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TMI Blog2004 (11) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ent per : S.N. Variava, J.]. - These Appeals are against the Judgment dated 12th December, 1996 of the Andhra Pradesh High Court. The Appeals have been placed before this Bench pursuant to an Order of this Court dated 16th January, 2002. 2. Briefly stated the facts are as follows : The Appellants provide consultancy services including Computer Consultancy Services. As part of their business they prepare and load on customers' computers custom made software (for sake of convenience hereinafter referred to as 'uncanned software') and also sell Computer Software Packages off the shelf (hereinafter referred to as 'canned software'). The canned Software Packages are of the ownership of companies/persons, who have developed those software. The Appellants are licensees with permission to sub-licence these packages to others. The canned software programmes are programmes like Oracle, Lotus, Master Key, N-Export, Unigraphics, etc. 3. In respect of the canned software the Commercial Tax Officer, Hy- derabad, passed a provisional Order of Assessment under the provisions of the Andhra Pradesh General Sales Tax Act, 1957 [hereinafter called 'the said Act'] holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in the Indian Sale of Goods Act, 1930 (Central Act III of 1930) a sale or purchase of goods shall be deemed, for the purpose of this Act to have taken place in the State, wherever the contract of sale or purchase might have been made, if the goods are within the State. (i) in the case of specific or ascertained goods, at the time the contract of sale or purchase is made; and (ii) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by the seller or by the purchaser, whether the assent of the other party is prior or subsequent to such appropriation. (b) Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of clause (a) shall apply as if there were separate contracts in respect of the goods at each of such places. Explanation III : Notwithstanding anything contained in this Act or in the Indian Sale of Goods Act, 1930 (Central Act III of 1930), two independent sales or purchases shall for the purposes of this Act, be deemed to have taken place. (1) When the goods are transferred from a principal to his selling agent and from the selling agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relied upon certain observations in the book "The Law Relating to Computers and the Internet" by one Mr. Rahul Matthan, wherein it has been stated that a software program is essentially a series of commands issued to the hardware of the computer that enables the computer to perform in a particular manner. It is stated that to make it effective, therefore, the sequence of commands must be physically stored on a portion of the computer that can be readily accessed by the processing unit of the computer. It is stated that in order for this, the programs should be reduced to a physical form so that it is capable of being stored. It is stated that the programs are therefore of a nature that they may be recorded on magnetic media (much like the recording of audio or video on cassettes and tapes) but that in cases of software, the programmes are recorded on floppy drives, CDs or hard drives. In the book, 'the nature of software' is defined as follows : "The Nature of Software What then, is the software program? If a person goes to a store to purchase an item of software, he will most likely be given a box containing a series of floppy discs or a single CD-ROM and some instruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." 10. Mr. Sorabjee submitted that the definitions show that a computer programme falls within the definition of literary work and is intellectual property of the programmer. 11. Mr. Sorabjee submitted that a computer software is nothing but a set of commands, on the basis of which the computer may be directed to perform the desired function. He submitted that a software is completely unlike a book or a painting. He submitted that when the customer purchases a book or a painting what he gets is the final product itself. Mr. Sorabjee submitted that in cases of software the consumer does not get any final product but all that he gets is a set of commands which enable his computer to function. He submitted that having regard to its nature and inherent characterstic, software is intangible property which cannot fall within the definition of the term "goods" in Section 2(h) of the said Act. 12. Mr. Sorabjee submitted that the question as to whether software is tangible or intangible property has been considered by the American Courts. He fairly pointed out that in America there is a difference of opinion amongst the various Courts. He submitted that, however, the major ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by means of a tape or a disc, it does not constitute purchase of tangible personal property and the same remains intangible personal property. It has been held that what the customer paid for is the intangible knowledge which cannot be subjected to the personal property tax. In these cases, difference is sought to be made between purchase of a book, music cassette/video or film and purchase of software on the following lines : "When one buys a video cassette recording, a book, sheet music or a musical recording, one acquires a limited right to use and enjoy the material's content. One does not acquire, however, all that the owner has to sell. These additional incidents of ownership include the right to produce and sell more copies, the right to change the underlying work, the right to license its use to other and the right to transfer the copyright itself. It is these incidents of the intellectual, intangible competent of the software property that Wallingford has impermissibly assessed as tangible property by linking these incorporeal incidents with the tangible medium in which the software is stored and transmitted." 