TMI Blog1996 (12) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... are and service companies, the list of which is enclosed to the writ petition, and the second petitioner is the resident manager of Tata Consultancy Services which is one of the members of the first petitioner. The members of the first petitioner are developing software for computers. They say that software is purely an intellectual property, which is not "goods " as defined in the APGST Act. Computer software programme consists of a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result, that is "source code" or "object code". A programmer expresses his thoughts in a conventional symbolic programming language, analogous to expressing his thoughts in the staff notations used for music. This expression is usually written in a form known as "source code". It contains a combination of computer language words and human language words. The writing of a computer programme in "source code" is the first and most essential step in the expression of the intellectual thoughts of the programmer. The programmer converts the "source code" into another form, known as "object code" which is a binary representations of the programm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to which copies of agreement, etc., were to be produced and examined by the Commercial Tax Officer, would fall under the first category and could not be taxed as turnover of sales of goods and that the turnover in question in the four appeals related to the second category and accordingly it upheld the order of the first appellate authority including the order of remand. Consequently it dismissed all the four appeals by a common order on April 1, 1996. Challenging the validity of the said order of the Tribunal the second petitioner filed the abovementioned four revisions. 5.. The Assistant Commissioner (CT), Legal, filed counter-affidavit for the second respondent in the writ petition. He submits that the computer software programme is essentially a set of instructions in a computer language and that the function of these programmes, is that of an interface between the computer and the user. Software can broadly be classified as "systems software" and "application software". "System software" is designed to facilitate the functioning of computers or computer systems and that in such softwares fall MS-DOS, Unix, etc. "Application software" is a software designed for a particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the State Legislature under entry 54 in List II of the Seventh Schedule to the Constitution, cannot enact any law levying sales tax on amounts received for the transfer of software which is an intellectual property. They say that the price paid by the user of the software is like the price paid for the opinion of a professional, a lawyer or a physician who may by words of mouth advise or treat or write an opinion or a prescription and the same cannot be equated to transfer of goods liable to tax under the APGST Act. 7.. Mr. G.S. Jetley, the learned senior counsel appearing for the petitioners, contends that section 2(n) read with Explanation IV and sections 5 and 5-E of the APGST Act are ultra vires the Constitution as they are beyond the legislative competence of the State Legislature. The learned counsel developed his argument stating that even after amendment of article 366, inserting clause (29A), the Legislature can levy sales tax on goods and since software is only intellectual property but not goods, no sales tax can be imposed on the transfer of the right to use software as that is beyond the competency of the State Legislature and ultra vires the Constitution. The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase takes place in the course of inter-State trade or commerce. Thus it is clear that where the sale or purchase of goods other than the newspaper is otherwise than in the course of inter-State trade or commerce, the State Legislature has competency to authorise levy of tax, on such sale or purchase. 12.. Section 5 of the APGST Act is the charging section and is in the following terms: "5. Levy of tax on sales or purchases of goods.-(1) Save as otherwise provided in this Act, every dealer shall pay a tax under this Act, for each year on every rupee of his turnover of sales or purchases of goods in each year irrespective of the quantum of his turnover at the rates of tax and at the points of levy specified in the Schedule. (2) For the purpose of this section and the other provisions of this Act, the turnover on which a dealer shall be liable to pay tax, shall be determined after making such deductions from his total turnover, and in such manner as may be prescribed: .................. Provided that- (i) in respect of the same transaction, the buyer or the seller, but not both, as determined by such rules as may be prescribed, shall be taxed; (ii) where a dealer h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made." 15.. This is an inclusive definition, it includes a tax on the transfer of right to use goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. "Transfer" referred to in subclauses (a) to (f) of clause (29A) and delivery or supply of any goods shall be deemed to be sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made. 16.. Thereafter the APGST Act was amended by Act 18 of 1985 and section 5-E, among other provisions, was inserted in the APGST Act. Section 5-E reads thus: "5-E. Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, who may transfer the right to use of any goods for any purpose whatsoever (whether or not for a specified period) in the course of business to any other person." 19.. The term "sale" is defined in section 2(n) as follows: "(n) 'sale' with all its grammatical variations and cognate expressions means 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 or in the supply or distribution of goods by a society (including a co-operative society), club, firm or association to its members, but does not include a mortgage, hypothecation or pledge of or a charge on goods." 20.. Explanation IV is in the following terms: "A transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration shall be deemed to be a sale. " 21.. "Tax" is defined in section 2(q) as follows: "'Tax' means a tax on the sale or purchase of goods payable under this Act and includes,- (i) to (iii)...................