Consultancy Services Vs. State of Andhra Pradesh  Insc 686 (5 November 2004)
N. Santosh Hegde, S. N. Variava, B. P. Singh & H. K. Sema (With C. A. Nos. 2584, 2585 and 2586 of 1998) S. N. VARIAVA, J.
These Appeals are against the Judgment dated 12th December, 1996 of the Andhra Pradesh High Court. The Appeals have been placed before this Bench pursuant
to an Order of this Court dated 16th January, 2002.
Briefly stated the facts are as follows :
The Appellants provide consultancy services including Computer Consultancy
Services. As part of their business they prepare and load on customers'
computers custom made software (for sake of convenience hereinafter referred to
as `uncanned software') and also sell Computer Software Packages off the shelf
(hereinafter referred to as `canned software'). The canned Software Packages
are of the ownership of companies/persons, who have developed those software.
The Appellants are licensees with permission to sub-licence these packages
to others. The canned software programmes are pragrammes like Oracle, Lotus,
Master Key, N-Export, Unigraphics, etc.
In respect of the canned software the Commercial Tax Officer, Hyderabad,
passed a provisional Order of Assessment under the provisions of the Andhra
Pradesh General Sales Tax Act, 1957 [hereinafter called `the said Act'] holding
that the software were goods. The Commercial Tax Officer accordingly levied
sales tax on this software. The Appellate Deputy Commissioner of Commercial
Taxes also held that the software were goods and liable to tax. However, the
matter was remanded back for purposes of working out the tax.
The further Appeal, filed by the Appellants, before the Sales Tax Appellate
Tribunal, Andhra Pradesh, was dismissed on 1st April, 1996.
The Appellants then filed a Tax Revision Case in the Andhra Pradesh High
Court, which has been dismissed by impugned Judgment dated 12th December, 1996.
The question raised in this Appeal is whether the canned software sold by
the Appellants can be termed to be "goods" and as such assessable to
sales tax under the said Act.
To consider this question, it is necessary to first look at the relevant
Section 2(h) of the said Act reads as follows:
"2(h) `goods' means all kinds of movable property other than actionable
claims, stocks, shares and securities, and includes all materials, articles and
commodities including the goods (as goods or in some other form), involved in
the execution of a works contract or those goods used or to be used in the
construction, fitting out, improvement or repair of movable or immovable
property and also includes all growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before sale or under
the contract of sale and also includes motor spirit." "Sale" is
defined in Section 2(n) as follows:
"2(n) `Sale' with all its grammatical variations and cognate
expressions means every transfer of the property in goods whether as such goods
or in any other form in pursuance of a contract or otherwise by one person to
another in the course of trade or business, for cash, or for deferred payment,
or for any other valuable consideration or in the supply or distribution of
goods by a society (including a co-operative society), club, firm or
association to its members, but does not include a mortgage, hypothecation or
pledge of, or a charge on goods.
Explanation I : A delivery of goods on the hire- purchase or any system of
payment by instalments shall, notwithstanding the fact that the seller retains
the title in the goods, as security for payment of the price, be deemed to be a
Explanation II : (a) Notwithstanding anything contained in the Indian Sale
of Goods Act, 1930 (Central Act III of 1930) a sale or purchase of goods shall
be deemed, for the purpose of this Act to have taken place in the State,
wherever the contract of sale or purchase might have been made, if the goods
are within the State.
(i) in the case of specific or ascertained goods, at the time the contract
of sale or purchase is made; and (ii) in the case of unascertained or future
goods, at the time of their appropriation to the contract of sale or purchase
by the seller or by the purchaser, whether the assent of the other party is
prior or subsequent to such appropriation.
(b) Where there is a single contract of sale or purchase of goods situated
at more places than one, the provisions of clause (a) shall apply as if there
were separate contracts in respect of the goods at each of such places.
Explanation III : Notwithstanding anything contained in this Act or in the
Indian Sale of Goods Act, 1930 (Central Act III of 1930), two independent sales
or purchases shall for the purposes of this Act, be deemed to have taken place.
