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30 July 2010 software is goods or services?

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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30 July 2010 Software is goods

In Tata Consultancy Services v. State of Andhra Pradesh (2005) 1 SCC 308 = 141 Taxman 132 = 271 ITR 401 = AIR 2005 SC 371 = 2004 AIR SCW 6583 = 137 STC 620 (SC 5 member Constitution bench), it has been held that canned software (i.e. computer software packages sold off the shelf) like Oracle, Lotus, Master-Key etc. are ‘goods’. The copyright in the programme may remain with originator of programme, but the moment copies are made and marketed, they become ‘goods’. It was held that test to determine whether a property is ‘goods’ for purpose of sales tax, is not whether the property is tangible or intangible or incorporal. The test is whether the concerned item is capable of abstraction, consumption and use, and whether it can be transmitted, transferred, delivered, stored, possessed etc. Even intellectual property, once it is put on a media, whether it be in form of books or canvas (in case of painting) or computer discs or cassettes and marketed would become goods. In all such cases, intellectual property has been incorporated on a media for purpose of transfer. The buyer is purchasing the intellectual property and not the media, i.e. the paper or cassette or discs or CD. - - There is no distinction between ‘branded’ and ‘unbranded’ software. In both cases, the software is capable of being abstracted, consumed and used. In both the cases, the software can be transmitted, transferred, delivered, stores, possessed etc. Unbranded software when marketed/sold may be goods. However, Supreme Court did not express any opinion because in case of unbranded software, other questions like situs of contract of sale and/or whether the contract is a service contract may arise. Hence, in case of unbranded software, the issue is not yet fully settled. [SC upheld decision of AP High Court reported in Tata Consultancy Services v. State of AP (1997) 105 STC 421 (AP HC DB)].

In Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = AIR 2006 SC 1383 = 3 STT 245 = 145 STC 91 = 282 ITR 273 (SC 3 member bench), following extract from decision in case of Tata Consultancy Services v. State of Andhra Pradesh was quoted with approval and adopted, ‘A ‘goods’ may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold and (c) capable of being transferred, delivered, stored and possessed. If a software, whether customised or non-customised satisfies these attributes, the same would be goods. - - It was observed that whether goods are incorporal or corporal, tangible or intangible, they must be deliverable’.

Earlier also, in Associated Cement Companies Ltd. v. CC 2001(4) SCC 593 = 2001 AIR SCW 559 = AIR 2001 SC 862 = 124 STC 59 (SC 3 member bench), it was held that computer software is ‘goods’ even if it is copyrightable as intellectual property.

2.1 Software is dutiable goods under customs, excise and Vat

Information Technology Software (branded as well as tailor made) is ‘excisable goods’ under headings 8523 80 20 [earlier 8524 91 11, 8524 91 12 and 8524 91 13]. The tariff rate of duty is 12% w.e.f. 1-3-2008 (earlier it was 8%). However, all software, except canned software i.e. software that can be sold off the shelf, is ‘exempt’ under Sr. No. 27 of notification No. 6/2006-CE dated 1-3-2006.

‘Packaged software or canned software’ means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf [Explanation to Sr No. 27 of notification No. 6/2006-CE dated 1-3-2006].