13. It has been fairly brought to the attention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , video tape, audio tape or books. It has been held that by sale of the software programme the incorporeal right to the software is not transferred. It is held that the incorporeal right to software is the copyright which remains with the originator. What is sold is a copy of the software. It is held that the original copyright version is not the one which operates the computer of the customer but the physical copy of that software which has been transferred to the buyer. It has been held that when one buys a copy of a copyrighted novel in a bookstore or recording of a copyrighted song in a record store, one only acquires ownership of that particular copy of the novel or song but not the intellectual property in the novel or song. 14. Mr. Dwivedi pointed out that the difference of opinion among the various American Courts has arisen because under the American Statutes Act what is taxable is "tangible personal property". He submitted that it is this definition which required the American Courts to consider whether software is tangible or intangible. Mr. Dwivedi submitted that the definition of the term "goods" in the said Act is a very wide definition. He submitted that "goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be movable property when it has all the attributes of such property. It is needless to repeat that it is capable of abstraction, consumption and use which, if done dishonestly, would attract punishment under Section 39 of the Indian Electricity Act, 1910. It can be transmitted, transferred, delivered, stored, possessed etc. in the same way as any other movable property. Even in Benjamin on Sale, 8th Ed. Reference has been made at p. 171 to County of Durham Electrical etc. Co. v. Inland Revenue, in which electric energy was assumed to be "goods". If there can be sale and purchase of electric energy like any other movable object, we see no difficulty in holding that electric energy was intended to be covered by the definition of "goods" in the two Acts. If that had not been the case there was no necessity of specifically exempting sale of electric energy from the payment of sales tax by making a provision for it in the Schedules to the two Acts. It cannot be denied that the Electricity Board carried on principally the business of selling, supplying or distributing electric energy. It would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken in a narrow sense. It was held that merely because electric energy was not tangible or would not be moved or touched like, for instance, a piece of wood or a book it would not cease to be movable property when it had all the attributes of such property. It was held that electricity was capable of abstraction, consumption and use which, if done dishonestly, was punishable under Section 39 of the Indian Electricity Act, 1910. It was held that electric energy could be transmitted, transferred, delivered, stored and possessed in the same way as any other movable property. It was held that electricity was thus "goods" within the meaning of the Sales Tax Act. 19.Thereafter, in the case of M. P. Cement Manufacturers' Association v. State of M. P. & Ors., reported in (2004) 2 SCC 249, the question was whether the levy of cess on generation of electricity by the M. P. Upkar Adhiniyam, 1981, as substituted by M. P. Upkar (Sanshodhan) Adhyadesh, 2001, was valid. It was held that there was no legislative competence in the State to levy cess as the Parliament had exclusive legislative competence in this respect by virtue of Entry 84 in List I of Schedule 7. However, in this case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes which contain information technology or ideas would necessarily be regarded as goods under the aforesaid provisions of the Customs Act. These items are moveable goods and would be covered by Section 2(22)(e) of the Customs Act. .......................................................................... 33. It is true that what the appellants had wanted was technical advice on information technology. Payment was to be made for this intangible asset. But the moment the information or advice is put on a media, whether paper or diskettes or any other thing, that what is supplied becomes a chattel. It is in respect of the drawings, designs etc. which are received that payment is made to the foreign collaborators. It is these papers or diskettes etc. containing the technological advice, which are paid for and used. The foreign collaborators part with them in lieu of money. It is, therefore, sold by them as chattel for use by the Indian importer. The drawings, designs, manuals etc. so received are goods on which customs duty could be levied. 34. The decision of Winter v. Putnam case [938 F 2nd 1033 (9th Cir 1991)] is also of no help to the appellants as in that case it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that the basic cost of software was US Dollars 401.047. While the rest of the amount of US Dollars 3,683,428 was payable only as a licence fee for its right to use the software for the Bank countrywide. The claim for the refund of the customs duty paid on the aforesaid amount of US Dollars 3,683,428 was not accepted by this Court as in its opinion, on a correct interpretation of Section 14 read with the Rules, duty was payable on the transaction value determined therein, and as per Rule 9 in determining the transaction value there has to be added to the price actually paid or payable for the imported goods, royalties and the licence fee for which the buyer is required to pay, directly or indirectly, as a condition of sale of goods to the extent that such royalties and fees are not included in the price actually paid or payable. This clearly goes to show that when technical material is supplied whether in the form of drawings or manuals the same are goods liable to customs duty on the transaction value in respect thereof. 