2001 (3) TMI 90 - SC - VAT and Sales Tax

SALE GOODS, MEANING OF TRANSFER OF RIGHT TO USE GOODS SOFTWARE PROGRAMME BRANDED OR UNBRANDED

Summary

Issues:
1. Classification of software as goods for the purpose of sales tax under the Andhra Pradesh General Sales Tax Act, 1957.

Detailed Analysis:
The Andhra Pradesh High Court categorized software into two types: specialized custom-made software and standardized software marketed for specific client classes. It concluded that while the first category may not qualify as "goods" under the Act, the second category, like Oracle or Lotus software, should be considered as "goods" subject to tax. The appellants argued that branded software, being a product of intellectual effort and creativity, should not be classified as goods. They contended that software is intangible intellectual property and that the value lies in the program itself rather than the physical medium like tapes or discs. They emphasized that the essence of the transaction is the right to use the software program, not the physical storage medium.

The respondents countered this argument by asserting that the physical medium, such as tapes or discs, is essential for transferring the software to hardware, making the value of the medium equivalent to the program itself. They highlighted that software, once recorded in physical form, becomes inseparable from the tangible object on which it is stored, like a disc or tape. They argued that software, despite its intellectual origins, becomes tangible property once recorded and is comparable to other forms of recorded information like books or tapes. They cited legal precedents and analogies to support their position that software should be considered as goods subject to taxation.

The Supreme Court referred to a previous case involving customs valuation to distinguish between intellectual property and goods. It emphasized that once intellectual property like computer programs is embodied in a tangible medium like a floppy disc, it becomes a movable commodity available in the market, thus meeting the definition of "goods." The court rejected the argument that customized software development contracts are for obtaining intangible intellectual property rather than taxable goods, emphasizing that the primary purpose of such contracts is to acquire software programs, which are considered goods subject to tax.

The court acknowledged the complexity and global implications of the issue and decided to refer the case to a larger bench for a comprehensive and authoritative ruling on the classification of software as goods for sales tax purposes. The court recognized the need for a detailed examination of various legal precedents and cases cited in the matter to arrive at a conclusive decision on this significant issue.