FIS Payment Solutions And Services India Private Limited Vs State of Karnataka (Karnataka High Court)
Karnataka High Court held that deployment of ATM and other assets, without transfer of possession and effective control, for provision of ATM management service to banks is outside the purview of Value Added Tax.
Facts- The common issue for consideration in the writ petitions is whether the respondents have jurisdiction to levy Value Added Tax (“VAT “) under the provisions of the Karnataka Value Added Tax Act, 2005 (“KVAT Act”) KVAT Act on ATM Management Services provided by the petitioner to various Banks across the State of Karnataka on which the petitioner has already paid Service Tax as per the Finance Act 1994.
Conclusion- Held that it is nowhere evident that the ATMs and equipment at any stage are transferred/delivered to the banks, and neither does the possession get transferred to the bank. The petitioners all through out the tenure of the agreement continue to provide ATM Management services to the banks deploying/using the ATMs and equipment. Delivery/transfer is sine qua non to the levy of VAT. However, no delivery, but only deployment, takes place. The petitioners not only have possession but are also in effective control of the ATMs and equipment. If it were neither in possession nor in effective control over the ATMs and equipment, the petitioners would have been unable to provide the services.
Held that the transaction is a pure service transaction not entailing any transfer of property of goods or effective control of the goods the recipient. The various terms of the agreements with the Banks discloses that the primary intent of the contract is only provision of ATM management service for which the Petitioner deploys ATMs and other assets at various sites across India. The Petitioner uses the ATMs and other assets merely as a means for providing ATM management services to banks.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
In W.P.No.9550/2020, petitioner has sought for the following reliefs:-
” a) Issue writ in the nature of Certiorari or any other appropriate Writ, Order or Direction of like nature to declare the Impugned Order bearing CAS No. 386319489 dated: 16.06.2020 for the period FY 2015-16(Annexure-A) along with the consequential demand Notice dated: 16.06.2020 issued by Respondent No.5 as illegal, arbitrary, wholly without jurisdiction and without the authority of law, thereby violating Article 14, 19(1) (g) and 265 of the Constitution of India and quashing the consequential Impugned Demand of Service Tax;
b) Issue a writ in the nature of Certiorari or any other appropriate Writ, Order or Direction of like nature to declare the Impugned Order bearing CAS No. 329319520 dated for the period FY 2016-17(Annexure-B:) along with the consequential demand Notice dated: 16.06.2020 issued by Respondent No.5 as illegal, arbitrary, wholly without jurisdiction and without the authority of law, thereby violating Article 14, 19 (1) (g) and 265 of the Constitution of India and quashing the consequential Impugned Demand of Service Tax;
c) Alternatively, Issue a Writ, of Mandamus or any other appropriate Writ, Order or Direction of like nature to direct the Respondent No.5 to seek for adjustment of Service Tax liability from the Respondent No.6 from the Service Tax paid on the very same turnover;
d) Such further and other relief, as this Hon’ble Court may deem fit and proper in the nature and circumstances of the case.”
In W.P.26262/2019, petitioner has sought for the following reliefs:-
” (i) That this Hon’ble Court be pleased to issue a Writ of Certiorari or a writ in the nature of Certiorari or any other writ, order or direction under Article 226 of the Constitution of India calling for the records pertaining to the Petitioners’ case and after going into the validity and legality thereof to quash and set aside two Orders No. DCCT(A)-5.61DG STO-512019-20 both dated: 30.04.2019 passed by the Deputy Commissioner of Commercial Taxes, (Audit-5.6) along with the Notice of Demand, for the period April 2013 to March 2014 and April 2014 to March 2015, vide Annexure-A and B ( the Respondent No.5);
(ii) that this Hon’ble Court be pleased to issue a Writ of Mandamus or any other appropriate writ, order or direction under Article 226 of the Constitution of India, directing the Respondents to forthwith:
(a) Refrain from taking any steps or proceedings in pursuance or in furtherance of the two Orders No. DCCT(A)-5.61DG STO-512019-20 both dated: 30.04.2019 passed by the Deputy Commissioner of Commercial Taxes, (Audit-5.6) Respondent No.5) for the period April 2013 to March 2014 and the period April 2014 to March 2015 and two Notice of Demand both dated: 30.04.2019;
(b) withdraw and /or cancel the impugned orders and Notice of Demand stated in clause (a) above passed by the Respondent No.5;
(C) Alternatively, to transfer the payment of service tax made by the petitioner to the Union of India to the State of Karnataka in the even this Hon’ble Court hold that the transaction is liable to VAT and refund the excess tax paid to the petitioner as the same cannot be held by Respondent Nos. 1 and, if any, because of the express prohibition under Article 265 of the constitution of India.
