Software is “goods”, its supply may be a “service” and not a “sale”

Infotech Software Dealers Association vs. UOI (Madras High Court)

Though software is “goods”, its supply may be a “service” and not a “sale”

S. 65(105)(zzzze) of the Finance Act, 1995 inserted by the F (No. 2) Act, 2009 provides for the levy of service tax on “any service provided … 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 … acquiring the right to use information technology software …” The Petitioner, an association of software resellers, contented inter alia that as software had been held to be “goods” by the Supreme Court in Tata Consultancy Services 271 ITR 401 and as there was a “sale” attracting VAT, there could not also be a “service” and that s. 65(105)(zzzze) was unconstitutional. HELD dismissing the Petition:

(i) Two questions arise for consideration: (a) whether software is goods and (b) if so, whether in all case of transactions, it would amount to sale or in some transactions it could be considered to be a service;

(ii) All software is “goods”. Article 366(12) of the Constitution defines the term “goods” to include all materials, commodities and articles. It is an inclusive definition. Though a software programme consists of various commands which enable the computer to perform a designated task and the copyright in that programme remains with the originator of the programme, yet because software is an article of value, it is “goods”. Indian law does not make a distinction between tangible property and intangible property. Tata Consultancy Services 271 ITR 401 (SC) followed;

(iii) However, while software is “goods”, all transactions are not necessarily a “sale”. The transaction may be one which is either an ‘exclusive sale’ or ‘an exclusive service’ or one which has the elements of a sale and service. A perusal of a sample ‘End User Licence Agreement’ (EULA) shows that the dominant intention of the parties is that the developer keeps the copyright of each software is only the right to use with copyright protection. By the agreement, the developer does not sell the software as such. The Petitioner in turn enters into a EULA for marketing the software to the end-user. Accordingly, when a transaction takes place between the Petitioner and its customers, it is not the sale of the software as such, but only the contents of the data stored in the software which would amount to only service. To bring the deemed sale under Article 366(29A)(d) of the Constitution, there must be a transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale of goods does not arise and in that sense, the transaction would be only a service and not a sale;

(iv) Accordingly, the argument that as software is ‘goods’, all transactions of canned / packaged software or customized software is a sale is not acceptable. The question whether a transaction amounts to a sale or service depends upon the individual transaction. Parliament cannot be said not to have the legislative competence to tax the transaction if it is shown to be a service.

Note: In Velankani Mauritius vs. DDIT (ITAT Bangalore), Kansai Nerolac Paints vs. ADIT (ITAT Mumbai) & Dassault Systems 229 CTR 105 (AAR) it has been held relying on Tata Consultancy Services 271 ITR 401 (SC) that income from software supply is not “royalty” but is “business profits” & not chargeable to tax in the absence of a PE. See Also update on Samsung Electronics 227 CTR 335 (Kar).