TMI Blog2004 (11) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... Pragya Bhagel, A.K. Prasad, R.N. Karanjawala, Pradeep S. Jetly, Ajit S. Bhasme, Jay Kishor Singh, Rajesh Kumar, Ms. Niranjana Singh, Abhishek Choudhary, Manoj Saxena, Gourav Bhatia, Gourav Dhama, Adarsh Upadhyay, Mrs. Vimla Sinha, Mohan Prasad Mehria, A. Subba Rao, K. Swamy, B. Krishna Prasad, Atul Y. Chitale, Pallav Sisodia, Ray Vikram Nath and Mrs. Suchitra Atul Chitale for the parties. Additional Solicitor-General of India: Mohan Parasaran for the parties. [Judgment 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration 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. Explanation I : A delivery of goods on the hire-purchase or any system of payment by instalments shall, notwithstanding the fact that the seller retains the title in the goods, as security for payment of the price, be deemed to be a sale. Explanation II : (a) Notwithstanding anything 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y goods, in accordance with the rules referred to in clause (i) of this proviso, he shall not be taxed again in respect of any sale of such goods effected by him. 7. Mr. Sorabjee submitted that the term goods in Section 2(h) only includes tangible movable property and the words all materials, articles and commodities also cover only tangible moveable property. He submitted that computer software is not tangible movable property. In support of his submission, he 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 mag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sorabjee also drew the attention of the Court to the definitions of Computer and Computer Programme in The Copyright Act, 1957. These read as follows : Computer includes any electronic or similar device having information processing capabilities . Computer programme means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is purchased or leased. It has been held that what is created and sold is information and the magnetic tapes or the discs are only the means of transmitting these intellectual creations from the originator to the user. It has been held that the same information could have been transmitted from the originator to the user by way of telephone lines or fed directly into the user's computer by the originator of the programme and that as there would be no tax in those cases merely because the method of transmission is 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r recorded on tangible medium constitutes a corporeal body. It has been held that a software recorded in physical form becomes inextricably intertwined with, or part and parcel of the corporeal object upon which it is recorded, be that a disk, tape, hard drive, or other device. It has been held that the fact that the information can be transferred and then physically recorded on another medium does not make computer software any different from any other type of recorded information that can be transferred to another medium such as film, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entries. What has essentially to be seen is whether electric energy is goods within the meaning of the relevant provisions of the two Acts. The definition in terms is very wide according to which goods means all kinds of movable property. Then certain items are specifically excluded or included and electric energy or electricity is not one of them. The term movable property when considered with reference to goods as defined for the purposes of sales tax cannot be taken in a narrow sense and merely because electric energy is not tangible 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the definition of goods . 18. The question whether electricity can be termed as goods again arose before a Constitution Bench of this Court in State of A. P. v. National Thermal Power Corpn. Ltd. Ors . reported in (2002) 5 SCC 203. This Court, noticing the earlier authorities, held that the definition of goods in Article 366(12) of the Constitution of India was very wide and included all kinds of movable properties. It was held that the term movable property when considered with reference to goods as defined for the purposes of sales tax cannot 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich does not fall within clause (a), (b), (c) or (d) of Section 2(22) will be regarded as coming under Section 2(22)(e). Even though the definition of the goods purports to be an inclusive one, in effect it is so worded that all tangible moveable articles will be the goods for the purposes of the Act by residuary clause (e) of Section 2(22). Whether moveable article comes as a part of a baggage, or is imported into the country by any other manner, for the purpose of the Customs Act, the provision of Section 12 would be attracted. Any media whether in the form of books or computer disks or cassettes 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 become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... popular music cassette is several times more than the value of a blank cassette. However, if a pre-recorded music cassette or a popular film or a musical score is imported into India duty will necessarily have to be charged on the value