Software licence renewal treated as service, not deemed sale, so turnover escaped VAT under the Karnataka Value Added Tax Act.

Post-sale renewal of software licences, where the renewal amounts were treated as service consideration and the software was no longer available with the assessee, was held outside the Karnataka Value Added Tax Act, 2003. The renewal did not amount to a fresh sale, transfer of right to use goods, or deemed sale under Article 366(29-A) of the Constitution. The analysis also relied on the mutual exclusivity of sales tax and service tax regimes, since the renewal activity was characterised as post-sale permission to access or operate software with support services from foreign vendors. The turnover from such renewals was therefore not exigible to VAT.

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Issues: Whether the turnover received towards renewal of software licences was liable to tax under the Karnataka Value Added Tax Act, 2003 as a transfer of right to use goods or deemed sale.

Analysis: The transaction was examined in the context of the original sale of software, the subsequent renewal process, and the manner in which service tax was levied and discharged on the renewal amounts. The Court noted that the renewal activity was not routed through the assessee as a fresh sale of goods, but represented post-sale permission to access or operate the software with support services from the foreign vendors. It further held that, after the original software sale, the goods were no longer available with the assessee, and the transaction fell within the service tax regime rather than the VAT regime. The principle of mutual exclusivity between sales tax and service tax, as well as the limits of the deemed sale fiction under Article 366(29-A) of the Constitution of India, supported this view.

Conclusion: The renewal of software licences was not exigible to tax under the Karnataka Value Added Tax Act, 2003. The issue was decided in favour of the assessee and against the revenue.

Ratio Decidendi: A post-sale renewal of software licence, when taxed as a service and not involving transfer of goods available with the assessee, cannot be brought within sales tax as a deemed sale or transfer of right to use goods.

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