2015 (11) TMI 328 - HC - VAT and Sales Tax

ERP software services not subject to sales tax under KST Act

The State of Karnataka Versus IBM India Private Limited Formerly Known As M/s. IBM India Ltd.

The State of Karnataka Versus IBM India Private Limited Formerly Known As M/s. IBM India Ltd. - TMI Issues Involved:1. Whether the Karnataka Appellate Tribunal is justified in finding that ERP software implementation services and business consultancy services do not involve any transfer of 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 and the First Appellate Authority, holding that the ERP software implementation and BCS services do 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 customers on the basic software constitute the development of software or not.Detailed Analysis:1. Justification of Tribunal's Finding on ERP Software Implementation and Business Consultancy Services:The Tribunal concluded that the activities of business consultancy services (BCS) and ERP software implementation do not involve any sale of goods or transfer of property in goods. The Tribunal's decision was based on the nature of the services provided by the assessee, which involved examining customer requests, conducting Business Process Review (BPR), recommending suitable ERP software, and implementing it if requested by the customer. The ERP software was purchased by the customer from a vendor, and the assessee's role was limited to providing implementation services. The Tribunal found that these services did not constitute a sale or deemed sale under the KST Act, as no new software was developed, and the implementation process was purely a service contract.2. Setting Aside Orders by Assessing Authority and First Appellate Authority:The Tribunal set aside the orders of the Assessing Authority and the First Appellate Authority, which had levied tax on the ERP implementation and BCS services. The Tribunal held that the ERP implementation process involved configuring the client's existing software without developing new software. The Tribunal referenced the judgment of the CESTAT and the Supreme Court, which affirmed that the consideration received for providing these services was subject to service tax and not VAT. The Tribunal emphasized that the ERP implementation process did not involve the creation of marketable goods, and the deliverable materials were client-specific and not commercially available software.3. Development of Software as per Customer Requirements:The Tribunal addressed the argument that the assessee was involved in the development of software, as indicated by a letter stating that 25% of the work in ERP implementation constituted software development. The Tribunal clarified that this percentage did not represent a sale price but rather the portion of the contract related to ERP implementation. The Tribunal cited the Supreme Court's criteria in the TATA CONSULTANCY SERVICES case, which stated that for a works contract involving the transfer of property in goods to exist, there must be a marketable commodity. The Tribunal found that the ERP implementation process did not result in the creation of such a commodity, as the instructions added by the assessee were not independently marketable or transferable.Conclusion:The Tribunal's decision was supported by legal evidence and aligned with the legal position declared by the Apex Court. The Tribunal found that the ERP implementation and BCS services provided by the assessee were pure services and did not involve any transfer of property in goods. Consequently, the Tribunal set aside the orders of the lower authorities and granted relief to the assessee. The High Court upheld the Tribunal's findings, dismissing the revision petition and answering the questions of law in favor of the assessee and against the revenue. The High Court also noted that the entire consideration received for the services was subject to service tax, and no portion could be attributed to the sale of software.