Karnataka High Court Rules in Favour of ATM Management Services as Pure Services, Overturns VAT Re-assessment

Karnataka High Court Rules in Favour of ATM Management Services as Pure Services, Overturns VAT Re-assessment

The Karnataka High Court has invalidated the re-assessment and affirmed that providing ATM management services to banks constitutes purely service-oriented activity and does not fall under the purview of Value Added Tax (VAT).

Justice S.R. Krishna Kumar's bench noted that the transaction represents a distinctively service-oriented interaction, devoid of any transfer of property or substantial control over goods to the recipient. Scrutiny of the contract's diverse stipulations with the banks reveals an exclusive focus on the provisioning of ATM management services. This involves the deployment of ATMs and associated assets across different locations in India. It is evident that the petitioners employ the ATMs and related assets as a mechanism solely for the purpose of delivering ATM management services to the banks.

The petitioner/assessee operates within the domain of furnishing ATM Management Services to multiple banks on a nationwide scale, offering comprehensive solutions throughout the service cycle. The petitioner has dutifully remitted Service Tax encompassing the entirety of the contractual remuneration received from banks in recognition of the services provided. Moreover, the petitioner has consistently fulfilled the obligation of submitting returns to the Service Tax Authorities as part of standard procedure.

The tax department attempted to impose VAT through the issuance of Assessment Orders and Demand Notices. This action disregarded the comprehensive array of services rendered by the petitioner and erroneously categorised the transaction as a "financial lease." Consequently, the department treated it as a transfer of ATM Machines' usage rights, deeming it a "sale of goods" in essence. Such an interpretation lacks both jurisdiction and legal basis, rendering it not only unlawful but also capricious and in opposition to the available evidence. It is therefore appropriate to nullify this approach.

The central concern revolved around the question of whether the tax department possessed the authority to impose VAT on the ATM Management Services extended by the petitioner to multiple banks within the geographic scope of Karnataka. Notably, the petitioner had already fulfilled the obligation of remitting Service Tax for these services.

The department argued that the classification of goods is applicable only once they are incorporated into a structure and linked to a bank network. The crucial determinant for invoking the petitioner's payment terms rests on the attainment of a successful integration certificate, which signifies the bank's acknowledgment. Following successful integration and certification by a bank-appointed representative, ownership of the ATM infrastructure is immediately transferred to the bank.

In the event of termination of services by the petitioner, the retrieval of goods is not permissible. However, the petitioner is entitled to the price stipulated for the goods according to the agreed terms. In situations involving the presence of tangible goods, their acceptance, consideration, and transfer of title, liability falls under the purview of the Karnataka Value Added Tax (KVAT) Act, rather than service tax.

The department asserted that the obligation for service tax pertains exclusively to services, as the Finance Act distinctly separates goods' turnover from this framework. In the context of providing ATM management services to banks, solely the services linked to management activities are subject to taxation, while the goods transacted, namely ATMs and associated equipment, remain exempt. Consequently, the petitions lack substantive basis and should be deemed ineligible for consideration, warranting their dismissal.

The Court emphasised that there exists no indication whatsoever that the ATMs and equipment undergo any form of transfer or delivery to the banks at any point. The possession of these assets likewise remains with the petitioners and does not shift to the banks. The petitioners persist in furnishing ATM Management services to the banks throughout the contractual duration, deploying and utilising the ATMs and equipment in this process. It is crucial to recognise that the imposition of VAT hinges on the condition of delivery or transfer. However, only deployment is evident here, while actual delivery is absent. Moreover, the petitioners not only possess but also exercise effective control over the ATMs and equipment. This level of control is pivotal, as, without it, the petitioners would be unable to provide the stipulated services.