(1) When the goods are transferred from a principal to his selling agent and
from the selling agent to his purchaser, or (2) When the goods are transferred
from the seller to a buying agent and from the buying agent to his principal,
if the agent is found in either of the cases aforesaid,-- (i) to have sold the goods
at one rate and to have passed on the sale proceeds to his principal at another
rate; or (ii) to have purchased the goods at one rate and to have passed them
on to his principal at another rate; or (iii) not to have accounted to his
principal for the entire collections or deductions made by him, in the sales or
purchases effected by him on behalf of his principal; or (iv) to have acted for
a fictitious or non- existent principal.
Explanation IV : A transfer of right to use any goods for any purpose (whether
or not for a specified period) for cash, deferred payment or other valuable
consideration shall be deemed to be a sale." Section 5 provides as
"5. Levy of tax on sales or purchases of goods (1) Save as otherwise
provided in this Act, every dealer shall pay a tax under this Act for each year
on every rupee of his turnover of sales or purchases of goods in each year
irrespective of the quantum of his turnover at the rate of tax and at the
points of levy specified in the Schedules.
(2) For the purpose of this section and other provisions of this Act, the
turnover which a dealer shall be liable to pay tax shall be determined after
making such deductions from his total turnover, and in such manner as may be
(3) The taxes under this section shall be assessed, levied and collected in
such manner, as may be prescribed:
PROVIDED that (i) in respect of the same transaction, the buyer or the
seller but not both, as determined by such rules as may be prescribed, shall be
(ii) Where a dealer has been taxed in respect of the purchase of any goods,
in accordance with the rules referred to in clause (i) of this proviso, he
shall not be taxed again in respect of any sale of such goods effected by
him." Mr. Sorabjee submitted that the term "goods" in Section
2(h) only includes tangible moveable property and the words "all
materials, articles and commodities" also cover only tangible moveable
He submitted that computer software is not tangible moveable property. In
support of his submission, he relied upon certain observations in the book
"The Law Relating to Computers and the Internet" by one Mr. Rahul
Matthan, wherein it has been stated that a software program is essentially a
series of commands issued to the hardware of the computer that enables the
computer to perform in a particular manner. It is stated that to make it
effective, therefore, the sequence of commands must be physically stored on a
portion of the computer that can be readily accessed by the processing unit of the
computer. It is stated that in order for this, the programs should be reduced
to a physical form so that it is capable of being stored. It is stated that the
programs are therefore of a nature that they may be recorded on magnetic media
(much like the recording of audio or video on cassettes and tapes) but that in
cases of software, the programmes are recorded on floppy drives, CDs or hard
drives. In the book, `the nature of software' is defined as follows:
"The Nature of Software What then, is the software program? If a person
goes to a store to purchase an item of software, he will most likely be given a
box containing a series of floppy discs or a single CD-ROM and some
Within the floppy discs or the CD-ROM will be all the components of the
program that one requires to copy (for install) onto the hard disc of the
computer, in order that the program can function.
So is the CD-ROM that you have purchased, the software? If the answer to
that question is yes, the corollary would be that the CD-ROM containing the
software program, becomes the sale and exclusive property of the person who
bought it and can be sold or distributed fully. If you purchase a soap, you
become the sole owner of that soap and you could re-sell it, cut it into pieces
and distribute it or, unhygienic though it may sound, even hire it out to
various people to useand no one could challenge your actions since you have
paid valuable consideration and purchased the product and thereby have accrued
the sole right to deal with that item.
If that applies to the soap, why could it not apply to the CD-ROM? The
answer to that question lies in understanding the basic difference between a
software program and other traditional goods.
As already discussed, software is a series of instructions. While it may be
housed in a floppy disc or a CD-ROM or the hard disc of the computer, the item
referred to as software is the series of commands that operates the computer.
Though the floppy disc, the CD- ROM and the hard disc are each tangible
commodities that could be bought sold and resold, the software embedded in
these media are intangible and fall into a very different category." Mr.
Sorabjee also relied upon a book "Software Engineering" by Roger S.
Pressman, wherein it has been stated that a Software is an instruction that
when executed provides desired function and performances. It is stated that a
Software is composed of programs, data and documents. Each of these items
comprises a configuration that is created as part of the software engineering
Mr. Sorabjee also drew the attention of the Court to the definitions of
"Computer" and "Computer Programme" in The Copyright Act, 1957.
These read as follows:
"Computer" includes any electronic or similar device having
information processing capabilities".
