - HC - VAT and Sales Tax

Court rules services not subject to VAT, fall under service tax. Appeal allowed, refund ordered.

Infosys Limited (Formerly Known As. Infosys Technologies Limited) Versus The Deputy Commissioner of Commercial Taxes (Audit-4. 4) And Others

Infosys Limited (Formerly Known As. Infosys Technologies Limited) Versus The Deputy Commissioner of Commercial Taxes (Audit-4. 4) And Others - TMI Issues Involved:1. Validity of reassessment order and demand notice.2. Constitutional validity of Section 3 of the Karnataka Value Added Tax Act, 2003, and Section 65 (105) (zzzze) of the Finance Act, 1994.3. Taxability of implementation, customization, and other support services under VAT and service tax.4. Refund of service tax paid by the petitioner.Issue-wise Detailed Analysis:1. Validity of Reassessment Order and Demand Notice:The petitioner challenged the reassessment order and demand notice issued under the Karnataka Value Added Tax (KVAT) Act, 2003, claiming that the reassessment was based on an incorrect interpretation of the nature of their services. The petitioner argued that the implementation of software, customization, and other support services are pure services and should not be subjected to VAT. The court examined the nature of the transactions and concluded that the implementation services provided by the petitioner do not involve any transfer of property in goods, and thus, are not liable to VAT under the KVAT Act. The reassessment order and demand notice were set aside.2. Constitutional Validity of Section 3 of the Karnataka Value Added Tax Act, 2003, and Section 65 (105) (zzzze) of the Finance Act, 1994:The petitioner sought a declaration that Section 3 of the KVAT Act and Section 65 (105) (zzzze) of the Finance Act, 1994, to the extent they seek to levy tax on pure services, are ultra vires Articles 246 and 265 of the Constitution of India. However, the court did not address the constitutional validity of these provisions as no arguments were presented on this issue. The court focused on the interpretation of the statutory provisions and concluded that the implementation services are not subject to VAT.3. Taxability of Implementation, Customization, and Other Support Services under VAT and Service Tax:The court analyzed the nature of the services provided by the petitioner, including the development, customization, and implementation of software. It was established that the petitioner owns the copyright to the software and provides a license for its use to the customers. The court distinguished between the sale of customized software, which is subject to VAT, and the implementation services, which are pure services and subject to service tax. The court relied on the definition of 'goods' under Article 366(12) of the Constitution and the relevant provisions of the Finance Act, 1994, which classify implementation services as declared services and subject to service tax. The court concluded that the implementation services provided by the petitioner are post-sale activities and do not involve any transfer of property in goods, and thus, are not subject to VAT.4. Refund of Service Tax Paid by the Petitioner:The petitioner sought a refund of the service tax paid on the implementation services. The court held that since the implementation services are classified as declared services under the Finance Act, 1994, and are subject to service tax, the petitioner is not entitled to a refund of the service tax paid. The court directed the respondents to refund the amounts deposited by the petitioner pursuant to the interim order.Conclusion:The court allowed the writ petitions, setting aside the reassessment order and demand notice to the extent they levied VAT on the implementation services. The court clarified that the petitioner is not liable to pay VAT on the implementation services, which are post-sale activities and classified as declared services under the Finance Act, 1994. The petitioner was directed to file a regular appeal on other issues not dealt with in the writ petitions within 30 days, and the appellate authority was instructed to decide those issues on merits without considering the question of limitation. The court ordered the refund of amounts deposited by the petitioner in compliance with the interim order.