of the final product. In this behalf we may note that in State Bank of India v. Collector of Customs [(2000) 1 SCC 727 : (2000) 1 Scale 72] the Bank had, under an agreement with the foreign company, imported a computer software and manuals, the total value of which was US Dollars 4,084,475. The Bank filed an application for refund of customs duty on the ground 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the word goods as defined under the Customs Act has an inclusive definition taking within its ambit any movable property. The list of goods as prescribed by the law are different items mentioned in various chapters under the Customs Tariff Act, 1997 or 1999. Some of these items are clearly items containing intellectual property like designs, plans, etc. 47. In the case of St Albans City and District Council v. International Computers Ltd . [(1996) 4 All ER 481)]. Sir Ian Glidewell in relation to whether computer programme on a disc would be regarded as goods observed at p. 493 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 logic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act is not as wide or exhaustive as the definition of the term goods in the said Act, it has still been held that the intellectual property when it is put on a media becomes goods. Mr. Sorabjee submitted that whilst referring to the case of St. Albans City and District Council v. International Computers Ltd . [1996 (4) All ER 481] this Court missed the express finding of that Court to the effect clearly, a disk is within this definition. Equally clearly, a program, of itself, is not . Mr. Sorabjee submitted that the English case clearly holds that software programes are not goods. He further submitted 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 Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes. 25. At this stage it must be mentioned that Mr. Sorabjee had pointed out that the High Court has, in the impugned Judgment, held as follows : ...In our view 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to what would appear to be the meaning intended to be conveyed by the use of the words under the circumstances. Sometimes definition clauses create qualification by expressions like unless the context otherwise requires ; or unless the contrary intention appears ; or if not inconsistent with the context or subject-matter . Parliament would legislate to little purpose , said Lord Macnaghten in Netherseal Co. v. Bourne, (1889) 14 AC 228, if the objects of its care might supplement or undo the work of legislation by making a definition clause of their own. People cannot escape from the obligation of a statute by putting a private interpretation 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of Kerala v. Mathai Verghese Ors . (1986) 4 SCC 746, p. 753 and Feroze N. Dotivala v. P.M. Wadhwani Ors ., (2003) 1 SCC 433, p. 442]. 39. It may not be necessary for us to rely upon the decisions of this Court in H. Anraj v. Government of T.N . [(1986) 1 SCC 414] the correctness whereof has been doubted in Sunrise Associates v. NCT of Delhi [(2000) 10 SCC 420]. It is also not necessary to rely upon the Australian decision, Pont Data Australia Pty Ltd . v. ASX Operations Pty Ltd. Anr . [1990 (93) Australian Law Reports 523] which is said to have been reversed in Re: ASX Operations Pty Ltd. and Australian Stock Exchange Ltd. and Pont Data Australia Pty Ltd. [FED No. 710 Trade Practices (1991) 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranscribed as a book, it becomes a goods. That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as goods because the Code definition includes specially manufactured goods. The topic has stimulated academic commentary with the majority espousing the view that software fits within the definition of a goods in the U.C.C. Applying the U.C.C. to computer software transactions offers substantial benefits to litigants and the courts. The Code offers a uniform body of law 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red wherein it was observed : We can take judicial notice, based on modern human experience, that the technology, exists for producing a copy of a movie film on disc, of a phonograph record on tape, and of a book on microfiche. We have previously discussed how the program copy is not separated from the tape, when it is used in the computer. See B.U. Note, supra, at 188-89. To remove the program copy from the magnetic tape requires that it be overwritten, or obliterated in a magnetic field, in the way in which one dictating on tape makes corrections or wipes the tape clean. 47. Thus, the court found a change in the concept and noticed a departure from earlier view that the computer software was intangible property. The argument of severability which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter software is tangible property). 