VAT cannot be charged on ATM management services as no transfer of possession occurs under Section KVAT Act

The HC held that the levy of VAT on ATM management services provided by the petitioner to banks was illegal and without jurisdiction. The court found no evidence of transfer or delivery of ATMs or equipment to the banks, as possession and control remained with the petitioner throughout. The transaction was deemed a pure service contract, not a sale or hire purchase, and thus did not attract VAT under the KVAT Act. The impugned orders treating the transaction as a deemed sale were quashed, and the petition was allowed.

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Issues Involved:
1. Jurisdiction to levy VAT on ATM Management Services.
2. Classification of the transaction as a financial lease or service.
3. Applicability of Service Tax and VAT on the same transaction.
4. Validity of the impugned orders and demands.

Summary of Judgment:

Issue 1: Jurisdiction to levy VAT on ATM Management Services

The common issue for consideration was whether the respondents have jurisdiction to levy VAT under the Karnataka Value Added Tax Act, 2005 ("KVAT Act") on ATM Management Services provided by the petitioner to various Banks across Karnataka, on which the petitioner has already paid Service Tax as per the Finance Act 1994. The court held that the impugned orders, levies, and demands by the respondents are illegal, arbitrary, and without jurisdiction or authority of law and deserve to be quashed.

Issue 2: Classification of the transaction as a financial lease or service

The petitioner argued that the transaction between the Petitioner and Banks does not involve a financial lease. The payment of Service Tax by the Petitioner is not in dispute, but the VAT authorities ignored that payment by stating that such payment was incorrect and that the transaction is one involving a financial lease on which VAT ought to be paid. The court found that the dominant intention of the transaction is to provide services and not to transfer any property in the ATM Machines to the Banks. The petitioner retains the possession and control of the ATM machines.

Issue 3: Applicability of Service Tax and VAT on the same transaction

The court reiterated that Service Tax and VAT are mutually exclusive levies. If Service Tax is levied on the same consideration, VAT cannot be levied. The impugned orders erroneously held the transaction to be one of deemed sale. The court concluded that the transaction is a pure service transaction not entailing any transfer of property of goods or effective control of the goods to the recipient.

Issue 4: Validity of the impugned orders and demands

The court quashed the impugned orders and demands, stating that they are illegal, arbitrary, and without jurisdiction or authority of law. The court emphasized that the subject transactions of ATM Management Services are not liable to VAT under the KVAT Act and the State of Karnataka does not have the legislative competence to levy VAT on such transactions.

Order:

(i) Both petitions are allowed.
(ii) In W.P. Nos. 26262-26263/2019:
a. The Re-assessment order dated 30.04.2019, for the period 2013-14, is quashed. Consequently, the demand notice dated 30.04.2019 for the period 2013-14 is also quashed.
b. The Re-assessment order dated 30.04.2019, for the period 2014-15, is quashed. Consequently, the demand notice dated 30.04.2019 for the period 2014-15 is also quashed.
(iii) In W.P. No. 9550/2020:
a. The Re-assessment order dated 16.06.2020, for the period 2015-16, is quashed. Consequently, the demand notice dated 16.06.2020 for the period 2015-16 is also quashed.
b. The Re-assessment order dated 16.06.2020, for the period 2016-17, is quashed. Consequently, the demand notice dated 16.06.2020 for the period 2016-17 is also quashed.

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