Introduction The menace of double taxation (i.e. VAT and Service Tax both on the same transaction) is increasing day by day. Both the authorities are trying to extract maximum out of the confused and unsettled legal position about attraction of VAT and Service Tax on certain type of transactions.
In relation to software, we come across sale/purchase transactions wherein both Service Tax and VAT are being levied. This is on account of uncertainty of legal position. There are different judgments from various Tribunals and High Courts.
Copyright in software
In relation to software, the sale/purchase transactions can take place on the premises that there is sale/purchase of copyright in the concerned software. However, whether there is sale/purchase of copyright either outright or by way of transfer of right to use goods is to be decided on the facts of each case. There can be certain guidelines based on decided cases.
Reference can be made to the judgment of the Hon’ble Karnataka High Court in the case of Sasken Communication Technologies Ltd. (55 VST 89) Karnataka.
In this judgment, it was observed that if the copyright is in regard to software developed for customer, firstly it belongs to the developer and thereafter if transferred to the customer for a consideration then it will be sale of software. There can be another situation, where the software is developed, wherein copyright from the inception belongs to the customer. In such circumstances, the software so developed belongs to customer only. The developer in such a case is rendering services. In such a situation, VAT is not applicable. Relevant observations of the High Court can be noted as under;
“39. From the aforesaid Clauses it is abundantly clear that the parties have entered into an agreement whereby the assessee renders service to the client for development of software, i.e. for software development and other services. Pursuant to the agreement and the work orders, the service shall be performed by the assessee. Services must be requested by issue of a valid work order together with a statement of work. As compensation for the service rendered to the customer, the fees specified in the relevant work order or in the statement of work is payable and billing is done on a time and material basis or on a fixed price on a monthly basis. Pricing for time and material projects shall be fixed at a rate set forth in Annexure-A to the agreement.
40. The assessee agrees, that all patentable and unpatentable, inventions, discoveries and ideas which are made or conceived as a direct or indirect result of the programming or other services performed under the agreement shall be considered as works made for hire and shall remain exclusive property of the client and the assessee shall have no ownership interest therein. Promptly, upon conception of such an invention, discovery, or idea the assessee agrees to disclose the same to the client and the client shall have full power and authority to file patent applications thereon and maintain patents thereon. At the request of the client the assessee agrees to execute the documents including but not limited to copyright assignment documents, take all rightful oaths and to perform such acts as may be deemed necessary or advisable to confirm on the client all right, title and interest in and to such inventions, discoveries or ideas, and all patent applications, patents, and copyrights thereon. Both the source code of developed software and hardware projects of worldwide Intellectual Property in and each shall be owned by the client. The assessee acknowledges that all deliverables shall be considered as works made for hire and the client will have all right, title including worldwide ownership of Intellectual Property Rights in and each deliverable and all copies made from it. If acceptable to the client, the client may reuse all or any of the components developed by the assessee outside the scope of those contracts for the execution of the projects under this agreement.
41. Therefore, even before rendering service, the assessee has given up his rights to the software to be developed by the assessee. The considerations under the agreement is not for the cost of the project, the consideration is for the service rendered, based on time or man hours. Once the project is developed, all rights in respect of the said project including the Intellectual Property Rights vest with the customer and he is at liberty to deal with it in any manner he likes. The assessee has agreed to execute all such documents which are required for the exercise of such absolute rights over the software developed by the assessee.
42. The ‘deliverables’ has been defined under the agreement to mean all materials in whatever form generated, treated or resulting from the development including but not related to the software modules or any part thereof, the source code and or object code, enhancement applications as well as any other materials media and documentation which shall be prepared, written and or developed by the developer for the client under this agreement and/or Project Order. If the customer agrees to provide any hardware, software and other deliverables that may be required to carry out the development and provide the deliverables he may do so. Otherwise the assessee has to make or provide all those hardware and software to develop the deliverable and the final product. No doubt at the end of the day, this software which is developed is embedded on the material object and only then the customer can make use of the same. The software so developed even before it is embedded on the material object or after it is embedded on a material object exclusively belongs to the customer. In the entire contract there is nothing to indicate that the assessee after developing the software has to embed the same on a material object and then deliver the same to the customer so as to have title to the project which is developed. The title to the project/software to be developed lies with the customer even before the assessee starts rendering service.”
