The State Of Karnataka vs M/S Kinfotech Pvt Ltd
2022 Latest Caselaw 4795 Kant

  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
                             -2-




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

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

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

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.

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

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

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

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