44. It is a misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act read with the Customs Tar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows : "Suppose I buy an instruction manual on the maintenance and repair of a particular make of car. The instructions are wrong in an important respect. Anybody who follows them is likely to cause serious damage to the engine of his car. In my view, the instructions are an integral part of the manual. The manual including the instructions, whether in a book or a video cassette, would in my opinion be 'goods' within the meaning of the 1979 Act, and the defective instructions would result in a breach of the implied terms in Section 14. If this is correct, I can see no logical reason why it should not also be correct in relation to a computer disc on to which a program designed and intended to instruct or enable a computer to achieve particular functions has been encoded. If the disc is sold or hired by the computer manufacturer, but the program is defective, in my opinion there would prima facie be a breach of the terms as to quality and fitness for purpose implied by the 1979 Act or the 1982 Act." 48.The above view, in our view, appears to be logical and also in consonance with the Customs Act. Similarly in Advent Systems Ltd. v. Unisys Corpn. [925 F 2d 670 (3d C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the observations of this Court in Associated Cements case (supra) are in the context of valuation of imported goods and must therefore not be taken into consideration whilst deciding whether software is intangible, incorporeal intellectual property. We are unable to accept this submission of Mr. Sorabjee. The observations have been made not just in the context of valuation but to decide whether the items imported were "goods". Question of valuation would come only if the items imported were "goods" on which customs duty could be levied. 23.In the case of Commissioner of Central Excise, Pondicherry v. M/s. Acer India Ltd, reported in JT 2004 (8) SC 53, this Court has considered in detail what a software programme is. After so considering, it has been held that a computer and operative software are different marketable commodities. This Judgment would also have been against the arguments canvassed by Mr. Sorabjee but for the fact that this Court has itself clarified as follows : "86. We, however, place on record that we have not applied our mind as regard the larger question as to whether the informations contained in a software would be tangible personal property or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 'unbranded software' is concerned, it is undoubtedly intellectual property but may perhaps be outside the ambit of 'goods'". [emphasis supplied] 26. Mr. Sorabjee submitted that the High Court correctly held that unbranded software was "undoubtedly intellectual property". Mr. Sorabjee submitted that the High Court fell in error in making a distinction between branded and unbranded software and erred in holding that branded software was "goods". We are in agreement with Mr. Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted, consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed etc. Thus even unbranded software, when it is marketed/sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon 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. 27. Before concluding, it must be mentioned that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etation on its language." The courts will always examine the real nature of the transaction by which it is sought to evade the tax." 33. In Words and Phrases, Volume 7A, Permanent Edition at page 590, 'commodity' has been defined as under: "A "commodity" is an article of trade, a movable article of value; something that is bought and sold. U.S. v. Sischo, D.C. Wash., 262 F. 1001, 1005 : The term "commodity" includes every movable thing that is bought or sold except animals. Peterson v. Currier, 62 III. App. 163. "Commodity" meaning that which affords convenience or advantage, especially in commerce, including everything movable which is bought and sold. McKeon v. Wolf, 77 III. App. 325." 34. The definition of 'goods' in Sale of Goods Act is also of wide import which means every kind of movable property. Property has been defined therein to mean the general property in goods and not merely a special property. It is not much in dispute that 'goods' would comprehend tangible and intangible properties, materials, commodities and articles and also corporeal and incorporeal materials, articles and commodities. If a distinction is sought to be made betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) ATPR para 41-069 97 ALR 513/19 IPR 323 27 FCR 460. 40. However, we may notice that the Federal Court of Australia while reversing the judgment was of the opinion that as the definition of 'goods' contained in sub-section (4) of Section 4 of the TP Act included gas and electricity, the same would not be held to mean further including "encoded electrical impulses". It was, however, noticed : "We should add that in Toby Constructions Products Pty Ltd. v. Computa Bar (Sales) Pty Ltd. (1983) 2 NSWLR 48, Rogers J. held that a sale of a computer system, comprising both hardware and software, was a sale of "goods" within the meaning both of the Sale of Goods Act 1923 (N.S.W.) and the warranties implied by Part V of the TP Act. His Honour said (supra) at 54), with reference to United States authorities, that he did not wish it to be thought he was of the view that software by itself may not be "goods". This is a question which is left open after the present appeal, which, as will be apparent, has decided a narrower point." 41. The standard works on software by Mr. Rahul Matthan and Mr. Roger S. Pressman, relied upon by Mr. Sorabjee, may be relevant for proper underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw on a wide range of questions likely to arise in computer software disputes: implied warranties, consequential damages, disclaimers of liability, the statute of limitations, to name a few. The importance of software to the commercial world and the advantages to be gained by the uniformity inherent in the U.C.C. are strong polity arguments favoring inclusion. The contrary arguments are not persuasive, and we hold that software is a "goods" within the definition in the Code." 43.In Colonial Life Insurance Co. v. Electronic Data Systems Corp., 817 F. Suppl. 235 (supra), Advent Systems Ltd. (supra) was followed. 44. Linda A. Sharp, J.D., in an Article titled "Computer Software or Printout Transactions as subject to State Sales or Use Tax", published in 36 ALR 5th 33, noticed the development of law as well as technological development of computers and opined that a tape containing a copy of a canned programme does not lose its tangible character because its content is a reproduction of the product of intellectual effort just as the phonorecord does not become intangible because it is a reproduction of the product of artistic effort. The learned author referred to a large numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had held the field was also negatived. Noticing several other judgments, it was held : "What is troublesome about (the tax court) approach is the fact that, while a substantial portion of the software is of a tangible nature, i.e. punched cards, magnetic tapes, instructions covering operation or applications, (for property tax purposes) the remainder consists of personal services to be rendered after purpose........" 