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inds of movable property including all materials, articles and commodities and goods (as goods) or in some other form involved in the execution of a works contract or those goods used or to be used in the construction, fitting out, improvement or repair of movable or immovable property and all growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale and motor spirit fall within the meaning of "goods"; actionable claims, stocks, shares and securities are excluded from that definition. We have noticed that the definition of "goods" is an inclusive definition-it includes in its meaning the very term which it seeks to explain. It has, therefore, become necessary to fall back on the meaning of "goods" as understood in English language; its ordinary dictionary meaning is "movable property or merchandise" (*). This term has been interpreted in various judgments of the courts and we shall refer to them briefly. 26.. In State of Bihar v. Rameshwar Jute Mills Ltd. [1953] 4 STC 179 (Pat) the meaning of the term "goods" in section 2(e) of the Bihar Sales Tax Act, 1947, fell for consideration of a Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possessed, moved or delivered. On appeal to the Supreme Court, reversing the judgment of the Madhya Pradesh High Court on the question whether "electricity" was "goods" it was held that "electricity " was "goods" within the meaning of that Act. It was pointed out that the term "movable property" when considered with reference to "goods" as defined for the purpose of sales tax could not be taken in a narrow sense and merely because electric energy was not tangible or could not be moved or touched like a piece of wood or a book, it could not cease to be movable property when it had also the attributes of such property; that the electricity was capable of abstraction, consumption and use and it could be transmitted, transferred, delivered, stored and possessed, therefore it was a movable property and "goods" within the meaning of the Act. 29.. In Assistant Sales Tax Officer v. B.C. Kame [1977] 39 STC 237 (SC) a photographer was taxed under the Madhya Pradesh General Sales Tax Act, 1958 on the amount received by him for supplying photograph prints to his client or customer or for enlarging the photos. The Supreme Court held that when a photographer undertook to take a photograph, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is as exhaustive as the definition under the APGST Act. The learned author expressed that in modern times the important question which is not yet wholly resolved, is whether computer software would constitute "goods" within the meaning of the Act. We have to bear in mind that we are concerned here with Here italicised. software which are contained in floppies or discs like ARC-INFO, WordStar, Foxpro, Wings, etc. Relying on a decision of New South Wales in Toby Construction Products Pty. Ltd. v. Compura Bar (Sales) Pty. Ltd. (1983) 2 NSWR 48 it is opined that the software contained in physical objects is clearly "goods". Referring to the Uniform Commercial Code of the United States, it is pointed out that computer software is classified into (i) "off the shelf" and (ii) supply of software which is tailor-made to the customer's particular requirements; in regard to the first category, it is indicated that the transaction closely resembles an ordinary consumer purchase of goods within the definition of a contract of sale of goods. 34.. As our discussion is confined to branded software, as it is called here, of which American equivalent is "computer software off the shelf", we do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a correct statement would be that all intellectual properties may not be "goods" and therefore branded software with which we are concerned here cannot be said to fall outside the purview of "goods" merely because it is intellectual property; so far as "unbranded software" is concerned, it is undoubtedly intellectual property but it may perhaps be outside the ambit of "goods". However, we consider it unnecessary to discuss its various aspects and express any opinion in that regard. We are, therefore, unable to accept the contention that merely because software is "intellectual property" it cannot be treated as "goods" as being too broad a statement. 39.. The other reasons given by Mr. Jetley for not treating the computer software as "goods" will be dealt with now. It is argued that where a developer of software creates the software packages, no bank or financial institution will accept that as security and that the entire set of software programme can be erased from the magnetic media and that such a thing is not possible in the case of "goods" and that is a proof positive of the fact that software is not "goods" as defined under the Act. Yet an additional aspect is highlighted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the software is contained in the floppies and discs. In our view, software is as much "goods" as music on tapes, video or audio, paintings on papers or any other work of art inscribed on any material things. When floppies or discs of branded software are sold and purchased or the right to use the same is licensed identifiable commodities/articles known to the market are dealt with but not the use of skill or labour of the programmer. 41.. It is argued that software contains instructions or information so it will be exempt from tax like newspaper; reliance is placed on the judgment of the Supreme Court in Sait Rikhaji Furtarnal v. State of Andhra Pradesh [1992] 85 STC 1 (SC); AIR 1991 SC 354. There the question was whether the old newspapers were covered by the exemption provided in the Constitution and not liable to sales tax. It was held that even if the newspapers were not of the same date or of a current period, their contents had news value and they continue to be the newspapers and therefore they would be covered by the exemption granted under the Constitution. The case of the petitioners here is that the floppies/discs containing the software programme fall within the mean ..... X X X X Extracts X X X X X X X X Extracts X X X X
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