Intellectual Property In A Software Programme – A Taxable Subject Matter Or Not?

With the liberalization policy geared in, the country has been witnessing a rapid transformation in all sectors and software has emerged as one of the vital aspect of trade and commerce. Of late, the Apex Court in India had an opportunity to determine the scope of the software as ‘goods’ to attract levy of sales tax.

The Constitution Bench of the Supreme Court of India in Tata Consultancy Service v. State of Andhra Pradesh 2006 (33) PTC 652 (SC) addressed an interesting question as to whether ‘canned softwares’ can be treated as goods to attract Sales Tax duty under the provisions of Andhra Pradesh General Sales Tax Act, 1957 (the Act) and whether Section 2 (h) of the Act which defines ‘goods’ to mean all kinds of movable property other than actionable claims..… covers only tangible property and precludes intangible property.

Tata Consultancy Services/Appellants are engaged in consultancy services including computer consultancy services. They are providers of the shelf computer software packages otherwise called as ‘canned software.’ Canned software is software that a person can go to a store and just buy off the shelf unlike uncanned software, which is custom made software and directly loaded on customer’s computers. The real owners of the canned software are persons who developed it. Tata Consultancy claims to be the licensees authorized to sub-license it to others.

The Commercial Tax Officer, Hyderabad under the provisions of the Act passed a provisional order of assessment holding that the softwares were ‘goods’. The Appellate Deputy Commissioner of Commercial Tax also held that software was a goods and hence assessable to sales tax under the Act. The Appellant preferred an appeal, which was dismissed by the Sales Tax Appellate Tribunal. Aggrieved by the Tribunal’s Order Tata Consultancy filed a Tax Revision appeal before the Andhra Pradesh High Court, which was also dismissed. Against this Order of the High Court, the Appellant preferred an appeal before the Supreme Court.

The Apex Court delivered two separate, but concurring judgments in this case.

The main contention on behalf of the Tata consultancy was that the term ‘goods’ as per Section 2 (h) of the Act include only movable tangible property and not intangible property. It was pointed out that unlike traditional articles, the software cannot be resold and the purchaser would not become the sole owner of the software by mere purchase. The software is a series of commands or instructions to the computer. Though the floppy disk and CD ROM are tangible property, the software embedded on it, is intangible and hence, falls under different category. The definition formulated in the Copyright Act, 1957 was drawn in for contending that computer programme falls within the parameters of ‘literary work’ and hence is intellectual property. It was argued that the customer when he purchases the software is not getting the final product but only a series of commands. A number of foreign cases were also cited to contend that software is an intangible property.

The next key argument raised was that, the magnetic tapes or discs were only the means of transmitting the intellectual creation and that the same can be transmitted either through telephone lines or fed directly to the computer where in no tax could be attracted. It is for the intangible knowledge that the customer is spending money and not for the tangible one.

On the other hand, the State, countering the contentions of Tata Consultancy pointed out that while one purchases a book or a copyrighted song in record, what he acquires is only the copy of that particular song or book and not the copyrighted matter. Further it was argued that Article 366 (12) of the Constitution of India express the term ‘goods’ to include all material commodity and article, which would include intangible property also. It was also contented that the criteria for levying tax is not whether the goods is tangible or intangible. Reliance was placed on Commissioner of Sales tax, Madhya Pradesh, Indore v. Madhya Pradesh Electricity Board, Jabalpur (1969) 1 SCC 200 and State of A.P. v. National Thermal Power Corp. Ltd (2002) 5 SCC 203, where in the Apex Court held that electricity can be termed as ‘goods’. The Court for the purpose of levying tax, held that property if capable of being abstracted, consumed, transmitted and transferred, delivered, stored or possessed are ‘goods.’

The Apex court shed light by answering

1. What point of time a particular thing can be termed as ‘goods’
2. Whether a software can be treated as goods
3. Whether intangible property can be termed as ‘goods’ under Sales tax Act

The Court categorically ruled that in India, the test to determine whether a property is ‘goods’ for the purpose of sales tax is not whether the property is tangible or intangible, but the test is whether the item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored possessed etc. Undoubtedly, canned and uncanned software satisfies all these conditions. The Court placed reliance on Associated Cement Company Ltd v. Commissioner of Customs (2001) 4SCC 593 where in, it was held that the moment the information or advise are put on media, whether in the form of paper, diskettes or in any other form, what is supplied becomes a chattel. The Court stressed to point out that it is a misconception to contend that what is being taxed is intellectual input. It is the goods whose value that has been enhanced by the input being taxed. The Court also pointed out that the opinion on the taxability of software in foreign countries are divided and drew tread from American case Advent Systems Ltd v. Unisys Corpn. (925 F 2d 670 (3d Cir1991)) which held "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, movable and available in the market place".

The Court held that a computer programme might contain a series of commands to enable the computer to perform a designed task even though the programme may remain with the originator. The point where it becomes goods is the moment when its copies are made and marketed. Even intellectual property, once put on media becomes goods. The Court finds no difference in the sale of a computer programme on a floppy or CD with that of a sale of music on a CD/cassette. It is not the disk or CD that the purchaser pays for and hence the software and media cannot be split up.

The Indian Courts have well settled parameters for defining ‘goods.’ It makes no difference as to whether it is a tangible property or intangible property. What make it ‘goods’ are the three attributes.

1. Utility
2. Capacity to be bought or sold
3. Capacity to be transmitted, transferred, delivered, stored and possessed.

There is no doubt on the part of the Apex Court as to software satisfies the above three criteria and hence is well within the parameters of the "goods" as defined in the Andhra Pradesh General Sales Tax Act, 1957.

The Intellectual Property per se is incapable of attracting any sales tax duties, but once it is converted into a medium, which can be bought and sold, it is treated as an article for value. It can be marketed like any commodity, and are evident to senses. The computer programme containing instructions in computer language is no different and is a licensable subject matter. It attaches a value to the buyer and hence becomes an object of trade and commerce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.