Full Judgment Text
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CASE NO.:
Appeal (civil) 2582 of 1998
PETITIONER:
TATA CONSULTANCY SERVICES
Vs.
RESPONDENT:
STATE OF ANDHRA PRADESH
DATE OF JUDGMENT: 13/03/2001
BENCH:
S. Rajendra Babu & R.C. Lahoti
JUDGMENT:
(WITH C.A. No. 2583, 2584, 2585 and 2586 of 1998)
J U D G M E N T
RAJENDRA BABU, J. :
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In these matters the Andhra Pradesh High Court concluded
that software is of two categories - (i) software which is
specialised and exclusively custom-made to cater to the
needs of individual clients, and (ii) software which is
standardised and marketed for the use of certain classes of
clients, like the Oracle, Lotus, Master Key, N-Export, Ex.
Unigraphics, etc. and held that for the purpose of the
Andhra Pradesh General Sales Tax Act (hereinafter referred
to as the Act) it is not necessary to consider whether the
definition of goods in Section 2(h) of the Act has to be
read down so as to exclude software from it. The High Court
took the view that the first category may not constitute
goods for the purpose of the Act, while the second
category are goods and held that they are leviable to tax.
The case advanced on behalf of the appellants is that
the branded software which is an intellectual property being
product of thought, creativity and intellectual efforts
cannot be goods for the purpose of the Act; that it is an
intangible intellectual property and, therefore, cannot be
goods; that software is an essentially classic form of
intellectual property; that the value of the tapes on which
it is sold is much lesser than the value of the software
programme itself; that the software programme is always
transferred onto the hardware and then the tapes are
useless; that, therefore, the licensee/payer is paying for
the programme and not for the tapes or discs; these discs
are different from music cassettes and video tapes, music
reels, etc. because the programme on the discs is separable
and is always transferred to the hardware, whereas in the
case of music cassettes, etc. though they may be separable
and can be transferred to another cassette or tape this is
not generally done and the music or movie always remains on
the tangible property on which it was stored when sold;
that there are other methods by which a software programme
can be installed, like, the programme directly keying in the
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programme through the console keyboard; that what is
transferred is the right to use the programme (which is a
set of instructions) and not the tape on which it is stored;
that though software has a physical component, these
physical components are merely tangential incidents of a
computer programme, they do not change the programmes
clearly intangible character; that the essence of the
contract is the right to use the software, therefore, the
essence of the transaction test must be applied; that in
PSI Data Systems Ltd. v. Collector of Central Excise, 1997
(2) SCC 78, it is held that if discs, floppies, CD ROMs are
sold along with the computer, their value is not to be
included for assessing excise duty; that a software
programme is a process that can be used to achieve a certain
result whereas a music cassette etc. is the end product in
itself.
While on behalf of the respondents the case of the
appellants is resisted on the ground that the magnetic
tapes, discs, are necessary to carry the programme and for
the transfer to the hardware and, therefore, the value of
the tapes is equal to the value of the programme; that the
fact that the programme can be transmitted through some
other means does not take away from the fact that in fact a
tangible means was actually used; that music cassettes,
phonographs and movie tapes are indistinguishable from discs
and tapes because (i) they can also be transmitted by
telephone lines and through radio waves, and (ii) the
contents of music cassettes etc. are also transferable to
some other medium belonging to the purchaser of the right to
use; that software is tangible property and software
recorded in physical form becomes inextricably linked with
the corporeal object upon which it is stored, that is, a
disc, tape, hard drive, etc.; that the fact that the
information can be transferred and then physically recorded
in another medium does not make software any different from
any other type of recorded information that can be
transferred to another medium such as film, videotape, audio
tape or books; that the distinction between books, films,
videotapes, audio-tapes etc. on the one hand and computer
programme on the other on the basis that the former cannot
exist without the tangible medium and the latter can is
unsustainable because even a programme has to be stored on
some medium like the hard disc and books, music etc. can
also be transferred from one medium to another; that in
Wal-Mart Stores, Inc. v. City of Mobile & County of
Mobile, 200-622, Supreme Court of Alabama (1996), the Court
said, Software is an arrangement of matter recorded in a
tangible medium and, therefore, constitutes a corporeal
body; that whether another medium was actually used should
be seen.
This Court in M/s Associated Cement Companies Ltd. v.
