TaxTMI 
TaxTMI 
2010 (8) TMI 13
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....ner in both the writ petitions is Infotech Software Dealers Association (hereinafter referred to as "the ISODA), a society registered under the Societies Registration Act with its headquarters at Mumbai. It prays for a Writ of Declaration to declare Section 65(105)(zzzze) of Chapter V of Finance Act, 1994 (as amended by Finance No.2 Act of 2009) is null and void, ultra vires and unconstitutional of the provisions of Articles 245, Entries 92C and 97 of List-I, Entry 54 of List-II of Schedule VII and contrary to provisions of Articles 14, 19(1)(g), 265 and 268A of the Constitution of India in so far as the petitioner is concerned. 2.2. The ISODA has about 100 members who are all software resellers. The members of the association of companies are engaged in the business of reselling of Computer Software Products. The sale of software by the members of the association falls into three categories. They are (i) Shrink Wrap Software; (ii) Multiple User Software/Paper Licence and (iii) Internet Download. The Shrink Wrap Software is a box containing the CD/DVD, user manual and the end user licence agreement. The box is wrapped in plastic and therefore called as "Shrink Wrap Software". Wh....
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....ought in by virtue of residuary power under Entry 97 of List I of Schedule VII. As the software being goods and there is no element of service when it is sold to the customers, the provisions of Section 65(105)(zzzze), particularly sub-clauses (v) and (vi) is unconstitutional, as it is beyond the legislative competence of Parliament. 2.7. The impugned provision is also liable to be struck down as being arbitrary and ultra vires of Article 14, as in the case of software, the right of possession as well as the effective control over the branded software is transferred to the purchaser, whereas under Section 65(105)(zzzze) (v) and (vi) of the Finance Act, the service tax has been levied only in relation to the supply of tangible goods without transfer of right of possession and effective control of tangible goods. The provision is also violative of Article 19(1)(g) and Article 265 of the Constitution of India. By virtue of the amendment, levy of service tax makes the sale of software totally unviable. As the measure and the value of tax have been done arbitrarily, particularly when the service element is absent, the levy of service tax on the value would be violative of Article 14 ....
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....n the original manufacturer of Standardised Software, namely, Microsoft and Symantec, and the end user, it would be clear that the software is not sold, but only licensed for the limited use for which it is licensed. In other words, in trade parlance, whenever a software product is launched, the original manufacturer releases what is known as End User License Agreement and Product Use Rights. 3.3. As the Right to Use includes, among other things, the three basic components, namely, (i) right to install the software in a computer by registering the same subject to licensing terms and conditions; (ii) right to run the software and (iii) right to receive updates online through the internet if and when provided by the original manufacturer, it would not amount to absolute sale. Right to Use excludes certain rights, particularly right to modify, right to work and right to commercial exploitation. 3.4. The provisions of Section 65(105)(zzzze) uses the expression providing the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for t....
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....ogy software supplied electronically." 6. Amendment Act No.2 of 2009 to the Finance Act, 1994: List I of Schedule VII contains certain specific entries, where the Parliament would be competent to enact law for imposition of taxes. Some of the entries are Entry Nos.82, 85, 86, 89, 90, 92 as stood when the Constitution was framed and brought in. By the Constitution (Sixth Amendment) Act, 1956, Entry 92-A was introduced with effect from 11.6.56, which confers power on the Parliament to enact law in respect of taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. By the Constitution (Forty-Sixth Amendment) Act, 1982, taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce was introduced with effect from 2.2.83. By the Constitution (Eighty-eighth Amendment) Act, 2003, Entry 92-C was introduced for taxes on services. Though the Amendment Bill was passed in both the Houses of Parliament, it was not given effect to. Entry 97 is a residual entry, which empowe....
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....o the validity of the provision. 9. As far as the legislative competency to make enactments in respect of the transaction which involves a sale is concerned, the State would be competent under Entry 54 of List II of Schedule VII and in such event, the Parliament may not have the legislative competency to enact law on those subjects. In respect of a transaction which is considered to be a service, no specific entry is prescribed under List I enabling the Parliament to enact law. As Entry 92-C has not yet been given effect to, the power of Parliament could be traced to the residual entry, namely, Entry 97. 10. While considering the issue in question, two incidental questions would arise, namely, whether a software is goods and if so, whether in all case of transactions, it would amount to sale or in some transactions it could be considered to be a service. 11. The provisions of sub-section (105) of Section 65 relate to taxable service. It speaks of service provided or to be provided and it does not speak of any service provider, namely, the goods as such. In terms of the provisions of clause (zzzze), any service provided or to be provided to any person or by any other ....
