2010 (8) TMI 13 - HC - Service Tax

Service Tax on software - constitutional validity - 65(105)(zzzze) - residuary power under Entry 97 of List I of Schedule VII of the constitution of India - Held that - the dominant intention of the parties would show that the developer or the creator keeps back the copyright of each software, be it canned, packaged or customised, and what is transferred to the network subscriber, namely, the members of the association, is only the right to use with copyright protection. By that agreement, even the developer does not sell the software as such. By that Master End-User License Agreement, the members of petitioner-association again enter into an End-User License Agreement for marketing the software as per the conditions stipulated therein. In common parlance, end user is a person who uses a product or utilises the service. An end user of a computer software is one who does not have any significant contact with the developer/creator/designer of the software. The software is goods and whether the transaction would amount to sale or service would depend upon the individual transaction and for the reason of that challenge, the amended provision cannot be held to be unconstitutional so long as the Parliament has the legislative competency to enact law in respect of tax on service in exercise of powers under Entry 97 of List I of Schedule VII.

Issues Involved:
1. Whether software amounts to "goods" and if so, whether its supply under an End User Licence Agreement (EULA) constitutes a sale or service.
2. Legislative competency of the Parliament to enact the amended provisions of Section 65(105)(zzzze) under Entry 97 of List I of Schedule VII of the Constitution of India.
3. Constitutionality of Section 65(105)(zzzze) in light of Articles 14, 19(1)(g), 245, 265, and 268A of the Constitution of India.

Analysis of Judgment:

1. Software as "Goods" and Nature of Transaction:
The court examined whether software qualifies as "goods" and if its supply under an EULA constitutes a sale or service. The petitioner, Infotech Software Dealers Association (ISODA), argued that software, whether canned or customized, is treated as goods and thus subject to sales tax and VAT. The respondents contended that standardized software provided under an EULA is not sold but licensed for limited use, and thus, it includes a service element. The court referenced the Supreme Court's judgment in Tata Consultancy Services v. State of Andhra Pradesh, which held that software is goods if it can be abstracted, consumed, used, transmitted, transferred, delivered, stored, or possessed. However, the court noted that the determination of whether a transaction is a sale or service depends on the individual transaction and the terms of the EULA.

2. Legislative Competency of Parliament:
The court analyzed the legislative competency of the Parliament to enact the amended provisions of Section 65(105)(zzzze) under Entry 97 of List I of Schedule VII. The petitioner argued that the State Legislature alone is competent to enact laws on taxes on the sale or purchase of goods under Entry 54 of List II. The respondents contended that the amendment falls under Entry 97 of List I, which is a residual entry allowing Parliament to enact laws on matters not enumerated in List II or List III. The court held that the Parliament has the legislative competency to enact laws for service tax under the residual Entry 97 of List I, especially since Entry 92-C for taxes on services has not been given effect to.

3. Constitutionality of Section 65(105)(zzzze):
The petitioner challenged the constitutionality of Section 65(105)(zzzze) on the grounds that it is arbitrary and ultra vires of Articles 14, 19(1)(g), 245, 265, and 268A of the Constitution. The court noted that the impugned provision relates to taxable service and does not directly tax goods. The court emphasized that the applicability of the provision depends on individual transactions and the nature of the transaction, whether it involves a sale or service. The court held that the amended provision is not unconstitutional as long as the Parliament has the legislative competency to enact laws on service tax under Entry 97 of List I. The court dismissed the writ petitions, stating that the software is goods, and whether a transaction amounts to sale or service depends on the individual transaction.

Conclusion:
The court dismissed the writ petitions, upholding the legislative competency of the Parliament to enact the amended provisions of Section 65(105)(zzzze) under Entry 97 of List I of Schedule VII. The court held that software qualifies as goods, but the determination of whether a transaction constitutes a sale or service depends on the individual transaction. The challenge to the constitutionality of the provision on the grounds of Articles 14, 19(1)(g), 245, 265, and 268A was also dismissed.

← Previous Next →