"Computer programme" means a set of instructions expressed in
words, codes, schemes or in any other form, including a machine readable
medium, capable of causing a computer to perform a particular task or achieve a
particular result." Mr. Sorabjee submitted that the definitions show that
a computer programme falls within the definition of literary work and is
intellectual property of the programmer.
Mr. Sorabjee submitted that a computer software is nothing but a set of
commands, on the basis of which the computer may be directed to perform the
desired function. He submitted that a software is completely unlike a book or a
painting. He submitted that when the customer purchases a book or a painting
what he gets is the final product itself. Mr. Sorabjee submitted that in cases
of software the consumer does not get any final product but all that he gets is
a set of commands which enable his computer to function. He submitted that
having regard to its nature and inherent characterstic, software is intangible
property which cannot fall within the definition of the term "goods"
in Section 2(h) of the said Act.
Mr. Sorabjee submitted that the question as to whether software is tangible
or intangible property has been considered by the American Courts. He fairly
pointed out that in America there is a difference of opinion amongst the
various Courts. He submitted that, however, the majority of the Courts have
held that a software is an intangible property. He showed to the Court a number
of American Judgments, viz., the cases of Commerce Union Bank vs. Tidwell
reported in 538 S.W.2d 405; State of Alabama vs. Central Computer Services, INC
reported in 349 So. 2d 1156; The First National Bank of Fort Worth vs. Bob
Bullock reported in 584 S.W.2d 548; First National Bank of Springfield vs.
Department of Revenue reported in 421 NE2d 175; Compuserve, INC. vs. Lindley
reported in 535 N.E. 2d 360 and Northeast Datacom, Inc., et al vs.
City of Wallingford reported in 563 A2d 688. In these cases, it has been
held that `computer software' is tangible personal property. The reasoning for
arriving at this conclusion is basically that the information contained in the
software programs can be introduced into the user's computer by several
different methods, namely, (a) it could be programmed manually by the
originator of the program at the location of the user's computer, working from
his own instructions or (b) it could be programmed by a remote programming
terminal located miles away from the user's computer, with the input
information being transmitted by telephone; or (c) more commonly the computer
could be programmed by use of punch cards, magnetic tapes or discs, containing
the program developed by the vendor. It has been noticed that usually the
vendor will also provide manuals, services and consultation designed to
instruct the user's employees in the installation and utilization of the
supplied program. It has been held that even though the intellectual process is
embodied in a tangible and physical manner, that is on the punch cards,
magnetic tapes, etc. the logic or intelligence of the program remains intangible
property. It is held that it is this intangible property right which is
acquired when computer software is purchased or leased. It has been held that
what is created and sold is information and the magnetic tapes or the discs are
only the means of transmitting these intellectual creations from the originator
to the user. It has been held that the same information could have been
transmitted from the originator to the user by way of telephone lines or fed
directly into the user's computer by the originator of the programme and that
as there would be no tax in those cases merely because the method of
transmission is by means of a tape or a disc, it does not constitute purchase
of tangible personal property and the same remains intangible personal property.
It has been held that what the customer paid for is the intangible knowledge
which cannot be subjected to the personal property tax. In these cases,
difference is sought to be made between purchase of a book, music
cassette/video or film and purchase of software on the following lines:
"When one buys a video cassette recording, a book, sheet music or a
musical recording, one acquires a limited right to use and enjoy the material's
content. One does not acquire, however, all that the owner has to sell. These
additional incidents of ownership include the right to produce and sell more
copies, the right to change the underlying work, the right to license its use
to other and the right to transfer the copyright itself. It is these incidents
of the intellectual, intangible competent of the software property that
Wallingford has impermissibly assessed as tangible property by linking these
incorporeal incidents with the tangible medium in which the software is stored
and transmitted." It has been fairly brought to the attention of the Court
that many other American Courts have taken a different view. Some of those
cases are South Central Bell Telephone Co. vs. Sidney J.
Barthelemy reported in 643 So.2d 1240; Comptroller of the Treasury vs.
Equitable Trust Company reported in 464 A.2d 248;
Chittenden Trust Co. vs. Commissioner of Taxes reported in 465 A.2d 1100;
University Computing Company vs. Commissioner of Revenue for the State of
Tennessee reported in 677 S.W.2d 445 and Hasbro Industries, INC. vs. John H.