Uncertainty prevails
In spite of the above judgments, the disputes are still arising about attraction of both the taxes. Recently, there was a controversy before the Hon’ble Karnataka High Court, where three separate transactions about software were involved. The reference is to the latest judgment of the Hon’ble Karnataka High Court in case of Infosys Ltd. (Writ Petition no. 57023-57070/2013 dated 9.2.2015.
The facts in this case are that the appellant M/s Infosys was having 3 separate transactions. One for sale of ready software like “Finacle”, another transaction was that it could be customised as per requirement of the customer. Both these transactions were considered as sale and VAT on the same was charged.
The third transaction was about implementation of the software supplied to the customer. Appellant was contending that this is a separate transaction for only rendering services and cannot be made liable to VAT . However, the sales tax authorities considered such implementation part also as part of the total transaction of supply and customisation. So, VAT was levied on the full implementation charges also.
High Court’s observations
So far as implementation part is concerned, the Hon’ble High Court did not agree with the understanding of the authorities. The relevant observations of the Hon’ble High Court are as under;
“52. The understanding of the authorities is that the assessee has developed a software viz., ‘Finacle software’ which is a basic software relating to banking activities and is the copyright holder for the same. Whenever customer namely a bank approaches the assessee to develop software for their business activities, the assessee will take steps to develop the said software as per the requirement of the customers. In this activity, the assessee will make changes to the Finacle software held by it by customising the same to the requirement of the customers and will deliver the improved/modified version of the Finacle software to them. Here, what is transferred is the software with all modifications as per the request and the proposal made by the customers. This implementation process is nothing but value addition to the Finacle software, but the dealer while declaring the turnover, splits the said transaction into two parts namely, sale part and service part. This act of the dealer in splitting the contract as one for sale and the other for implementation of finacle software, thereby claiming exemption on the latter part is not correct because in almost all the instances, what is supplied by the assessee to the customers is the software as per the requirements and the amount received towards the whole process of customisation has to be considered as the amount received for the supply of customised Finacle software.
53. From the aforesaid findings, it is clear that the Assessing Authority is of the view that the customisation is equivalent to implementation. During customisation when scripting or code writing is done in order to make the standard or package software useful to the client, the consideration paid for customisation constitutes the consideration for transfer of goods. The said aspect is not disputed by the assessee.
54. What the assessee contends is that the assessee has the packaged software ‘Finacle’ a banking solution. If the said software cannot be used as such by the banks, then they make known their requirements to be incorporated in the said packaged software either by way of modifications, additions and so as to make it customer specific, which is called as customisation. What is sold by the assessee to the bank is the customised software and not the packaged software. It is clear from the invoice that for the consideration received for this customised software, the assessee has paid VAT because the assessee has copyright not only in the packaged software but also in the customised software and what is transferred to the bank is only the right to use the said software which is a deemed sale. After this customised software is installed in the premises of the bank, before bank starts using it, the process of integration with other systems has to be carried out. It is for that purpose a separate contract called service contract is entered into. The terms of the said contract as set out above involves only rendering service and rendering training to the employees of the bank, so that the installed software starts functioning. The terms of the agreement makes it clear that it is not obligatory for the bank/customer to have the services rendered only by the assessee as a part of contract of sale or a condition of sale. It is open to the customers to have the services rendered by any other competent agency. Therefore, the Assessing Authority has misconstrued this implementation to that of customisation of the software and erred in holding that the customisation involves transfer of goods and the assessee cannot avoid payment of VAT by describing the same as implementation.”
Thus, the Hon’ble High Court has appreciated that the transactions were independent. Further, where there is no transfer of copy right and only services are involved, no VAT can be levied.
Conclusion
The issue about dual taxation of VAT and Service Tax is a burning issue. The customers are suffering due to double levy by the vendors. The clarity of law is therefore very much required. We hope that with the help of above judgments both the concepts i.e. about independent nature of transactions and nature of transactions involving sale/purchase of software will become clear. Therefore, there will be some certainty and correct tax will be levied. We hope that authorities from both the departments will follow the judgment in the spirit of Law so as to overcome the problem of double taxation.
