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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 ..... d 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. - 3811 & 18886 of 2009 - - - Dated:- 24-8-2010 - ST CORAM THE HONOURABLE MR.JUSTICE D.MURUGESAN AND THE HONOURABLE MR.JUSTICE M.SATHYANARAYANAN Represented by: For Petitioner :: Mr.Arvind P.Datar For Respondents :: Mr.M.Ravindran, Mr.S.Yashwanth Petitions under Article 226 of The Constitution of India, praying for the issue of 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) as null and void and 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 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. Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is also classified into two types, namely, Canned Software and Customised Software. Canned software means a software that is designed and created for sale to more than one person and it is designed in such a way that large number of people can use it on a variety of hardware and it is also called as Packaged Software or Standard Software or Normal Software or Branded Software . On the other hand, Customised Software means the software created for a single person or a specific customer to meet his specific requirement and it is also called as Tailor-made Software or Specific Software . 2.4. Whenever software is sold in all the categories, they are treated as goods regardless of the nature of transaction. In such event, the goods are liable to sales tax and are liable to Value Added Tax (VAT). As the ultimate transaction is only that of sale of goods, an element of service is absent and in such circumstances, the State Government alone is competent to enact a law under Entry 54 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule VII and the challenge to the legislative competency of Parliament is totally unsustainable. All standardised software are not like any other product or goods. There is no element of sales when it is supplied to the end user by means of EULA. Along with the Standardised Software a key (an alpha numerical code) is provided to the end user to activate the software by registering the same with the original manufacturer through the internet. Standardised Software Licence licensed and available across the shelf or downloaded from internet is not a finished product, rather updates are given by the original manufacturer (Microsoft or Symantec) to the end user for an agreed period. Updates are supplied to the end user through the internet for a period specified in the license. Once the software is registered with the original manufacturer through the internet using the key supplied by the original manufacturer, (the key is nothing but an alpha numerical 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 te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a sale or service and the writ petitions are premature, as no action is taken in terms of the amended provision. 4. We have heard Mr.Arvind P.Datar, learned senior counsel for the petitioner and Mr.M.Ravindran, learned Additional Solicitor General of India for the respondents. 5. The provisions of Section 65(105)(zzzze) reads as under:- Section 65: In this chapter, unless the context otherwise requires,-- (105) taxable service means any service provided or to be provided- (zzzze) to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including-- (i) development of information technology software, (ii) study, analysis, design and programming of information technology software, (iii) adaptation, upgradation, enhancement, implementation and other similar services related to information technology software, (iv) providing 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 ph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t II of Schedule VII of the Constitution. Entry 97 of List I would not be applicable if the transaction is covered by Entry 54 of List II. In that sense, the Parliament lacks competency to bring in the amendment. Mr.Datar, would further submit that inasmuch as the software is goods and the nature of transaction is nothing but a sale, the State alone has the legislative competence. In support of the proposition that the software is goods, he would rely upon the judgment of the Apex Court in Tata Consultancy Services v. State of Andhra Pradesh, (2005) 1 SCC 308. He would also submit that while considering the transaction, the dominant intention of the transaction would be the relevant test to determine as to whether such transaction is a sale or service. In support of the said submission, he would rely upon the judgment of the Apex Court in Bharat Sanchar Nigam Ltd., v. Union of India and 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( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidual transaction. The only test, probably the relevant test for the Court to apply and consider is whether the impugned provision can be brought under Entry 97 of List I of Schedule VII. Inasmuch as that entry being a residuary entry and it relates to taxable service, the Parliament would certainly have the legislative competency. In this context, we may also refer to the judgment of the Apex Court in Tamil Nadu Kalyana Mandapam Association v. Union of India and others, (2004) 5 SCC 632, wherein it has been held that in the absence of any entry under List II, the Parliament would be empowered to make the law for service tax under the residuary powers in terms of Entry 97 of List I of Schedule VII. 12. Article 366(12) of the Constitution of India defines the expression goods , which include all materials, commodities and articles. It is an inclusive 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the copyright of the incorporeal right to software remains with the originator and what is sold is a copy of the software. It was further 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. Having referred to the above judgments, the Apex Court in paragraph-19 held as follows:- 19.Thus this Court has held that the term goods, for the purposes of sales tax, cannot be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc. are goods for the purposes of sales tax. The submission of Mr Sorabjee that this authority is not of any assistance as a software 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimately observed that in both cases the software can be transmitted, transferred, delivered, stored, possessed etc. Thus even unbranded software, when it is marketed/sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise. The Apex Court held that in India, the test to determine whether a property is a good for the purpose of sales tax under that Act is not whether the property is tangible or intangible or incorporeal, but whether the concerned data is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc. The Apex Court further held that 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India has also not gone into the question of severability. His Lordship also observed that under Article 366(12) of the Constitution of India, the goods include all materials, commodities and articles. The commodity is an expression of wide connotation and includes everything of use or value which can be the object of trade and commerce. His Lordship also observed that when the word includes is used in an interpretation clause, it must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include. With these observations, His Lordship concurred with the findings of His Lordship S.N.Variava, J. The law on definition of goods enunciated in Tata Consultancy 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was observed that delivery of goods cannot constitute the basis for levy of tax but the transfer of right to use the goods is the basis for tax. But the court emphasised that actual delivery of the goods is not necessary for effecting the transfer or right to use the goods, but the goods must be available at the time of transfer that is at the time of execution of agreement of transfer of right to use the goods, the same must be available and deliverable and when they are not deliverable, question of right to use the goods would not arise. Therefore, if there is no deliverable goods in existence, there is no transfer of goods to the user at all. Thus, whether the goods are tangible or intangible, they must 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnology Software' to mean any representation of instructions, data, sound or image including source code and object code, recorded in a machine readable form and capable of being manipulated or providing interactivity to a user, by means of an automatic data processing machine. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 29A of Article 366, there is no other service which has been permitted to be so split. For example the clauses of Article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residuary Entry 97 of List I. On posing a question as to whether the imposition of service tax on the service rendered by the mantap-keepers are intra vires of the Constitution and can be justified for such levy under the residuary Entry 97 of List I of VII Schedule, ultimately, held that keeping the nature of the services rendered, the Parliament did not lack legislative competency. In this regard, the Apex Court had observed as follows: 44. In regard to the submission made on Article 366(29A)(f), we are of the view that 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software developed to meet the needs of variety of users and which is intended for sale and capable of being sold off the shelf. Similarly, in the budget speech 2008-09, the Hon'ble Minister for Finance in paragraph 151, while increasing the excise duty from 8% to 12% on packaged software to bring it on par with the customised software which will attract a service tax of 12%. Only in the above background, the amendment was brought into the Finance Act, 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. Witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the software. Clause 1.5 of EULA relating to License Grant for Media Elements reads as under: The software may include certain photographs, clip art, shapes, animations, sounds, music and video clips that are identified in the software for your use (together Media Elements ). You may also copy and modify the Media Elements, and license, display and distribute them, along with your modifications as part of your software products 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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