Norberg, Tax Administrator reported in 487 A.2d 124. In these cases, the Courts
have held that when stored on magnetic tape, disc or computer chip, this
software or set of instructions is physically manifested in machine readable
form by arranging electrons, by use of an electric current, to create either a
magnetized or unmagnetized space. This machine readable language or code is the
physical manifestation of the information in binary form. It has been noticed
that at least three program copies exist in a software transaction: (i) an
original, (ii) a duplicate, and (iii) the buyer's final copy on a memory
device. It has been noticed that the program is developed in the seller's
computer then the seller duplicates the program copy on software and transports
the duplicates to the buyer's computer. The duplicate is read into the buyer's
computer and copied on a memory device. It has been held that the software is
not merely knowledge, but rather is knowledge recorded in a physical form
having a physical existence, taking up space on a tape, disc or hard drive,
making physical things happen and can be perceived by the senses. It has been
held that the purchaser does not receive mere knowledge but receives an
arrangement of matter which makes his or her computer perform a desired
function. It has been held that this arrangement of matter recorded on tangible
medium constitutes a corporeal body. It has been held that a software recorded
in physical form becomes inextricably intertwined with, or part and parcel of
the corporeal object upon which it is recorded, be that a disk, tape, hard
drive, or other device. It has been held that the fact that the information can
be transferred and then physically recorded on another medium does not make
computer software any different from any other type of recorded information
that can be transferred to another medium such as film, video tape, audio tape
or books. It has been held that by sale of the software programme the
incorporeal right to the software is not transferred. It is held that the
incorporeal right to software is the copyright which remains with the
originator. What is sold is a copy of the software. It is 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. It has been held that when one buys a copy of a copyrighted novel in
a bookstore or recording of a copyrighted song in a record store, one only
acquires ownership of that particular copy of the novel or song but not the
intellectual property in the novel or song.
Mr. Dwivedi pointed out that the difference of opinion among the various
American Courts has arisen because under the American Statutes Act what is
taxable is "tangible personal property". He submitted that it is this
definition which required the American Courts to consider whether software is
tangible or intangible. Mr. Dwivedi submitted that the definition of the term
"goods" in the said Act is a very wide definition. He submitted that
"goods" have been defined to mean all kinds of moveable property
except those specified, namely, actionable claims, stocks, shares and
securities. He pointed out that the definition includes all materials, articles
and commodities. He submitted that the words "all materials, articles and
commodities" have been used in the said Act in the same sense as used in
Article 366 (12) of the Constitution of India. Article 366 provides that unless
the context otherwise requires, the expressions given therein would have the
meanings respectively assigned to them. Under Sub-clause (12), the term
"goods" includes all materials, commodities and articles. He
submitted that the legislative power, of the State to levy sales tax, is by
virtue of Entry 54 of List II of Schedule 7. Mr. Dwivedi relied upon a number
of cases of this Court, set out hereafter, to show that the term
"goods" has been held to include even incorporeal and/or intangible
In the case of Commissioner of Sales Tax, Madhra Pradesh, Indore vs. Madhya
Pradesh Electricity Board, Jabalpur reported in (1969) 1 SCC 200, the question
whether electricity was "goods" for the purposes of imposition of
sales tax under the Madhya Pradesh General Sales Tax Act, 1959. It was noted
that the definition of the term "goods" meant all kinds of
"movable property" and included "all materials, articles and
commodities". It was held as follows:
"The reasoning which prevailed with the High Court was that a
well-defined distinction existed between the sale or purchase of
"goods" and consumption or sale of electricity otherwise there was no
necessity of having Entry No.53 but under Entry 53 taxes can be levied not only
on sale of electricity but also on its consumption which could not probably
have been done under Entry 54. It is difficult to derive much assistance from
the aforesaid entries. What has essentially to be seen is whether electric
energy is "goods" within the meaning of the relevant provisions of
the two Acts. The definition in terms is very wide according to which
"goods" means all kinds of movable property. Then certain items are
specifically excluded or included and electric energy or electricity is not one
of them. The term "movable property" when considered with reference
to "goods" as defined for the purposes of sales tax cannot be taken
in a narrow sense and merely because electric energy is not tangible or cannot
be moved or touched like, for instance, a piece of wood or a book it cannot
cease to be movable property when it has all the attributes of such property.
