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Karnataka High Court Rules That Software Development Services are not Liable to VAT

17 Nov 2011

In a very important ruling, the Karnataka High Court has held that customised software development services qualify to be "services" and are not liable to VAT under Karnataka Value Added Tax Act, 2003. This ruling should largely benefit the software industry, as the industry is faced with wide-spread litigation on the taxability of software related transactions under VAT before various State VAT authorities. Taxand India analyses the facts of the case and how this ruling will benefit MNCs in the software industry.

Facts of the case
Sasken Communication Technologies Limited ("Appellant") was involved in the business of software development and provision of software services. The contracts executed were "work for hire" and at no point of time does the Appellant own the copyright or any other right in the work.

Due to audit proceedings initiated by the Karnataka VAT authorities, it was found that the Appellant received consideration from domestic clients wherein the Appellant provided high end work of software development in various fields. Upon such examination, the authorities had concluded that the activity qualified as a works contract and the same attracted levy of VAT as a works contract.

Hence, the Appellant filed a writ petition before the single member bench of the High Court, which was dismissed on the grounds of availability of an alternate remedy. The Appellant thereafter filed a writ appeal before the Division Bench of the High Court.

Taxand India discusses key contentions of the Appellants and commentary from the High Court


Taxand's Take

Taxand's Take
It has been seen that over the last few years, the VAT authorities have been attempting to levy VAT on software development and various other software related transactions. This decision of the High Court comes as a welcome relief to the industry. This decision puts to rest the controversy on applicability of VAT and service tax on software development transactions. Having said this, the decision has relied more specifically on the intellectual property (IP) clause of the contract to hold that there is no VAT liability, as the IP vests directly with the customer in this case.

However, one may argue that even in a case where the IP clause is not supportive or is silent, the principles laid out by the Court under "works contract" should be applicable to say that as there are no pre-existing goods for transfer, it would not qualify to be a works contract and as per dominant intention the same shall be treated as provision of services.

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Rajeev Dimri
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