Service Tax on Software: characterisation as sale or service upheld where licence retains copyright; taxability sustained.

Service tax on supply of software focuses on whether transactions are sales or services; the dominant intention and contractual structurewhere developers retain copyright and grant end-user licencesmeans the transfer is a right to use not an outright sale, affecting characterization. The constitutional validity of taxing such software transactions under residuary legislative power was accepted, so long as Parliament possesses competence under Entry 97 List I; consequently the amended provision cannot be struck down for being unconstitutional on that ground.

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Issues: (i) Whether Section 65(105)(zzzze) of the Finance Act, 1994 (as amended) is within the legislative competency of Parliament under Entry 97 of List I of Schedule VII of the Constitution of India; (ii) Whether computer software is "goods" and whether transactions pursuant to End User Licence Agreements (EULAs) are sales or services.

Issue (i): Whether the amendment bringing information technology software related transactions within "taxable service" under Section 65(105)(zzzze) is intra vires Parliament's powers.

Analysis: Entry 97 of List I is a residuary power permitting Parliament to legislate on matters not enumerated in Lists II or III, including taxation of services. Article 366(29A)(d) and the absence of an operational Entry 92-C leave service taxation to residual legislative competence. The amended clause targets services "provided or to be provided" in relation to information technology software; its application depends on the nature of individual transactions and does not purport to convert every software transaction into a service regardless of facts.

Conclusion: Section 65(105)(zzzze) is within Parliament's legislative competency under Entry 97 of List I; the vires challenge to the provision is rejected in respect of legislative competence.

Issue (ii): Whether software is "goods" and whether supply under EULA amounts to sale or service.

Analysis: The inclusive constitutional definition of "goods" (Article 366(12)) and precedent establish that software, when possessing attributes of marketable commodity (utility; capable of being bought and sold; capable of being transmitted, transferred, delivered, stored and possessed), qualifies as goods. However, the nature of a specific transaction depends on the parties' dominant intention and contractual terms (including EULA provisions such as retention of copyright and grant of a limited "right to use"). Transactions delivering absolute transfer with deliverable goods may be sales; transactions conferring only a limited right to use, updates, or licencing restrictions may constitute services. The applicability of Section 65(105)(zzzze) therefore requires transaction-specific determination by the authorities or courts.

Conclusion: Software can be "goods" for fiscal purposes, but whether a particular supply under EULA is a sale or a service is fact- and contract-specific; neither the classification of software as goods nor the possibility of service character vitiates the amended provision.

Final Conclusion: The writ petitions challenging Section 65(105)(zzzze) on the grounds of legislative incompetence and related constitutional objections are dismissed; the amended provision remains operative subject to transaction-specific determinations of sale or service.

Ratio Decidendi: Parliament has legislative competence under Entry 97 of List I to tax services relating to information technology software; software may qualify as "goods" under Article 366(12) but the characterization of a particular transaction as sale or service depends on the dominant nature of that transaction and the contractual terms between parties.

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