(iii) To issue order(s), direction(s), writ(s) or any other relief(s) as this Hon’ble Court deems fit and proper in the facts and circumstances of the case and in the interest of justice.”
2. The common issue for consideration in the writ petitions is whether the respondents have jurisdiction to levy Value Added Tax (“VAT “) under the provisions of the Karnataka Value Added Tax Act, 2005 (“KVAT Act” ) KVAT Act on ATM Management Services provided by the petitioner to various Banks across the State of Karnataka on which the petitioner has already paid Service Tax as per the Finance Act 1994.
3. Petitioner is engaged in the provision of ATM Management Services for various banks at pan India level and undertake end to end services for the banks. Petitioner has paid Service Tax on the entire value of the contractual consideration received from banks on account of rendering of the aforesaid services and has also been regularly filing returns with the Service Tax Authorities. It is contended that petitioner render these ATM Management services to various banks across the Country whereby, end to end management of the ATM Machines is provided by the petitioner. The petitioner has duly discharged Service Tax on the entire revenue earned from such transaction. It is the grievance of the petitioner that the respondents have sought to levy VAT on the very same consideration by passing the Impugned Assessment Orders and Demand Notices by ignoring the gamut of services provided by the petitioner and treating the transaction as a “financial lease” and therefore, holding the same to be transfer of right to use the ATM Machines and “deemed sale of goods” which is not only without jurisdiction or authority of law but also illegal, arbitrary and contrary to the material on record and deserve to be quashed.
4. The respondents have opposed the petitions and have filed their statements of objections, to which petitioners have also filed their rejoinder/reply.
5. Heard learned Senior counsel for the petitioner and learned AGA and learned CGSC for respondents and perused the material on record.
6. In addition to reiterating the various contentions urged in the petitions and referring to the material on record, learned Senior counsel for the petitioner has made the following submissions:-
(i) The transaction between the Petitioner and Banks does not involve a financial lease. The payment of Service Tax by the Petitioner is not in dispute but the VAT authorities have ignored that payment by stating that such payment was incorrect and that the transaction is one involving financial lease on which VAT ought to be paid.
(ii) Under the Agreements with the Banks, the Petitioner provides end to end services to provide ATM related services to Banks. The Petitioner is responsible for the successful operation of the ATM transactions by the Bank’s customers and therefore, is responsible for deploying its own ATM machines, their installation, operation and maintenance, insurance etc. The dominant intention of the transaction is undoubtedly to provide services and not to transfer any property in the ATM Machines to the Banks.
(iii) VAT is charged only on sale of goods or deemed sale of goods; deemed sale includes the transfer of right to use goods; the transfer of right to use becomes leviable to VAT only if there is transfer of effective transfer of control and possession of goods; where the transferee is not allowed to use the goods at his free will but only uses it for the purpose of the transferor, there cannot be any transfer of effective control from the transferor to the transferee; where there is no transfer of control and possession, Service Tax is leviable.
(iv) Service Tax and VAT are mutually exclusive levies. If service tax is levied on the same consideration, VAT cannot be levied. Both levies are mutually exclusive and cannot be levied simultaneously on the same consideration.
(v) Composite contract involving both sale of goods and rendition of services cannot be split artificially to levy tax on separate components. The nature of the contract has to be determined by applying the dominant intention test as it is neither works contract or catering contracts.
(vi) The impugned orders have erroneously held the transaction to be one of deemed sale. A deemed sale under would arise only when goods are either delivered physically or granted the effective control and possession to the recipient. In the present case, the transaction is a pure service transaction not entailing any transfer of property of goods or effective control of the goods the recipient. The various terms of the agreements with the Banks discloses that the primary intent of the contract is only provision of ATM management service for which the Petitioner deploys ATMs and other assets at various sites across India. The Petitioner uses the ATMs and other assets merely as a means for providing ATM management services to banks.