It is needless to repeat that it is capable of abstraction, consumption and use
which, if done dishonestly, would attract punishment under Section 39 of the Indian Electricity Act,
1910. It can be transmitted, transferred, delivered, stored, possessed etc.
in the same way as any other movable property.
Even in Benjamin on Sale, 8th Ed. Reference has been made at p. 171 to
County of Durham Electrical etc. Co. v. Inland Revenue, in which electric
energy was assumed to be "goods". If there can be sale and purchase
of electric energy like any other movable object, we see no difficulty in
holding that electric energy was intended to be covered by the definition of
"goods" in the two Acts. If that had not been the case there was no
necessity of specifically exempting sale of electric energy from the payment of
sales tax by making a provision for it in the schedules to the two Acts.
It cannot be denied that the Electricity Board carried on principally the
business of selling, supplying or distributing electric energy. It would
therefore clearly fall within the meaning of the expression "dealer"
in the two Acts." 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 concerned item 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
This Court in the case of H. Anraj vs. Government of Tamil Nadu, reported in
(1986) 1 SCC 414, had, in the context of Bengal Finance (Sales Tax) Act, 1941,
occasion to consider whether lottery tickets were goods. It has been submitted
that the lottery tickets were an actionable claim as the essence of a lottery
was a chance for a prize for a price. This Court noted the definition of
"goods" and held that the term "moveable property", for the
purposes of sales tax, could not be taken in a narrow sense. It was held that
incorporeal rights, like copyright or an intangible thing like electric energy,
were regarded as goods exigible to sales tax and, therefore, entitlement to a
right to participate in a draw, which was beneficial interest in movable
property, would fall within the definition of "goods".
The question whether electricity can be termed as "goods" again
arose before a Constitution Bench of this Court in State of A. P. vs.
National Thermal Power Corpn. Ltd. & Ors. reported in (2002) 5 SCC 203.
This Court, noticing the earlier authorities, held that the definition of
"goods" in Article 366 (12) of the Constitution of India was very
wide and included all kinds of movable properties. It was held that the term
"movable property" when considered with reference to
"goods" as defined for the purposes of sales tax cannot be taken in a
narrow sense. It was held that merely because electric energy was not tangible
or would not be moved or touched like, for instance, a piece of wood or a book
it would not cease to be movable property when it had all the attributes of
such property. It was held that electricity was capable of abstraction,
consumption and use which, if done dishonestly, was punishable under Section 39
of the Indian
Act, 1910. It was held that electric energy could be transmitted,
transferred, delivered, stored and possessed in the same way as any other
movable property. It was held that electricity was thus "goods" within
the meaning of the Sales Tax Act.
Thereafter, in the case of M. P. Cement Manufacturers' Association vs. State
of M. P. & Ors., reported in (2004) 2 SCC 249, the question was whether the
levy of cess on generation of electricity by the M. P. Upkar Adhiniyam, 1981,
as substituted by M. P.
Upkar (Sanshodhan) Adhyadesh, 2001, was valid. It was held that there was no
legislative competence in the State to levy cess as the Parliament had
exclusive legislative competence in this respect by virtue of Entry 84 in List
I of Schedule 7. However, in this case also it has been held that electricity
was "goods" and that the State would have competence to levy tax on
the sale and consumption of electricity but could not levy cess on the
production of electricity.
In the case of Associated Cement Companies Ltd. vs.
Commissioner of Customs, reported in (2001) 4 SCC 593, the question was
whether customs duty was leviable on technical material supplied in the form of
drawings, manuals and computer disc, etc.