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....onable claims, stocks, shares and securities and including all materials, articles and commodities including the goods involved in works contract etc. Section 2(n) of that Act defines a sale with all its grammatical variations and cognate expressions as meaning, every transfer of the property in goods, whether as such goods or in any other form in pursuance of a contract or otherwise by one person to another in the course of trade or business, for cash, or for deferred payment, or for any other valuable consideration etc. The Apex Court referred to the judgments of the American Courts in the cases of Commerce Union Bank v. Tidwell 538 S.W.2d 405; State of Alabama v. Central Computer Services, Inc.349 So.2d 1156; First National Bank of Fort Worth v. Bob Bullock, 584 S.W.2d 548; First National Bank of Springfield v. Deptt. of Revenue, 421 NE2d 175; Compuserve, Inc. v. Lindley 535 N.E. 2D 360 and Northeast Datacom, Inc. v. City of Wallingford, 563 A2d 688 holding that computer software is intangible personal property. The Apex Court also considered many other judgments of the American Courts in South Central Bell Telephone Co. v. Sidney J. Barthelemy, 643 So.2d 1240; Comptroller of ....
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....des all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software program may consist of various commands which enable the computer to perform a designated task. The copyright in that program may remain with the originator of the program. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become "goods:. We see no difference between a sale of a software program on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasi....
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....d is a marketable commodity. They are visible to the senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regards leviability of the tax under a fiscal statute, it may not make a difference. A program containing instructions in computer language is subject-matter of a licence. It has its value to the buyer. It is useful to the person who intends to use the hardware viz. the computer in an effective manner so as to enable him to obtain the desired results. It indisputably becomes an object of trade and commerce. These mediums containing the intellectual property are not only easily available in the market for a price but are circulated as a commodity in the market. Only because an instruction manual designed to instruct use and installation of the supplier program is supplied with the software, the same would not necessarily mean that it would cease to be a goods. Such instructions contained in the manual are supplied with several other goods including electronic ones. What is essential for an article to become goods is its marketability." While concurring with the majority view, His Lordship, how....
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....ible property and intangible property. 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) utility (b) capable of being bought and sold (c) capable of transmitted, transferred, delivered, stored and possessed. If a software whether customised or non-customised satisfies these attributes, the same would be goods. Unlike the American Courts, Supreme Court of India have also not gone into the question of severability. 17. This Court in the case of Infosys Technologies v. C.T.O. (2008) TIOL 509 HC Mad has held that "if the software whether customised or non-customised satisfies the Rules as a 'goods', it will also be 'goods' for the purpose of Sales Tax. 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 transmitted, transferred, delivered, stored and possessed. 18. Recently, the Karnataka High Court in the case of Antrix Corporation Ltd. v. Assistant Commissioner of Commercial Taxes & others, (2010) TIO....
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....is the right to use the software. The sale is with a condition for exclusive use of the software by the customer at the exclusion of others and it gives absolute possession and control to the user of the right to use the software. The sale normally gives a warranty period and after the said period, some annual maintenance charges are recovered for the services rendered, popularly called as "Annual Maintenance Contract". Paragraph 8523 80 20 of the Central Excise Tariff Act covers "Information Technology Software" and attracts excise duty at the rate of 10%. Supplementary Note to Chapter 85 reads as under: "For the purposes of heading 8523, information technology software means any representation of instructions, data, sound or image including source code and object code, recorded in a machine readable form and capable of being manipulated or providing interactivity to a user, by means of an automatic data processing machine." Notification No.6/2006 (Entry 27) provides for an exemption in respect of any customized software (that is to say any custom designed software, developed for a specific user or a client) other than packaged software or canned software. The same Ent....
