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TMI Blog2010 (8) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... of Articles 14, 19(1)(g), 265 and 268A of the Constitution of India in so far as the petitioner is concerned. ORDER D.MURUGESAN, J. Both the writ petitions raise an important question as to whether a software would amount to goods and if so, when it is supplied to a customer pursuant to the "End User Licence Agreement" (EULA), the transaction is liable to be treated as sale or service and whether the Parliament has the legislative competency to bring in the amended provisions of Section 65(105)(zzzze) by virtue of the powers under Entry 97 of List I of Schedule VII of the Constitution of India? 2.1. Facts put forth by the petitioner: The petitioner in both the writ petitions is Infotech Software Dealers Association (hereinafter referred to as "the ISODA), a society registered under the Societies Registration Act with its headquarters at Mumbai. It prays for a Writ of Declaration to declare Section 65(105)(zzzze) of Chapter V of Finance Act, 1994 (as amended by Finance No.2 Act of 2009) is null and void, ultra vires and unconstitutional of the provisions of Articles 245, Entries 92C and 97 of List-I, Entry 54 of List-II of Schedule VII and contrary to provisions of Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... List II of Schedule VII. 2.5. Until 16.5.2008, the sale of canned software license was subject to 4% VAT and the contract for customised software maintenance and other technical support were subject to service tax. No service tax was levied in the case of sale of canned software license. 2.6. An amendment was brought to Section 65(105) of Chapter V of Finance Act, 1994 through Finance Act No.2 of 2009, whereby a new clause (zzzze) was introduced to Section 65(105). Sub-section (105) of Section 65 defines the expression "taxable service" and by virtue of the new provision of clause (zzzze), the information technology software is also brought under the meaning of "taxable service". That amendment was brought in by virtue of residuary power under Entry 97 of List I of Schedule VII. As the software being goods and there is no element of service when it is sold to the customers, the provisions of Section 65(105)(zzzze), particularly sub-clauses (v) and (vi) is unconstitutional, as it is beyond the legislative competence of Parliament. 2.7. The impugned provision is also liable to be struck down as being arbitrary and ultra vires of Article 14, as in the case of sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erical code) the terms of license are agreed upon and installed for use in the specific computer. 3.2. The original manufacturer, who creates the software, only licenses the software for the private use of the end user subject to the terms and conditions. If the end user agrees to the terms and conditions, such end user is given "right to use" (install, run and get updates) the software within the limits prescribed. At no stage an end user who runs the software installed in his computer becomes absolute owner of the software. The end user cannot tamper or modify, cannot improve and cannot rectify errors in the software and the end user should not sell the software to another person for commercial exploitation. In view of the specific licensing agreement between the original manufacturer of Standardised Software, namely, Microsoft and Symantec, and the end user, it would be clear that the software is not sold, but only licensed for the limited use for which it is licensed. In other words, in trade parlance, whenever a software product is launched, the original manufacturer releases what is known as End User License Agreement and Product Use Rights. 3.3. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a database, advice on proprietary information technology software. (v) acquiring the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products. (vi) acquiring the right to use information technology software supplied electronically." 6. Amendment Act No.2 of 2009 to the Finance Act, 1994: List I of Schedule VII contains certain specific entries, where the Parliament would be competent to enact law for imposition of taxes. Some of the entries are Entry Nos.82, 85, 86, 89, 90, 92 as stood when the Constitution was framed and brought in. By the Constitution (Sixth Amendment) Act, 1956, Entry 92-A was introduced with effect from 11.6.56, which confers power on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... others, (2006) 3 SCC 1. 8. We have carefully considered the rival contentions and the submissions of the respective learned senior counsel for the petitioner and the learned Additional Solicitor General for the respondents. The basic question is as to whether the provisions of Section 65(105)(zzzze) of Chapter V of the Finance Act, 1994 (as amended by Finance No.2 Act of 2009) is within the legislative competency of the Parliament? We may also point out that so far no action has been initiated against any of the members of the petitioner-Association pursuant to the above provision. Nevertheless, as Mr.Datar, learned senior counsel had insisted the consideration of the challenge in the larger interest, we propose to discuss the rival contentions as to the validity of the provision. 9. As far as the legislative competency to make enactments in respect of the transaction which involves a sale is concerned, the State would be competent under Entry 54 of List II of Schedule VII and in such event, the Parliament may not have the legislative competency to enact law on those subjects. In respect of a transaction which is considered to be a service, no specific en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition. 13. Article 366(29A)(a) deals with a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration. On the other hand, Article 366(29A)(d) deals with a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. The question as to whether the software is goods or not came up for consideration before the Apex Court in the decision in Tata Consultancy Services case (supra). In that case, the Apex Court was considering the provisions of the Andhra Pradesh General Sales Tax Act, 1957. Section 2(h) of the said Act defines "goods" as meaning, all kinds of movable property other than actionable claims, stocks, shares and securities and including all materials, articles and commodities including the goods involved in works contract etc. Section 2(n) of that Act defines a sale with all its grammatical variations and cognate expressions as meaning, every transfer of the property in goods, whether as such goods or in any other form in pursuance of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware is different from electricity and that software is intellectual incorporeal property whereas electricity is not, cannot be accepted. In India the test to determine whether a property is goods, for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the item concerned is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible." 15. While considering the expression "goods" as used in Article 366(12) of the Constitution of India, the Apex Court has further observed as follows: "27. In our view, the term goods as used in Article 366(12) of the Constitution and as defined under the said Act is very wide and includes all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software program may consist of various commands which enable the computer to perform a designated task. The copyright in that program may rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the software, both canned and uncanned, all the above are possible. Nevertheless, the Apex Court had left the issue as to whether even an unbranded software, when it is marketed/sold, may be goods or not undecided, as the other queries like situs of contract of sale and/or whether the contract is a service contract may arise. 