Service Tax on Software - Tax on goods versus tax on service - constitutional validity - legislative competence of the central government

In a recent decision, Honorable Madras High Court has upheld the legislative competence of levy of service tax on software services by the central government [See: Infotech Software Dealers Association Versus Union of India and others 2010 -TMI - 77347 - HIGH COURT OF MADRAS]

While deciding the writ petition, honorable high court has observed that:

17.  The law as to whether the software is goods or not is no longer res integra in view of the above dictum of the Apex Court.  A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme.   The term 'all materials, articles and commodities' includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, delivered, stored, possessed etc. A software is an intellectual property and it is an article of value.   Indian law does not recognise or make a distinction between tangible property and intangible property. A 'goods' may be a tangible property or an intangible one.  It would become goods provided it has the attributes thereof having regard to (a) utility (b) capable of being bought and sold (c) capable of transmitted, transferred, delivered, stored and possessed. If a software whether customised or non-customised 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.

22. A customised software is developed to suit the needs of a particular customer and the same cannot be used by or for any other customer.  In other words, the packaged software attracts excise duty.  Customised software is exempt from excise duty in terms of Notification 6 of 2006 (Entry 26).  If the software is sold through the medium of internet in the form of downloadable, it does not fit into the ambit of "IT software of any media".  In that event, it is possible to hold that when an access control is given through an internet medium with a username and password and when there is no CD or other storage media for the item, it does not satisfy the requirement of being 'goods' or the entry used in the statute.

26. To decide the imposition of tax, the nature of transaction is relevant.  When a statute, particularly a taxing statute is considered with reference to the legislative competency, the nature of transaction and the dominant intention on such transaction would be relevant.  In the event the goods or commodity is sold as such, the transaction would fall under Entry 56 of List II of Schedule VII.  However, without there being a sale of such goods, the right to use the information or the data stored in a commodity, namely, the software is transferred, whether it can be called as a sale of the commodity or the goods as such is the question to be considered.

31. From the above, 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. According to Webster's New World Telecom dictionary, an end user is "the ultimate user of a product or service, especially of a computer system, application or network." On a careful reading of the above, we are of the considered view that when a transaction takes place between the members of ISODA with its customers, it is not the sale of the software as such, but only the contents of the data stored in the software which would amount to only service. To bring the deemed sale under Article 366(29A)(d) of the Constitution of India, there must be a transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale of goods does not arise and in that sense, the transaction would be only a service and not a sale.

32. The above discussion as to the canned/packaged software or customised software is in respect of the transactions that are prevalent among the software re-sellers and their customers and the discussion is not with reference to any specific transaction. The challenge to the amended provision is only on the ground that the software is goods and all transaction would amount to sales.  The said challenge is opposed on the ground that though the software is goods, the transaction may not amount to a sale in all cases and it may vary depending upon the End User Licence Agreement.  As already pointed out, the Parliament has the legislative competency to bring in enactments to include certain services provided or to be provided in terms of information technology software for use in the course or furtherance of business or commerce to mean a taxable service, in terms of the residuary Entry 97 of List I of Schedule VII, the challenge to the amended provision cannot be accepted so long as the residuary power is available. However, the question as to whether a transaction would amount to sale or service depends upon the individual transaction and on that ground, the vires of a provision cannot be questioned.

33. It is the specific case of the respondents that pursuant to the amended provision, so far no demand has been raised against any of the members of the petitioner-Association and in the event such demands are made, the members of the petitioner-Association can challenge such demands depending upon the nature of transaction and may consequently resist the imposition of tax by showing that the transaction is only a sale and not a  service. Therefore, we are of the considered view that the amended provision cannot be held to be unconstitutional on the ground that the Parliament lacks the legislative competency and the applicability of that provision would depend upon the individual transactions which could be established before the authorities as and when the demand is made. 

34. In view of our above findings, the challenge to the impugned provision on the ground that it is contrary to the provisions of Articles 245, 265 and 268A must fail.  For the same reasons, we are not inclined to go into the other challenge with regard to Articles 14 and 19(1)(g) of the Constitution of India also.

For full text of judgment visit:

Infotech Software Dealers Association Versus Union of India and others 2010 -TMI - 77347 - HIGH COURT OF MADRAS