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....tive competency to enact law for levying service tax under Entry 93-C. That Entry 93-C is not notified. Hence in case if an element of service is available, the Parliament has got power to impose service tax under the residual Entry 97 of List I of VII Schedule. 23. The provisions of Section 65(53a) of the Finance Act, 1994 state as follows:- "information technology software" means any representation of instruction, data, sound or image, including source code and object code, recorded in machine readable form and capable of being manipulated or providing interactively to a user, by means of a computer or an automatic data processing machine or any other device or equipment." 24. After the Constitution (Forty-Sixth Amendment) Act, 1982 introducing clause (29A)(d) to Article 366 of the Constitution, tax on the sale or purchase of goods includes "a tax on the transfer of the right to use any goods for any purpose whether or not for a specified period" for cash, deferred payment or other valuable consideration. The Finance Act, 2008 has brought in some new services under the service tax net. One of them is "Information Technology Software Service". The relevant amendment....
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.... contracts where the sale element. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of 'sale' for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Article 366(29A) operate. By introducing separate categories of 'deemed sales', the meaning of the word 'goods' was not altered. Thus the definitions of the composite elements of a sale such a intention of the parties, goods, delivery etc., would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must move with the times. See Attorney General v. Edison Telephone Company 1886 QBD 244. But the 46th Amendment does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word 'goods' has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunklerley has survived is with reference to the dominant nature test to be app....
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....alls into one category or the other is to as what is 'the substance of the contract'. We will, for the want of a better phrase, call this the dominant nature test." 26. The dominant test applied by the Apex Court is that if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service and impose tax on the sale. The Apex Court further quoted with approval the judgment in State of Madras v. Gannon Dunkerley and Co.(Madras) Ltd., IX STC 353 (SC) and held that the dominant nature test to be applied to a composite transaction not covered by Article 366(29A). While considering that Article, the Apex Court further observed that "of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve....
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.... Restaurant Assn. Of India v. Union of India, AIR 1990 SC 1637 ought to have appreciated that in that matter Article 366(29A)(f) of the Constitution was not considered which is of vital importance to the present matter and that the High Court ought to have differentiated the two matters. In reply, our attention was invited to paras 31 and 32 of the judgment of the High Court in which service aspect was distinguished from the supply aspect. In our view, reliance placed by the High Court on Federation of Hotel and Restaurant and in particular, on the aspect theory is, therefore, apposite and should be upheld by this Court. In view of this, the contention of the appellant on this aspect is not well founded." 28. Article 366(29A)(d) is a deeming provision as to tax on the right to transfer the use of any goods for any purpose be considered as a tax on sale or purchase of goods. Even before the Amendment came into force, the customs Notification No.21 of 2002 dated 1.3.2002 referring the goods in Sl.No.157 excluded the standard rate of customs for "Information Technology Software" and the document of title conveying the right to use the "Information Technology Software". Sl.No.311 of....
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....ion in a form that personally identifies you. 4. Not For Resale Software. Product identified as 'Not for Resale" or "NFR" may not be resold, transferred, or used for any purpose other than demonstration, test or evaluation. 7. Software Transfer. You may permanently transfer all of your rights under this EULA, provided you retain no copies, you transfer all of the Product (including all COMPONENTS, UPDATES, the media and printed materials, any upgrades, and this EULA), you provide Microsoft notice of your name, company, and address and the name, company, and address of the person to whom you are transferring the rights granted herein,and the recipient agrees to the terms of this EULA. If the Product is an upgrade, any transfer must include all prior versions of the Product. If the Product is received as part of a subscription, any transfer must include all prior deliverables of Product and all other subscription deliverables. 9. Production Use. The Product may only be used for development purposes as described in this EULA and may not be used in a production environment, unless such use is allowed under the terms of the Component Agreement delivered wi....
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....ght notice on your products and services that include the Media Elements." 30. From the above, the dominant intention of the parties would show that the developer or the creator keeps back the copyright of each software, be it canned, packaged or customised, and what is transferred to the network subscriber, namely, the members of the association, is only the right to use with copyright protection. By that agreement, even the developer does not sell the software as such. By that Master End-User License Agreement, the members of petitioner-association again enter into an End-User License Agreement for marketing the software as per the conditions stipulated therein. In common parlance, end user is a person who uses a product or utilises the service. An end user of a computer software is one who does not have any significant contact with the developer/creator/designer of the software. According to Webster's New World Telecom dictionary, an end user is "the ultimate user of a product or service, especially of a computer system, application or network." On a careful reading of the above, we are of the considered view that when a transaction takes place between the members of ISOD....