Infosys not liable to pay VAT for software “implementation” process: Karnataka HC

Offering respite to information technology service providing companies such as Infosys Ltd., a Division Bench of the Karnataka High Court has reportedly ruled that such companies are not liable to pay Value Added Tax for software “implementation” process, which happens after installation of customized software.

Rejecting the State’s contention that the process of implementation of IT software is a pre-sale activity and, therefore, constitutes sale, the Bench, comprising Justice N. Kumar and Justice B. Veerappa observed, “In substance, implementation means the customized 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.” Such implementation was without substance and contrary to law, the Court held.

The State had also contended that the process of implementation of software is part of customization and pre-sale activity, and without customization and without implementation; the software is not completely saleable, useable and functional. The Court however stated that the process of implementation of project starts only after installation of software (customized copyrighted Finacle), which is the goods transferred to the banks through agreement.

The Court was hearing petitions filed by Infosys, Bengaluru. Infosys had challenged the demand notices, issued by the Commercial Taxes Department in 2012-13, asking the company to pay 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 Infosys, in various banks across the country.

The Department had accepted to the VAT paid by Infosys on the sale value of “packaged and customized versions of Finacle” while treating “implementation” process as not part of sale. However, post-2009 the department claimed that “implementation” is nothing but “value-addition to Finacle software and therefore there is sale of customized Finacle and attracts VAT”.