50. It is true that in Compuserve, Inc . (supra), the court found that the computer software developed by the appellants therein was intangible property, but a perusal of the said judgment shows the other views of the other courts were noticed therein wherein computer software was held to be a tangible property on the ground that the computer programme was coded on a tangible medium such as a computer tape. 51. Northeast Datacom, Inc. et al . v. City of Wallingford [212 Conn.639, 563 A2d 688, was rendered on the premise of the severability doctrine. The said judgment, however, was rendered keeping in view the statute levying tax on personal property wherein the phrase tangible personal property was added by amendment in 1961 by Public 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le knowledge or information , but rather, was to obtain recorded knowledge stored in some sort of physical form that Bell's computers could use. Recorded as such, the software is not merely an incorporeal idea to be comprehended, and would be of no use if it were. Rather, the software is given physical existence to make certain desired physical things happen. One cannot escape the fact that software, recorded in physical form, becomes inextricably intertwined with, or part and parcel of the corporeal object upon which it is recorded, be that a disc, tape, hard drive, or other device. Crockett , supra, at 871072; Cowdrey , Supra, at 188-90. That the information can be transferred and then physically recorded on another medium is of no moment, and does not make computer software any different than any 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ram and the disk carrying the program. In both the Sale of Goods Act, 1979, s 61, and the Supply of Goods and Services Act 1982, s.18, the definition of goods includes 'all personal chattels other than things in action and money' Clearly, a disk is within this definition. Equally clearly, a program, of itself, is not. As regard utility of an instruction manual, it was observed: As I have already said, the program itself is not 'goods' within the statutory definition. Thus a matter of the program in the way I have described does not, in my view, constitute a transfer of goods. It follows that in such circumstances there is no statutory implication of terms as to quality or fitness for purpose. 57. The question which arose in that case was as to whether the defendant therein had breached its contract to supply 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellbrook) v. Oakes [1998 (4) All ER 353]. 64. In Inland Revenue Commissioners v. Trustees of Sir John Aird's Settlement, (1984) Ch. 382, it is stated : Two methods of statutory interpretation have at times been adopted by the court. One, sometimes called literalist, is to make a meticulous examination of the precise words used. The other sometimes called purposive, is to consider the object of the relevant provision in the light of the other provisions of the Act the general intendment of the provisions. They are not mutually exclusive and both have their part to play even in the interpretation of a taxing statute. 65. In Indian Handicrafts Emporium and Others v. Union of India and Others [(2003) 7 SCC 589] this Court expounded the theories of purposive construction. [See also Ramesh Mehta v. Sanwal Chand Singhvi and Ors, JT 2004 (Suppl.1) SC 274] 66. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Exchange Board, India Anr., 2004 (7) SCALE 158] 69. So long natural meaning for the charging section is adhered to and when the law is certain, then a strange meaning thereto should not be given. [See Indian Banks' Association, Bombay and Ors . v. M/s. Devkala Consultancy Services and Ors., JT 2004 (4) SC 587]. 70. Although normally a taxing statute is to be strictly construed but when the statutory provision is reasonable akin to only one meaning, the principles of strict construction may not be adhered to. [See Commnr. of Central Excise, Pondicherry v. M/s. Acer India Ltd., 2004 (8) SCALE 169] Determination : 71. A software may be intellectual property but such personal intellectual property contained in a medium is bought and sold. It is an article of value. It is sold in various forms like - floppies, disks, CD-ROMs, punch cards, magnetic tapes, etc. Each one of the mediums in which the intellectual 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possessed. If a software whether customized or non-customized 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. 75. Recently, in Commnr. Of Central Excise, Pondicherry v. M/s. Acer India Ltd . [2004 (8) SCALE 169] this Court has held that operational software loaded in the hard disk does not lose its character as tangible goods. 76. If a canned software otherwise is 'goods', the Court cannot say it is not because it is an intellectual property which would tantamount to rewriting the judgment. In Madan Lal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Ltd . [(1962) Suppl. 3 SCR 973], this Court held that the court cannot rewrite the provisions of law which clearly is the function of the Legislature which interprets them. 77. I respectfully agree with the opinion of Variava, J. that the appellant herein is liable to pay sales tax on the softwares marketted by it and the appeals should be dismissed. [Order] 78. Parties agreed that the points raised in this Writ Petition are covered by the ratio of the Judgment pronounced today in Civi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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