The Bombay High Court ruled that the agreement to provide manpower for maintenance is contract of service, not sale under the Maharashtra Value Added Tax Act, 2002 (the MVAT Act).
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 1st January 2006 to 31st December 2006. The agreement provided the scope of work. Under the agreement, appellant was to provide to QAD a team of 9 employees to perform services at the rate of US $ 4200 per person per month.
The application was filed before the Commissioner of Sales Tax seeking clarification regarding the ambiguity on applicability of VAT on services related to repair/maintenance of software. The Commissioner of Sales Tax, by an order dated 18th October 2012, held that appellant’s case would fall under the definition of sale as per Section 2(24) of the MVAT Act. It was held that services provided by appellant to QAD are subject to VAT.
The line of codes added to the base software in order to rectify an error or bug cannot be treated as software (“goods”) which can be brought to the market to be freely bought and sold. Applying the above test to the instant case, it is established that the consideration received by appellant cannot be considered as consideration for transfer of goods. Thus, the transaction should not be exigible to VAT.
A Division Bench comprising Justices Dr Neela Gokhale and KR Shriram observed that “The pith and substance of the contract or true nature of the transaction shows that the contract is a contract for service simplicitor and is not a works contract or composite contract consisting of 2 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 attracted.”
“In the present case, there is no saleable medium as the work has been carried out on the original software itself which exists only the US servers of QAD. As stated above, even if there were no bugs reported during a month, QAD would be liable to pay appellant under the agreement at the rate of US $ 4200 per month. This itself shows that this was not a contract of sale but was a contract for service” the Court noted.
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