The further question was if customs duty was leviable how it was to be
valued. In that case also it was inter alia argued that custom duty could not
be levied as the drawings, designs diskettes, etc. were not goods and that they
only constituted ideas. It had been submitted that what was being transferred
was technology, i.e., the knowledge or know-how and thus, even though this may
be valuable, it was intangible property and not goods. This Court noted Section
2 (22) of the Customs Act, which defined "goods" as follows:
"2.(22)(a) vessels, aircrafts and vehicles;
(d) currency and negotiable instruments; and (e) any other kind of moveable
property." It is thus to be seen that under the Customs Act, apart from
what had been specified therein, any other kind of moveable property
constituted goods. This Court held as follows:
"27. According to Section 12 of the Customs Act, duty is payable on
goods imported into India. The word "goods" has been defined in
Section 2(22) of the Customs Act and it includes in clause (c)
"baggage" and clause (e) "any other kind of moveable
property". It is clear from a mere reading of the said provision that any
moveable article brought into India by a passenger as part of his baggage can make
him liable to pay customs duty as per the Customs Tariff Act. An item which
does not fall within clauses (a), (b), (c) or (d) of Section 2(22) will be
regarded as coming under Section 2(22)(e). Even though the definition of the
goods purports to be an inclusive one, in effect it is so worded that all
tangible moveable articles will be the goods for the purposes of the Act by
residuary clause (e) of Section 2(22). Whether moveable article comes as a part
of a baggage, or is imported into the country by any other manner, for the
purpose of the Customs Act, the provision of Section 12 would be attracted. Any
media whether in the form of books or computer disks or cassettes which contain
information technology or ideas would necessarily be regarded as goods under
the aforesaid provisions of the Customs Act.
These items are moveable goods and would be covered by Section 2(22)(e) of
the Customs Act.
33. It is true that what the appellants had wanted was technical advice on
information technology. Payment was to be made for this intangible asset. But
the moment the information or advice is put on a media, whether paper or
diskettes or any other thing, that what is supplied becomes a chattel. It is in
respect of the drawings, designs etc. which are received that payment is made
to the foreign collaborators. It is these papers or diskettes etc.
containing the technological advice, which are paid for and used. The
foreign collaborators part with them in lieu of money. It is, therefore, sold
by them as chattel for use by the Indian importer. The drawings, designs,
so received are goods on which customs duty could be levied.
34. The decision of Winter v. Putnam case (938 F 2nd 1033 (9th Cir 1991) is
also of no help to the appellants as in that case it was the quality of
information regarding mushrooms which was not regarded as a product even though
the encyclopaedia containing the information was regarded as goods. Here we are
not concerned with the quality of information given to the appellants. The
question is whether the papers or diskettes etc. containing advice and/or
information are goods for the purpose of the Customs Act. The answer, in our
view, is in the affirmative.
41. Significantly Chapter 49 also includes items which have substantial
intellectual value as opposed to the value of the paper on which it is put.
Newspapers, periodicals, journals, dictionaries etc. are to be found in Chapter
49 wherein maps, plans and other similar items are also included, while Chapter
97 talks about original engravings. It is clear that intellectual property when
put on a media would be regarded as an article on the total value of which
customs duty is payable.
42. To put it differently, the legislative intent can easily be gathered by
reference to the Customs Valuation Rules and the specific entries in the
Customs Tariff Act.
The value of an encyclopaedia or a dictionary or a magazine is not only the
value of the paper. The value of the paper is in fact negligible as compared to
the value or price of an encyclopaedia. Therefore, the intellectual input in
such items greatly enhances the value of the paper and ink in the aforesaid examples.
This means that the charge of a duty is on the final product, whether it be the
encyclopaedia or the engineering or architectural drawings or any manual.
43. Similar would be the position in the case of a programme of any kind
loaded on a disc or a floppy. For example in the case of music the value of a
popular music cassette is several times more than the value of a blank
cassette. However, if a pre-recorded music cassette or a popular film or a
musical score is imported into India duty will necessarily have to be charged
on the value of the final product. In this behalf we may note that in State
Bank of India v. Collector of Customs ((2000) 1 SCC 727 : (2000) 1 Scale 72)
the Bank had, under an agreement with the foreign company, imported a computer software
and manuals, the total value of which was US Dollars 4,084,475. The Bank filed
an application for refund of customs duty on the ground that the basic cost of
software was US Dollars 401.047. While the rest of the amount of US Dollars
3,683,428 was payable only as a licence fee for its right to use the software
for the Bank countrywide. The claim for the refund of the customs duty paid on
the aforesaid amount of US Dollars 3,683,428 was not accepted by this Court as
in its opinion, on a correct interpretation of Section 14 read with the Rules,
duty was payable on the transaction value determined therein, and as per Rule 9
in determining the transaction value there has to be added to the price
actually paid or payable for the imported goods, royalties and the licence fee
for which the buyer is required to pay, directly or indirectly, as a condition
of sale of goods to the extent that such royalties and fees are not included in
the price actually paid or payable. This clearly goes to show that when technical
material is supplied whether in the form of drawings or manuals the same are
goods liable to customs duty on the transaction value in respect thereof.
