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Issues: (i) Whether implementation of software, after supply of packaged and customised software, involved a deemed transfer of goods or transfer of right to use goods so as to attract VAT under Article 366(29A)(d) of the Constitution of India. (ii) Whether implementation was a pre-sale activity forming part of the taxable turnover or a post-sale service simplicitor chargeable only to service tax.
Issue (i): Whether implementation of software, after supply of packaged and customised software, involved a deemed transfer of goods or transfer of right to use goods so as to attract VAT under Article 366(29A)(d) of the Constitution of India.
Analysis: The software sold to the customer was already a copyrighted article and VAT had been paid on the sale of the customised software. The implementation arrangement was separate and concerned installation, parameterisation, training, integration and related support to make the software operational in the customer's environment. The contract showed that the copyright and proprietary rights continued to vest with the developer and that what was transferred in the implementation phase was not any goods or right to use goods, but only services needed to operationalise the already-supplied software. In those circumstances, the implementation activity did not amount to a deemed sale.
Conclusion: The issue is answered against the Revenue and in favour of the assessee.
Issue (ii): Whether implementation was a pre-sale activity forming part of the taxable turnover or a post-sale service simplicitor chargeable only to service tax.
Analysis: The Court held that the factual record and the contract structure separated the sale of customised software from the later implementation services. The implementation commenced after installation of the software and was directed to making the system functional and usable. Since no goods came into existence or passed during implementation, the activity was not part of the sale price or taxable turnover under VAT. The same activity was expressly covered within the service tax regime as implementation of information technology software and could not be taxed again as VAT on the theory of pre-sale customisation.
Conclusion: The issue is answered in favour of the assessee and against the Revenue.
Final Conclusion: The assessment order was set aside insofar as it levied VAT on implementation charges, and the implementation activity was held to be a taxable service rather than a VAT-liable sale.
Ratio Decidendi: Where the contract for software implementation is separate from the sale of customised software and does not involve transfer of property in goods or transfer of right to use goods, the activity is a post-sale service simplicitor taxable under the service tax law and not under VAT.
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