48. In the aforementioned premise, it also negatived the contention which incidentally has been raised by Mr. Sorabjee that the price paid for a copy of a canned programme reflects the cost of developing the programme which the proprietor hopes to recover, with profit, by spreading the cost among its customers, stating : ".....Simply because the canned program on tape is much more expensive than the typical phonorecord, the program tape is not any less tangible." 49. In Compuserve, INC v. Lindley [535 N.E. 2d 360], the court disagreed with the opinions contained in the earlier judgments and stated the law in the following terms : "......Thus, the essence of the transaction in the sale of computer software was the purchase of non-taxable intangible infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Act 61 No. 24. 52.In South Central Bell Telephone Co. v. Sidney J. Barthelemy, et al. [643 So. 2d 1240 : 36 A.L.R. 5th 689], the Supreme Court of Louisiana noticed the definition of 'tangible personal property' which was in the following terms : "Personal property which may be seen, weighed, measured, felt or touched, or is in any other manner perceptible to the senses. The term 'tangible personal property' shall not include stocks, bonds, notes or other obligations or securities." It was held : "The term "tangible personal property" set forth in the City Code, and its synonymous Civil Code concept "corporeal movable", must be given their property intended meaning. Physical recordings of computer software are not incorporeal rights to be comprehended by the understanding. Rather, they are part of the physical world. For the reasons set out below, we hold the computer software at issue in this case constitutes corporeal property under out civilian concept of that term, and thus, is tangible personal property, taxable under § 56-21 of the City Code." 53. The court, however, noticed that the shift in the trend was not uniform. Having regard to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other type of recorded information that can be transferred to another medium such as fil, video tape, audio tape, or books." It was further opined : "It is now common knowledge that books, music, and even movies or other audio/visual combinations can be copied from one medium to another. They are also all available on computer in such forms as floppy disc, tape, and CD-ROM. Such movies, books, music, etc. can all be delivered by and/or copied from one medium to another, including electrical impulses with the use of a modem. Assuming there is sufficient memory space available in the computer hard disc drive such movies, books, music, etc....can also be recorded into the permanent memory of the computer such as was done with the software in this case. 93-1072, at p. 4, 5. 631 So. 2d at 1346-47 (dissenting opinion). See also Shontz. Supra, at 168-170; Harris, supra, at 187. That the information, knowledge, story, or idea, physically manifested in recorded form, can be transferred from one medium to 15 another does not affect the nature of that physical manifestation as corporeal, or tangible. Shontz, supra, at 168-170. Likewise, that the software can be transferred from 1248 one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the plaintiffs with a computer system to be used in administering their collection of community charge by providing valid software which significantly overstated the relevant population of their area and, thus, caused them to suffer a loss of revenue. The suit for damages was allowed. It was held by the Court of Appeals that the submission on behalf of the appellant was that the question as to whether as between the plaintiffs and the defendant the plaintiffs dealt as consumer or on the defendant's written standard terms of business within Section 3(1) in the light of the definition of 'business' in Section 14 was answered in the negative on the ground that one cannot be said to deal on another's standard terms of business, negotiate with those terms before entering into the contract. 58. Glidewell, J. noticed that in that case the evidence was that in relation to many of the programme releases, an employee of ICL went to St. Albans' premises where the computer was installed taking with him a disk on which the new programme was encoded and himself performed the exercise of transferring the programme into the computer. The learned Judge despite holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Francis Bennion in his oft quoted treatise "Statutory Interpretation" at pages 368 & 369 states : "Sub-section (2) Where the enactment is grammatically ambiguous, the opposing constructions put forward are likely to be alternative meanings each of which is grammatically possible. Where on the other hand the enactment is grammatically capable of one meaning only, the opposing constructions are likely to contrast an emphasized version of the literal meaning with a strained construction. In the latter case the court will tend to prefer the literal meaning, wishing to reject the idea that there is any doubt. Example 149.2 In a tax avoidance case concerning capital transfer tax, the Court of Appeal were called on to construe the Finance Act 1975, Sch 5 para 6(7) as originally enacted. Counsel for the Inland Revenue put forward several alternative arguments on construction, but the court preferred the one based on the unglossed literal meaning. It may be conjectured however that the other arguments helped to convince the court that the Inland Revenue's case was to be preferred." 67. A statute ordinarily must be literally construed. Such a literal construction would not be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tellectual property is contained is a marketable commodity. They are visible to senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regard leviability of the tax under a fiscal statute, it may not make a difference. A programme 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 programme 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. 72.At this juncture, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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