44. It is a misconception to contend that what is being taxed is
intellectual input. What is being taxed under the Customs Act read with the
Customs Tariff Act and the Customs Valuation Rules is not the input alone but
goods whose value has been enhanced by the said inputs. The final product at
the time of import is either the magazine or the encyclopaedia or the
engineering drawings as the case may be. There is no scope for splitting the
engineering drawing or the encyclopaedia into intellectual input on the one
hand and the paper on which it is scribed on the other. For example, paintings
are also to be taxed.
Valuable paintings are worth millions. A painting or a portrait may be
specially commissioned or an article may be tailor-made. This aspect is
irrelevant since what is taxed is the final product as defined and it will be
an absurdity to contend that the value for the purposes of duty ought to be the
cost of the canvas and the oil paint even though the composite product, i.e.,
the painting, is worth millions.
45. It will be appropriate to note that the Customs Valuation Rules, 1988
are framed keeping in view the GATT protocol and the WTO agreement. In fact our
rules appear to be an exact copy of GATT and WTO. For the purpose of valuation
under the 1988 Rules the concept of "transaction value" which was
introduced was based on the aforesaid GATT protocol and WTO agreement. The
shift from the concept of price of goods, as was classically understood, is
clearly discernible in the new principles.
Transaction value may be entirely different from the classic concept of
price of goods. Full meaning has to be given to the rules and the transaction
value may include many items which may not classically have been understood to
be part of the sale price.
46. The concept that it is only chattel sold as chattel, which can be
regarded as goods, has no role to play in the present statutory scheme as we
have already observed that the word "goods" as defined under the
Customs Act has an inclusive definition taking within its ambit any moveable
property. The list of goods as prescribed by the law are different items
mentioned in various chapters under the Customs Tariff Act, 1997 or 1999. Some
of these items are clearly items containing intellectual property like designs,
47. In the case of St Albans City and District Council v. International
Computers Ltd. ((1996) 4 All ER 481) Sir Ian Glidewell in relation to whether
computer programme on a disc would be regarded as goods observed at p. 493 as
"Suppose I buy an instruction manual on the maintenance and repair of a
particular make of car. The instructions are wrong in an important respect.
Anybody who follows them is likely to cause serious damage to the engine of his
car. In my view, the instructions are an integral part of the manual. The
manual including the instructions, whether in a book or a video cassette, would
in my opinion be 'goods' within the meaning of the 1979 Act, and the defective
instructions would result in a breach of the implied terms in Section 14.
If this is correct, I can see no logical reason why it should not also be correct
in relation to a computer disc on to which a program designed and intended to
instruct or enable a computer to achieve particular functions has been encoded.
If the disc is sold or hired by the computer manufacturer, but the program is
defective, in my opinion there would prima facie be a breach of the terms as to
quality and fitness for purpose implied by the 1979 Act or the 1982 Act."
48. The above view, in our view, appears to be logical and also in
consonance with the Customs Act.
Similarly in Advent Systems Ltd. v. Unisys Corpn. (925 F 2d 670 (3d Cir
1991)) it was contended before the Court in the United States that software
referred to in the agreement between the parties was a "product" and
not a "good" but intellectual property outside the ambit of the
Uniform Commercial Code. In the said Code, goods were defined as "all
things (including specially manufactured goods) which are moveable at the time
of the identification for sale". Holding that computer software was a
"good" the Court held as follows :
"Computer programs are the product of an intellectual process, but once
implanted in a medium they are widely distributed to computer owners. An
analogy can be drawn to a compact-disc recording of an orchestral rendition.
The music is produced by the artistry of musicians and in itself is not a
'good', but when transferred to a laser-readable disc it becomes a readily
merchantable commodity. Similarly, when a professor delivers a lecture, it is
not a good, but, when transcribed as a book, it becomes a good.
