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CASE NO.: Appeal (civil) 2582  of  1998

PETITIONER: TATA CONSULTANCY SERVICES

       Vs.

RESPONDENT: STATE OF ANDHRA PRADESH

DATE OF JUDGMENT:       13/03/2001

BENCH: S. Rajendra Babu & R.C. Lahoti

JUDGMENT:

(WITH C.A. No. 2583, 2584, 2585 and 2586 of 1998) J  U  D  G  M  E  N  T

RAJENDRA BABU,  J.  : L...I...T.......T.......T.......T.......T.......T.......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

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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

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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

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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.