TATA Consultancy
Services Vs. State of Andhra
Pradesh [2001] Insc
137 (13 March 2001)
S. Rajendra
Babu & R.C. Lahoti Rajendra Babu, J. :
(WITH
C.A .No 2583, 2584, 2585 and 2586 of 1998)
J U D
G M E N T
L.T.J
In
these matters the Andhra Pradesh High Court concluded that software is of two
categories –
(i) software
which is specialised and exclusively custom-made to cater to the needs of
individual clients, and
(ii)
software which is standardised and marketed for the use of certain classes of
clients, like the Oracle, Lotus, Master Key, N-Export, Ex. Unigraphics, etc.
and held that for the purpose of the Andhra Pradesh General Sales Tax Act
(hereinafter referred to as the Act) it is not necessary to consider whether
the definition of goods in Section 2(h) of the Act has to be read down so as to
exclude software from it. The High Court took the view that the first category
may not constitute goods for the purpose of the Act, while the second category
are goods and held that they are leviable to tax.
The
case advanced on behalf of the appellants is that the branded software which is
an intellectual property being product of thought, creativity and intellectual
efforts cannot be goods for the purpose of the Act; that it is an intangible
intellectual property and, therefore, cannot be goods; that software is an
essentially classic form of intellectual property; that the value of the tapes
on which it is sold is much lesser than the value of the software programme
itself; that the software programme is always transferred onto the hardware and
then the tapes are useless; that, therefore, the licensee/payer is paying for
the programme and not for the tapes or discs; these discs are different from
music cassettes and video tapes, music reels, etc. because the programme on the
discs is separable and is always transferred to the hardware, whereas in the
case of music cassettes, etc. though they may be separable and can be
transferred to another cassette or tape this is not generally done and the
music or movie always remains on the tangible property on which it was stored
when sold;
that
there are other methods by which a software programme can be installed, like,
the programme directly keying in the programme through the console keyboard;
that what is transferred is the right to use the programme (which is a set of
instructions) and not the tape on which it is stored;
that
though software has a physical component, these physical components are merely
tangential incidents of a computer programme, they do not change the programmes
clearly intangible character; that the essence of the contract is the right to
use the software, therefore, the essence of the transaction test must be
applied; that in PSI Data Systems Ltd. v. Collector of Central Excise, 1997 (2)
SCC 78, it is held that if discs, floppies, CD ROMs are sold along with the
computer, their value is not to be included for assessing excise duty; that a
software programme is a process that can be used to achieve a certain result
whereas a music cassette etc. is the end product in itself.
While
on behalf of the respondents the case of the appellants is resisted on the
ground that the magnetic tapes, discs, are necessary to carry the programme and
for the transfer to the hardware and, therefore, the value of the tapes is
equal to the value of the programme; that the fact that the programme can be
transmitted through some other means does not take away from the fact that in
fact a tangible means was actually used; that music cassettes, phonographs and
movie tapes are indistinguishable from discs and tapes because
(i) they
can also be transmitted by telephone lines and through radio waves, and
(ii)
the contents of music cassettes etc. are also transferable to some other medium
belonging to the purchaser of the right to use; that software is tangible
property and software recorded in physical form becomes inextricably linked
with the corporeal object upon which it is stored, that is, a disc, tape, hard
drive, etc.; that the fact that the information can be transferred and then
physically recorded in another medium does not make software any different from
any other type of recorded information that can be transferred to another
medium such as film, videotape, audio tape or books; that the distinction
between books, films, videotapes, audio-tapes etc. on the one hand and computer
programme on the other on the basis that the former cannot exist without the
tangible medium and the latter can is unsustainable because even a programme
has to be stored on some medium like the hard disc and books, music etc. can
also be transferred from one medium to another; that in Wal-Mart Stores, Inc.
v. City of Mobile & County of Mobile, 200-622, Supreme Court of Alabama
(1996), the Court said, Software is an arrangement of matter recorded in a
tangible medium and, therefore, constitutes a corporeal body; that whether
another medium was actually used should be seen.