(vii) VAT can be charged on a transaction only where there is a ‘sale’ or a deemed sale of goods. There is no dispute that there is no sale of the ATM machines by the Petitioner to the Banks. For constituting a deemed sale, the transaction should involve a transfer of right to use by the Petitioner to the Banks.
(viii) The impugned orders fail to appreciate that there is a transfer of right to use only when the transfer of the right to use is complete i.e. there is an effective transfer of possession and control of the asset to the transferee. The transferee should have liberty to use the asset in any way that it wants. If the transferor retains effective control of the asset which can only be used for fulfilling the contract of the transferor, the transferor retains effective control of the asset and no VAT can be charged. In such a situation, only Service tax is chargeable since exclusivity and transfer of effective possession and control of goods is essential for a transaction to constitute a transfer of right to use goods.
(ix) The respondents have also failed to consider and appreciate that in order to constitute a transfer, there must be goods available for delivery; there must be a consensus ad idem as to the identity of the goods; the transferee should have a legal right to use the goods consequently, all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee; for the period during which the transferee has such legal right it has to be to the exclusion to the transferor which is the necessary concomitant of the plain language of the statute – a “transfer of the right to use” and not merely a license to use the goods; having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others and in the absence of these conditions being satisfied, it cannot be said that there was a transfer as contended by the respondents.
(x) Petitioner is already paying Service Tax on the ATM Management Services, VAT under the Act cannot be levied on the very same turnover; petitioner has already discharged Service Tax on the turnover on account of ATM Management Services received from the Banks, therefore, the same may be adjusted for the payment of any VAT liability if the demand is sought to be raised and the excess if any should be refunded the Petitioner.
(xi) Transactions of rendering Services cannot be artificially bifurcated to levy VAT; there does not exist any separate consideration, which is payable solely for the right to use ATMs and the entire contract is a composite indivisible contract for rendering a host of services; splitting of an indivisible contract is not permissible as splitting can only be done for specified contracts which involve a works contract; the intention of the parties to the composite contract is relevant in determining whether they intended separate rights arising out of the sale of goods; in case there is no such intention, there is no sale even if the contract could be disintegrated; the dominant nature test is relevant for arriving at the substance of the contract, if it was not a case of works contract or catering contract by way of constitutional fiat, splitting was made permissible; the bifurcation of the contract and revenue generated is only permissible in specified situations and where none of the said transaction has even been alleged in the impugned order, levy of VAT is completely without jurisdiction.
(xii) In any case, KVAT Act does not contain any provision by which an indivisible contract of services and goods inviting transfer of right to use could be split and consideration segregated to charge both the taxes separately; in the absence of machinery provision to spit the contract and determine value, the charge would fail and it would have to be inferred that the Legislature did not intend to tax indivisible contracts at all; the substantive and machinery provisions of a taxing statute are an integrated code and if there is no machinery to compute an integrated code and if there is no machinery to compute a tax, it has to be inferred that such transactions were not intended to be taxed by the substantive provisions. The dominant nature of the Agreements of the Petitioner with the Banks is service and hence only Service Tax is liable to be paid which has been done by the Petitioner in the present case.
7. It is therefore contended that the impugned levies and demands by the respondents deserve to be quashed.
8. Per contra, learned AGA and learned CGSC for the respondents submit that the sale of goods is effected after incorporating the same into a structure and when connected to bank network; it is only on the basis of successful integration certificate i.e. acceptance by the bank that the petitioner’s payment terms comes into play; the property of ATM infrastructure is passed on to the bank immediately after successful integration and certification by the bank appointed person; if there is termination of services of the petitioner, it cannot recover back the goods but is entitled to the price of the goods based on agreed price; when there are goods, acceptance of goods, consideration for the said goods and also a transfer of the title in such goods, the same would be taxable under KVAT Act and not under the Finance Act, 1994 (service tax); service tax is payable only in respect of services and there is a clear demarcation in the Finance Act for excluding the turnover of goods. Under the ATM management services to banks, only services relating to management activities are taxable and not the goods transferred i.e. ATM and equipment. It is therefore submitted that there is no merit in the petitions and that the same are liable to be dismissed.
9. I have given my anxious consideration to the rival submissions and perused the material on record.
10. The two writ petitions involve identical issues and cover Financial Years 2013-14 to 2017-18. The details of the demand raised are tabulated below:
