Karnataka High Court
The State Of Karnataka vs M/S Kinfotech Pvt Ltd on 15 March, 2022
Bench: S.Sujatha, Shivashankar Amarannavar
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 15TH DAY OF MARCH, 2022
PRESENT
THE HON'BLE MRS.JUSTICE S.SUJATHA
AND
THE HON'BLE MR. JUSTICE SHIVASHANKAR AMARANNAVAR
S.T.R.P.No.156/2018
BETWEEN :
THE STATE OF KARNATAKA,
REP BY THE SECRETARY,
FINANCE DEPARTMENT,
VIDHANA SOUDHA,
BENGALURU-560 001. ...PETITIONER
(BY SRI JEEVAN J. NEERALGI, AGA.)
AND :
M/s KINFOTECH PVT. LTD.,
NO.2/10, AJAY PLAZA,
1ST MAIN, N.S.PALYA,
BANNERGHATTA ROAD,
BENGALURU-560 076 ...RESPONDENT
(BY SRI CHANDRASHEKARA K., ADV.)
THIS STRP IS FILED UNDER SECTION 65(1) OF THE
KARNATAKA VALUE ADDED TAX ACT, 2003 AGAINST THE
ORDER DATED 31.10.2017 PASSED IN STA NOS.2262 TO
2285/2013 ON THE FILE OF THE KARNATAKA APPELLATE
TRIBUNAL AT BANGALORE, ALLOWING THE APPEALS FILED
AGAINST THE ORDER DATED 29.06.2013 PASSED IN VAT-AP-
241 TO 264/12-13 ON THE FILE OF THE JOINT COMMISSIONER
OF COMMERCIAL TAXES (APPEALS-3) BANGALORE, DISMISING
THE APPEALS BY UPHOLDING THE ORDER DATED 31.03.2012
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PASSED BY THE DEPUTY COMMISSIONER OF COMMERCIAL
TAXES (AUDIT)3.3, DVO-3, BANGALORE, FOR THE TAX
PERIODS OF APRIL 2009 TO MARCH 2011.
THIS PETITION COMING ON FOR HEARING, THIS DAY,
S. SUJATHA, J., MADE THE FOLLOWING:
ORDER
This Sales Tax Revision Petition is filed by the State of Karnataka under Section 65(1) of the Karnataka Value Added Tax Act, 2003 ('Act' for short) challenging the order dated 31.10.2017 passed by the Karnataka Appellate Tribunal at Bengaluru ('Tribunal' for short) in STA Nos.2262 to 2285/2013 relating to the tax periods April 2009 to March 2011.
2. The respondent herein is a dealer registered under the provisions of the Act and is engaged in the trading of computer software and hardware. The respondent is a channel partner for various software companies such as Microsoft, McAfee etc. During the tax periods in question, the respondent had effected -3- sales of software licences and had paid tax under the provisions of the Act.
3. When the case was taken up for audit, the prescribed authority has noticed that no tax was paid on the turnover relating to the renewal of software licences. Accordingly, after issuance of notice and upon consideration of the respondent's reply, the respondent was reassessed to tax under Section 39(1) of the Act levying tax on the amount received by the respondent in respect of the renewal of software licences. The assessing authority further levied interest and penalty under Sections 36(1) and 72(2) of the Act respectively. Being aggrieved by the said reassessment orders, the respondent had preferred appeals before the first appellate authority, which dismissed the appeals confirming the reassessment orders. Being aggrieved, the respondent had approached the Tribunal under Section 63(1) of the Act. The Tribunal, after hearing the -4- matter, allowed the respondent's appeals setting aside the orders of the first appellate authority and the assessing authority. Hence, this revision petition is filed by the State raising the following question of law;
"Whether the Tribunal was right in holding that the turnover received by the respondent in respect of renewal of software licences is not liable to be tax under the provisions of the KVAT Act?"
4. Learned Additional Government Advocate appearing for the petitioner - State submitted that the sale of software licences being liable to tax under Section 4(1)(a)(ii) of the Act read with Entry 34 of the III Schedule, the renewal of software licences also is liable to tax which has the characteristics of sale of goods. Elaborating the arguments on this point, it was submitted that, if the validity period of the software licence expired, the customer would not be able to operate the software. If the customer wishes to continue using the software, renewal of the same is -5- essential which permits the customer to use the software for a new extended period of time. The Tribunal grossly erred in holding that the renewal of software licence is merely a service and not transfer of goods. Thus, the learned Additional Government Advocate argued that the renewal of software licence is exigible to levy of sales tax under the provisions of the Act as deemed sales i.e., transfer of right to use the goods.
5. Learned counsel appearing for the respondent - assessee justifying the impugned order submitted that the transaction of renewal of software licence is assessed to service tax under the Service Tax Act and the service tax liability has been discharged on this transaction by the assessee. As such, the said transaction would not come within the ambit of transfer of right to use goods to bring it within the tax net as deemed sales under the provisions of the VAT Act. -6- Learned counsel argued that the Tribunal has extensively analyzed the material aspects to arrive at a conclusion that the renewal of software licence involved in the present case is not exigible to levy of tax under the VAT Act and accordingly, the same deserves to be confirmed by this Court dismissing the revision petition filed by the State, answering the question of law in favour of the assessee and against the revenue.
6. We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record.
7. The nature of transaction as could be deciphered is that the anti virus computer software generated and supplied by the foreign based developers M/s McAfee Inc U.S.A and M/s. Symantec U.S.A., are marketed in India through M/s Ingram Micro India Ltd., Mumbai and M/s Redington (India) Ltd. The respondent is one of the channel partners effecting -7- purchase of "anti virus software" from India based distributors and effecting sales of the same to the end customers. Up to this stage, there is no dispute regarding the payment of tax under the VAT Act for the sales of anti virus software effected by the respondent. But the controversy is with respect to the amount received by the respondent towards renewal of software licences raising service tax invoices.
8. The copies of the service tax invoices and half yearly service tax returns filed by the respondent before the Tribunal are considered and some of the sample copies of the purchase orders/service tax invoices relating to the transactions are extracted by the Tribunal.
9. Section 65 (105)(zzzze) of the Finance Act, 1994, defines information technology services, which includes adaptation, upgradation, enhancement, implementation and other similar services related to -8- information technology software. The word 'service' is defined under Section 65-B(44) of the Finance Act, 1994, which has come into effect from 1.7.2012. In terms of the said provision, any activity which constitutes merely transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29-A) of Article 366 of the Constitution has been excluded. Section 66-E provides for declared services. As per clause (d), development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software, would come under the said declared services.
10. The software licences are taxable as per Entry 34 of the III Schedule to the Act. The stance of the department that the respondent has effected transfer of right to use the software as paid subscription, hence liable to tax under the provisions of -9- the VAT Act, cannot be countenanced in view of the amendment brought to Section 65(105)(zzzze) with effect from 16.5.2008 which has been considered in the judgment of this Court in Sasken Communication Technologies ltd., v. Joint Commissioner of Commercial Taxes (Appeals) -3, Bengaluru and another, reported in (2012) 55 VST 89 (Karn).
11. In the case of Bharath Sanchar Nigam Limited and another v. Union of India and others, reported in 2006(60) Kar.L.J., 391 (SC), the Hon'ble Apex Court has considered the mutual exclusivity reflected in Article 246(1) of the Constitution and has held that sales tax and the service tax are mutually exclusive of each other. The relevant paragraph is quoted hereunder;
".......subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and for another purpose fall within another legislative power. They might be overlapping; but the overlapping
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must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is overlapping does not detract from the distinctiveness of the aspects". No one denies the legislative competence of States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow State to entrench upon the Union list and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Art. 366(29A), the value of the goods involved in the execution of the whole transaction cannot be assessed to Sales Tax. As was said in Larsen & Toubro Vs. Union of India (1993) 1 SCC 365.
For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service. As was held by us in Gujarat Ambuja Cements Ltd. Vs. Union of India (2005) 4 SCC 214,228.
"This mutual exclusivity which has been reflected in Article 246(1) means that
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taxing entries must be construed so as to maintain exclusivity."
12. The reasoning of the authorities that the original software which was sold was still the property of the respondent and later versions developed or upgraded are also software which is again transacted by allowing access to the customers for a consideration and hence, the transaction is transfer of right to use the upgraded version of the said software by renewal of licence, is wholly misconceived. The renewal of software licences are not routed through the respondent. The respondent has collected the application from end users for renewal of software licences and has forwarded them to the distributors. The said renewal of software licences are only grant of permission to access/operate the software sold earlier with full support services of the foreign based developers and to make software functional or usable under the contract. Once the
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original software is sold, the same would not continue to be the property of the respondent. The post sale activity relating to renewal of software licence is directly from the foreign vendors to the end customers electronically through e-mail.
13. These aspects would indicate that the service tax collected on this transaction of renewal of software licence at 10.30% and remitted to the Central Government cannot be construed as transfer of right to use the goods, more particularly, when the goods are not available with the respondent. When the original goods are not available with the respondent, the aspect theory and the divisibility of the contract in furtherance of deemed sale as envisaged under Article 366 (29-A) of the Constitution, is only a myth and is not valid in the eye of law. We find no perversity or illegality in the order of the Tribunal impugned.
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14. For the reasons aforesaid, we answer the question of law in favour of the assessee and against the revenue.
Resultantly, Sales Tax Revision Petition stands dismissed.
Sd/-
JUDGE Sd/-
JUDGE nd