Commissioner of Customs, JT 2001 (2) SC 141, examined a
similar question in the context of the Customs Act and
Tariff Act with reference to the Customs Valuation
(Determination of Price of Imported Goods) Rules, 1988
wherein several decisions rendered relating to levy of sales
tax in the context of works contract were cited to contend
that the drawings, plan, manuals, etc. supplied were in the
nature of intellectual property being knowledge or know how
which could only amount to service and not goods. This
Court is of the view that those decisions would not be of
any help in the case in which the matter was being
considered as the question before them was only whether the
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papers or diskettes etc. containing advice and/or
information are goods for the purpose of the Customs/Tariff
Act. In the course of the discussion several observations
have been made as to the nature of the goods and the
expression goods used in various contexts is also taken
note of in arriving at the conclusion. It is specifically
stated that once these drawings, etc. were put on the
diskettes it would enhance the value of those goods and
adopted the reasoning set out in Advent Systems Limited v.
UNISYS Corporation, [925 F 2d 670 (3d Cir 1991)] that
computer programmes are the product of an intellectual
process, but once implanted in a medium are widely
distributed to computer owners though the programme can be
copyrightable as intellectual property it does not alter the
fact that once in the form of a floppy disk or other medium
the programme is tangible, moveable and available in the
market place and, therefore, would amount to goods. The
fact that some programmes may be tailored for specific
purposes need not alter their status as goods. To arrive
at these conclusions this Court referred to several
decisions cited therein.
The debate adverted to by us as to development of
customised computer software programmes for a customer do
not constitute computer and data processing services because
the true object of software development contract is not to
obtain the services of the consultant, but to obtain
software programmes consisting of intangible intellectual
property which are not taxable. The services used to
customise and develop the computer software are part of the
final software package sold and not separate computer and
data processing services subject to tax.
This debate will be incomplete without considering the
decisions in addition to those cited in Associated Cement
Company Ltd. case [supra] and those referred to in this
order, to the following: Beta Computers (Europe) Ltd. v.
Abobe Systems (Europe) Ltd. (1995); Commerce Union Bank v.
Tidwell, 56-85 TN-Taxrptr-TB 200-279 Tennessee Supreme
Court; State of Alabama v. Central Computer Services.
INC, 379 So 2nd 1156; BOB Bullock, Comptroller v.
Statistical Tabulating Corporation, 60-82 Tx-Taxrptr-TB
200-683 Texas Supreme Court; The First National Bank of
Fort Worth, A National Banking Association v. BOB Bullock
Comptroller of Public Accounts, State of Texas, 584 sw 2nd
548; First National Bank of Springfield v. Department of
Revenue, 55-84 IL-Taxrptr-TB 201-165 Illionis Supreme Court;
Ray S. James, Director of Revenue, State of Missouri v.
Tres Computer Systems, INC., 642S.W. 2nd 347; Comptroller
of the Treasury v. Equitable Trust Co., 296 Md. 459, 464
A.2nd 248; Chittenden Trust Co. v. Commissioner of Taxes,
55-98 VT-Taxrptr- TB-200-193, Vermont Supreme Court; Toby
Constructions Products Pty. Ltd. v. Computa Bar (Sales)
Pty. Ltd. (1983); University Computing Company v. Hon.
Martha Olsen, Commissioner of Revenue for the State of
Tennessee, 677 S.W. 2d 445; Hasbro Industries, INC. v.
John H. Norberg, Tax Administrator, 487 A.2d 124;
Compuserve, INC. v. Lindley, 535 N.E. 2nd 360; Northeast
Datacom, INC v. City of Wallingford, 55-90 CT-Taxrptr-TB
200-320, Connectict Supreme Court; South Central Bell
Telephone Co. v. Sindney K. Barthelemy, 643 So.2d 1240;
Wal-Mart Stores, INC. v. City of Mobile & County of Mobile
(supra); Kenneth P. Hahn. As Assessor, etc. v. State
Board of Equalization; State v. Central Computer Services.
Inc. (1977, Ala) 349 So. 2d 1160, 91 ALR 3d 274); and
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Andersen Consulting, LLP v. Gene Gavin, Commissioner of
Revenue Services, (2000) Connecticut Superior Court. Deeper
and further consideration is required in view of the
importance of the matter having global implications.
Therefore, an authoritative pronouncement is required on all
these aspects of the matter. In that view of the matter, we
think it appropriate to place the papers in these cases
before the Honble the Chief Justice of India to be referred
to a Larger Bench.