That a computer program may be copyrightable as intellectual property does
not alter the fact that once in the form of a floppy disc or other medium, the
program is tangible, moveable and available in the marketplace. The fact that
some programs may be tailored for specific purposes need not alter their status
as 'goods' because the Code definition includes 'specially manufactured
49. We are in agreement with the aforesaid observations and hold that the
value of the goods imported would depend upon the quality of the same and would
be represented by the transaction value in respect of the goods imported."
To be noted that this authority is directly dealing with the question in issue.
Even though the definition of the term "goods" in the Customs Act is
not as wide or exhaustive as the definition of the term "goods" in
the said Act, it has still been held that the intellectual property when it is
put on a media becomes goods. Mr. Sorabjee submitted that whilst referring to
the case of St. Albans City and District Council vs. International Computers
Ltd. [1996 (4) All E R 481] this Court missed the express finding of that Court
to the effect "clearly, a disk is within this definition. Equally clearly,
a program, of itself, is not". Mr. Sorabjee submitted that the English
case clearly holds that software programes are not goods. He further submitted
that the observations of this Court in Associated Cements Case (Supra) are in
the context of valuation of imported goods and must therefore not be taken into
consideration whilst deciding whether software is intangible, incorporeal
intellectual property. We are unable to accept this submission of Mr. Sorabjee.
The observations have been made not just in the context of valuation but to
decide whether the items imported were "goods". Question of valuation
would come only if the items imported were "goods" on which custom
duty could be levied.
In the case of Commissioner of Central Excise, Pondicherry vs. M/s Acer
India Ltd., reported in JT 2004 (8) SC 53, this Court has considered in detail
what a software programme is. After so considering, it has been held that a
computer and operative software are different marketable commodities. This
Judgment would also have been against the arguments canvassed by Mr. Sorabjee
but for the fact that this Court has itself clarified as follows:
"86. We, however, place on record that we have not applied our mind as
regard the larger question as to whether the informations contained in a
software would be tangible personal property or not or whether preparation of
such software would amount to manufacture under different statues." In our
view, the term "goods" as used in Article 366 (12) of the
Constitution of India and as defined under the said Act are very wide and include
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 programme may
consist of various commands which enable the computer to perform a designated
The copyright in that programme may remain with the originator of the
programme. But the moment copies are made and marketed, it becomes goods, which
are susceptible to sales tax. Even intellectual property, once it is put on to
a media, whether it be in the form of books or canvas (in case of painting) or
computer discs or cassettes, and marketed would become "goods". We
see no difference between a sale of a software programme on a CD/floppy disc from
a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In
all such cases, the intellectual property has been incorporated on a media for
purposes of transfer. Sale is not just of the media which by itself has very
little value. The software and the media cannot be split up. What the buyer
purchases and pays for is not the disc or the CD. As in the case of paintings
or books or music or films the buyer is purchasing the intellectual property
and not the media i.e. the paper or cassette or disc or CD. Thus a transaction
sale of computer software is clearly a sale of "goods" within the
meaning of the term as defined in the said Act. 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, transferred, delivered, stored, possessed etc. The software
programmes have all these attributes.
At this stage it must be mentioned that Mr. Sorabjee had pointed out that
the High Court has, in the impugned Judgment, held as follows:
"...In our view a correct statement would be that all intellectual
properties may not be `goods' and therefore branded software with which we are
concerned here cannot be said to fall outside the purview of `goods' merely
because it is intellectual property; so far as `unbranded software' is
concerned, it is undoubtedly intellectual property but may perhaps be outside
the ambit of `goods'".
[emphasis supplied] Mr. Sorabjee submitted that the High Court correctly
held that unbranded software was "undoubtedly intellectual property".
Sorabjee submitted that the High Court fell in error in making a distinction
between branded and unbranded software and erred in holding that branded software
was "goods". We are in agreement with Mr. Sorabjee when he contends
that there is no distinction between branded and unbranded software. However,
we find no error in the High Court holding that branded software is goods. In
both cases, the software is capable of being abstracted, consumed and use.
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
Before concluding, it must be mentioned that before the High Court certain other
questions were also raised. However, those have not been agitated or pressed
In this view of the matter, we see no infirmity in the Judgment of the
authorities below or in the impugned Judgment. Accordingly, the Appeals shall
stand dismissed with no order as to costs.