This
Court in M/s Associated Cement Companies Ltd. v. Commissioner of Customs, JT
2001 (2) SC 141, examined a similar question in the context of the Customs Act
and Tariff Act with reference to the Customs Valuation (Determination of Price
of Imported Goods) Rules, 1988 wherein several decisions rendered relating to
levy of sales tax in the context of works contract were cited to contend that
the drawings, plan, manuals, etc. supplied were in the nature of intellectual
property being knowledge or know how which could only amount to service and not
goods. This Court is of the view that those decisions would not be of any help
in the case in which the matter was being considered as the question before
them was only whether the papers or diskettes etc. containing advice and/or
information are goods for the purpose of the Customs/Tariff Act. In the course
of the discussion several observations have been made as to the nature of the
goods and the expression goods used in various contexts is also taken note of
in arriving at the conclusion. It is specifically stated that once these
drawings, etc. were put on the diskettes it would enhance the value of those
goods and adopted the reasoning set out in Advent Systems Limited v. UNISYS
Corporation, [925 F 2d 670 (3d Cir 1991)] that computer programmes are the
product of an intellectual process, but once implanted in a medium are widely
distributed to computer owners though the programme can be copyrightable as
intellectual property it does not alter the fact that once in the form of a
floppy disk or other medium the programme is tangible, moveable and available
in the market place and, therefore, would amount to goods. The fact that some programmes
may be tailored for specific purposes need not alter their status as goods. To
arrive at these conclusions this Court referred to several decisions cited
therein.
The
debate adverted to by us as to development of customised computer software programmes
for a customer do not constitute computer and data processing services because
the true object of software development contract is not to obtain the services
of the consultant, but to obtain software programmes consisting of intangible
intellectual property which are not taxable. The services used to customise and
develop the computer software are part of the final software package sold and
not separate computer and data processing services subject to tax.
This
debate will be incomplete without considering the decisions in addition to
those cited in Associated Cement Company Ltd. case [supra] and those referred
to in this order, to the following: Beta Computers (Europe) Ltd. v. Abobe Systems (Europe) Ltd. (1995); Commerce Union Bank
v. Tidwell, 56-85 TN-Taxrptr-TB 200-279 Tennessee Supreme Court; State of Alabama v. Central Computer Services.
INC,
379 So 2nd 1156; BOB Bullock, Comptroller v. Statistical Tabulating
Corporation, 60-82 Tx-Taxrptr-TB 200-683 Texas Supreme Court; The First
National Bank of Fort Worth, A National Banking Association v. BOB Bullock
Comptroller of Public Accounts, State of Texas, 584 sw 2nd 548; First National
Bank of Springfield v. Department of Revenue, 55-84 IL-Taxrptr-TB 201-165 Illionis
Supreme Court;
Ray S.
James, Director of Revenue, State of Missouri v. Tres Computer Systems, INC.,
642S.W. 2nd 347; Comptroller of the Treasury v. Equitable Trust Co., 296 Md.
459, 464 A.2nd 248; Chittenden Trust Co. v. Commissioner of Taxes, 55-98 VT-Taxrptr-
TB-200-193, Vermont Supreme Court; Toby Constructions Products Pty. Ltd. v. Computa
Bar (Sales) Pty. Ltd. (1983); University Computing Company v. Hon. Martha
Olsen, Commissioner of Revenue for the State of Tennessee, 677 S.W. 2d 445;
Hasbro Industries, INC. v. John H. Norberg, Tax Administrator, 487 A.2d 124;
Compuserve,
INC. v. Lindley, 535 N.E. 2nd 360; Northeast Datacom, INC v. City of
Wallingford, 55-90 CT-Taxrptr-TB 200-320, Connectict Supreme Court; South
Central Bell Telephone Co. v. Sindney K. Barthelemy, 643 So.2d 1240;
Wal-Mart
Stores, INC. v. City of Mobile & County of Mobile (supra); Kenneth P. Hahn.
As Assessor, etc. v. State Board of Equalization; State v. Central Computer
Services. Inc. (1977, Ala) 349 So. 2d 1160, 91 ALR 3d 274);
and Andersen Consulting, LLP v. Gene Gavin, Commissioner of Revenue Services,
(2000) Connecticut Superior Court. Deeper and further
consideration is required in view of the importance of the matter having global
implications.
Therefore,
an authoritative pronouncement is required on all these aspects of the matter.
In that view of the matter, we think it appropriate to place the papers in
these cases before the Honble the Chief Justice of India to be referred to a
Larger Bench.
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