By TIOL News Service

BENGALURU, OCT 05, 2015: REVENUE has preferred a Revision Petition against the order passed by the Karnataka Appellate Tribunal deleting the levy of tax under KST Act and holding the activities of Business Consultancy services and implementation of the Enterprises Re-source Planning (ERP) software as pure services not involving any sale of goods or any transfer of property in goods in the execution of works contract.

The case of the assessee is that, in respect of the activity of the business consultancy services, the customers approach the assessee for such services. Then the assessee's team of business consultants examine the request of the customers and then conduct Business Process Review ('BPR') under Business Consultancy Services ('BCS') programme, and identify and recommend a suitable ERP software to the customer. Then the necessary ERP software is purchased by the customer. Thereafter ERP implementation team of the assessee enters into contracts with the customers for ERP implementation services if the customers seek such implementation.

The ERP implementation service is independent of the earlier business consultancy service. Every customer does not contract for both the BCS and ERP implementation service together. When ERP software is purchased by the client, such software needs to be installed, integrated and implemented at the client's end. The installation of ERP software is performed by the project implementation team comprising of the personnel of the assessee company, along with the employees of the client. The team ensures that the ERP software is appropriately integrated in the system of the client, and thereafter implementation of the said software is done.

The case of the assessee is that in the activities of BCS and ERP software (purchased by the customers from other vendors) implementation, the assessee provides only services and no transfer of property in goods is involved.

Service tax on ERP implementation services (w.e.f 16.5.2008) has been paid on such services. BCS does not involve transfer of property in goods. Service tax is also paid on BCS receipts. In both, only the service is provided and these two services involve no transfer of property in goods.

The Counsel for the Revenue inter alia submitted that the agreement for providing service includes code writing involvement; that the said code writing constitutes sale of software which is exigible to tax. It is also emphasised that in their letter dated 19.06.2008 the assessee has admitted that 25% of the work in ERP implementation constitutes development of software and, therefore, at least 25% of the consideration paid under the agreement should be treated as sales and tax is leviable under the Act.

The respondent assessee pointed out that deliverable materials do not include commercially available software or hardware which are provided under separate agreements; deliverable materials are not marketable; they are not goods available in the market; that they are client specific and they intend making the Baan ERP functional to meet the requirements of the client; that the entire consideration received for providing services to the client have been subjected to service tax [refer 2010-TIOL-167-CESTAT-BANG   affirmed by the Apex Court]. Therefore, no portion of the consideration received could be attributed to sale of the software and, therefore, the impugned order does not call for any interference.

The High Court observed that an almost identical issue was decided in the case of INFOSYS LIMITED - 2015-TIOL-2106-HC-KAR-VAT and where it is held that - since there is no transfer of ownership or the licence to use the software (deemed sale), it is a pure service contract. There is no sale of goods. It is a case of rendering service and is liable to service tax only.

The High Court concluded thus -

+ In this case, the integration process of the developed ERP software is undertaken by the assessee by deputing ERP implementation team to render ERP implementation service. What this team does is, they install the ERP software, integrate it and implement at the client's end.

+ The members of the ERP Software implementation team ensures that the ERP software is appropriately integrated in the system of the client. In the process the experts will take all necessary steps to provide functional data for the installation of the ERP software and it becomes useful for the client.

+ In the process there is no transfer of any goods involved. Unless the goods is in existence and deliverable so that the right in the goods is transferred, VAT is not attracted. There is no marketable commodity in existence to be sold. Unless such a commodity, whether tangible or intangible, exists there cannot be a sale.

+ When in the course of implementation even if any software comes into existence, the title of the software vests with the client and not with the assessee. The said deliverable materials do not constitute commercially available software. They are not goods available in the market. It is client specific. The said materials are required to make the ERP functional to meet the requirements of the client.

+ As the ownership of these deliverables vest with the client, in order to see that it does not prevent them from using that knowledge while attending to other clients, the clauses 2.2 and 2.21 in the agreement are entered into.

+ The entire consideration received for providing services to the client have been subjected to service tax. Therefore, no portion of the consideration received could be attributed to sale of the software.

+ Therefore, the finding recorded by the Tribunal is based on legal evidence and supported by the legal position as declared by the Apex Court in several judgments referred to in the order.

Holding that there is no merit in the Revision petition, the same was dismissed.

(See 2015-TIOL-2298-HC-KAR-VAT)