16. Hon'ble Mr.Justice S.B.Sinha, while concurring with the conclusion of the Hon'ble Mr.Justice S.N.Variava for majority, considered the definition of "goods" and held as follows:- "46. 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 the senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regards leviability of the tax under a fiscal statute, it may not make a difference. A program containing instructions in computer language is subject-m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsultancy case was quoted with approval by the Apex Court in the judgment in Bharat Sanchar Nigam Limited and another v. Union of India and others, (2006) 3 SCC 1. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deliverable. On the aforesaid premise, the Apex Court held that the case of State of Uttar Pradesh v. Union of India reported in (2004) 137 Src pg.620(SC), was not correctly decided. In view of the settled law, it must be held that software is 'goods' as defined in Article 366(12) of the Constitution of India. 20. This takes us to the next question as to the nature of transaction. Packaged or canned software is a software that is sold off the shelf and it can be used by more than one customer. Whenever software is not sold off the shelf, the sale price includes free initial installation and implementation of the software which also includes some modification or customisation to suit the customers without disturbing the basic structure of the software or its performances. It is relevant to note that the copyright in the software is protected and always remains the property of the creator and what is sold is the right to use the software. The sale is with a condition for exclusive use of the software by the customer at the exclusion of others and it gives absolute possession and control to the user of the right to use the software. The sale normally gives a w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "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. 23. The software being an intangible property can be considered as goods for the purpose of levy of sales tax. However, in a transaction whereby the software is delivered to the customers, the question is as to whether it would amount to an exclusive sale. In the event if it is a case of sale, then the submission of Mr.Datar as to the legislative competency of the State Government under Entry 54 of List II must be accepted. There may be cases of exclusive sale or exclusive service or where the element of sales and service is involved. In cases where an element of service is alone involved, the Parliament has the legislative competency to enact law for levying service tax under Entry 93-C. That Entry 93-C is not notified. Hence in case if an element of service is available, the Parliament has got power to impose service tax under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; While considering the applicability of dominant test, namely, the intention of the parties, we may refer to the judgment of the Apex Court in Bharat Sanchar Nigam Limited v. Union of India, (2006) 3 SCC 1. That was a case where the Apex Court was considering the nature of transaction by which mobile phone connections are enjoyed and whether such transaction is a sale or is it a service or is it both. With reference to Article 366(29A)(d), the Apex Court has held as follows: "43. All the clauses of Article 366(29A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the sale of Goods Act, 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerly limited. The amendment especially allows specific composite contracts viz., works contracts (Clause (b)), hire purchase contracts (Clause (c)), catering contracts (Clause (e)) by legal fiction to be divisible contracts where the sale element. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of 'sale' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases. 44. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29A) continues to be did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is 'the substance of the contract'. We will, for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it does not provide to the contrary. It only permits the State to impose a tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise include the supply of services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article "such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods." In other words, the operative words of the said sub-article are supply of goods and it is only supply of food and drinks and other articles for human consumption that is deemed to be a sale or purchase of goods. 45. The concept of catering, admittedly, includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering. Mr.Mohan Parasaran, learned Senior Counsel for the appellant submitted that the High Court before applying the aspect theory laid down by this Court in the case of Federation of Hotel and Restaurant Assn. Of India v. Union of India, AIR 1990 SC 1637 ought t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1994 to include "Information Technology Software" service to be a taxable service. 30. The above factor can be also taken note of to find out the nature of transaction. The Master End-User License Agreement, which is a legal agreement, states that the product is licensed through the Microsoft Developer Network Subscription Program (MSDN) and the agreement is between the MSDN and the end-user. Clause 2 of the Master End-User License Agreement (EULA) provides that for each license, one individual is authorised to use the product according to the terms of that agreement. Clause 4 of EULA relates to additional rights and limitations-general. The relevant sub-clauses under Clause 4 read as under: "2. Termination. Without prejudice to any other rights, Microsoft may cancel this EULA if you do not abide by the terms and conditions of this EULA, in which case you must destroy all copies of the product and all of its component parts. 3. Consent To Use of Data. You agree that Microsoft and its affiliates may collect and use technical information you provide as a part of support services related to the Product Microsoft agrees not to use this informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and services, including your web sites, but you are not licensed to do any of the following: - you may not sell, license or distribute copies of the Media Elements by themselves or as part of any collection, product or service if the primary value of the product or service is in the Media Elements. - you may not grant customers of your product or service any rights to license or distribute the Media Elements. - you may not license or distribute any of the Media Elements that include representations of identifiable individuals, governments, logos, initials, emblems, trademarks, or entities for any commercial purposes or to express or imply any endorsement or association with any product, service, entity, or activity. - you may not create obscene or scandalous works, as defined by federal law at the time the work is created, using the Media Elements. In addition, you must (a) indemnify and defend Microsoft from and against any claims or lawsuits, including attorneys' fees that arise from or result from the licensing, use or distribution of Media Elements as modified by you, and (b) include a valid copyright notice on your products and services that include the Media Elemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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