Agreement To Provide Manpower For Maintenance Is Contract Of Service And Not A Sale Under MVAT Act: Bombay High Court

The Bombay High Court has held that an agreement to provide manpower to perform maintenance is a contract of service and not a sale contract under the MVAT Act.

The bench of Justice K. R. Shriram and Justice Neela Gokhale has observed that the pith and substance of the contract or true nature of the transaction show that the contract is a contract for service simpliciter and is not a works contract or composite contract consisting of two contracts, one for service and one for sale, but is an indivisible contract for service only. On examination of the contract as a whole, it becomes obvious that the contract is essentially an agreement to render service. The theory of works contract or the concept of aspect theory is not attractive.

The appellant or assessee is in the business of providing services relating to the repair and maintenance of software. The appellant had executed an agreement with one QAD India Private Limited (QAD) to provide manpower to perform maintenance services as desired by QAD in relation to Enterprise Resource Planning (ERP) software called MFG/PRO. The agreement was for the period January 1 to December 31, 2006. The agreement provided the scope of work. Under the agreement, the appellant was to provide QAD with a team of nine employees to perform services at a rate of US $4200 per person per month.

MVAT authorities conducted a business audit in 2009 for the period 2005–2006 to 2007–2008. During the course of the audit, in response to queries raised, the appellant explained to the MVAT authorities that he was only providing manpower services in the nature of work on a hire basis. It was explained that the appellant has merely worked on the property belonging to QAD and, therefore, cannot create any copyright over the software. As the audit officers were not accepting the appellant's explanation, under the provisions of Section 56 of the MVAT Act, the appellant applied for the determination of disputed questions under Section 56 of the MVAT Act.

The application was filed before the Commissioner of Sales Tax, seeking clarification regarding the ambiguity regarding the applicability of VAT on services related to the repair or maintenance of software.

The Commissioner of Sales Tax held that the appellant's case would fall under the definition of sale as per Section 2(24) of the MVAT Act. The services provided by the appellant to QAD are subject to VAT.

The appellant contended that services provided by the appellant to QAD cannot be construed as sales under the MVAT Act, and no VAT should be applicable to the same.

The court noted that it is intellectual property that will become goods once put on a medium for sale. Intellectual property does not exist in the mind of the technician. What exists in his mind is his intellect, and using that intellect, the technician can create or develop goods. It is those goods that are intellectual property when put on a medium for sale. The technician uses his intellect to develop intellectual property, but the software, which is the intellectual property, will become goods only if it has been put on a medium for sale.

The court held that there is no saleable medium as the work has been carried out on the original software itself, which exists only on the US servers of QAD.

Counsel For Petitioner: D.B. Shroff

Counsel For Respondent: Himanshu Takke

Case Title: Atos India Private Limited Versus The State of Maharashtra

Case No.: Maharashtra Value Added Tax Appeal No.21 Of 2015

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