Bringing relief to information technology service companies such as Infosys, the Karnataka High Court has declared that such companies are not liable to pay any Value Added Tax (VAT) for the software “implementation” process, which happens after installation of customised software.

The contention of the State that the process of implementation of IT software is a pre-sale activity and, therefore, constitutes sale is without substance and contrary to the law, the Court held in its recent verdict. A Division Bench comprising Justice N Kumar and Justice B Veerappa delivered the verdict while allowing petitions filed by Infosys Ltd, Bengaluru. 

Infosys had questioned the demand notices, issued by the Commercial Taxes Department in 2012-13, asking the company to pay several crores of rupees as additional sales tax, interest and penalty for the years 2005-09 in relation to “implementation” of Finacle, a universal banking solution developed and provided by the software company in various banks across the country. 

The Department had initially accepted the VAT paid by Infosys on the sale value of “packaged and customised versions of Finacle” without treating “implementation” as part of the sale. However, in 2012-13, the Department claimed that “implementation” is nothing but “value addition to Finacle software and therefore there is sale of customised Finacle and attracts VAT.” 

Court view “In substance implementation means the customised software is integrated into several other systems so that the banks can start using the licensed software. In the process, there is no transfer of any goods or right to use any goods, what is rendered is service and therefore, said consideration paid as service charge is not subjected to VAT but subjected to service tax,” the High Court ruled.

The Court also said the process of implementation of a project starts only after installation of software (customised copyrighted Finacle), which is the goods transferred to banks through an agreement.

The Court rejected the State’s contention that the process of software implementation is part of customisation and pre-sale activity, and without it the software is not completely saleable, useable and functional.  As “implementation” is included under the definition of taxable services under the Service Tax Act by Parliament, it said the State has no power to levy VAT by treating it as transfer of property in goods or otherwise. 

Related Topics