F.NO.354/132/2005-TRU Government of India Ministry of Finance Department of Revenue Tax Research Unit
Sub: Leviability of service tax on maintenance or repair of software.
Board has examined the leviability of service tax on maintenance or repair or servicing of software under section 65(105)(zzg) read with section 65 (64) of the Finance Act , 1994.
2. Supreme Court in the case of Tata Consultancy Services vs State of Andhra Pradesh (Civil Appeal no 2582 0f 1998) has observed that all the tests required to satisfy the definition of goods are possible in the case of software and in computer software the intellectual property has been incorporated on media for the purpose of transfer and software and media cannot be split up. Therefore, sale of computer software falls within the scope of sale of goods. Supreme Court has also observed that they are in agreement with the view that there is no distinction between branded and unbranded software.
3. Branded software, also known as canned software, sold off the shelf, is transferred in a media and is sold as such and the Supreme Court has decided that such branded software falls within the definition of goods. In the case of unbranded / customized software, the supplier develops the software and thereafter transfers the software so developed in a media and it is taken to the customerâ€™s premises for loading in their system. Thus, in the case of unbranded / customized software also, the intellectual property namely software is incorporated in a media for use. Supreme Court has held that software in a media is goods.
4. Any service provided to a customer by any person in relation to maintenance or repair is leviable to service tax under section 65(105) (zzg) of the Finance act , 1994. â€œMaintenance or repairâ€ is defined under section 65(64) of the said Act. Accordingly, â€œmaintenance or repairâ€ means any service provided in relation to maintenance or repair or servicing of any goods or equipment.
5 Software, being goods, any service in relation to maintenance or repair or servicing of software is leviable to service tax under section 65(105)(zzg) read with section 65 (64) of the Finance Act, 1994.
6 These instructions are issued taking into account the said decision of the Supreme Court , and in supersession of all earlier clarifications / circulars issued on the above subject.
7. Field formations may be suitably informed.
8. Trade notice may be issued for information of the trade.
9. The receipt of this circular may kindly be acknowledged.
Are pieces of software `goods' that can attract sales and other taxes? The Supreme Court held that software may be intellectual property but as the property contained in a medium is bought and sold, it is an article of value. H. P. Ranina disc usses the Supreme Court verdict that can have ramifications beyond the ambit of the sales tax law, and may be applicable under other statutes in different circumstances.
THE Supreme Court recently gave a landmark decision on the implications of sale of software, mainly revolving around the issue whether software can be described as `goods'. The issue before the apex court arose in the context of sales tax being levied when an Indian company sold the software.
This judgment may have far reaching implications even under provisions of the income-tax law. To deal with this point, it is necessary to first consider the rationale laid down by the Court after an exhaustive review of various Indian and foreign authorities.
In Tata Consultancy Services versus State of Andhra Pradesh ( 141 Taxman 132), the facts were that the company provided consultancy services including computer consultancy services. As part of its business, the company prepared and loaded on customers' computers custom-made software (`uncanned software') and also sold computer software packages off-the-shelf (`canned software').
The canned software packages were owned by companies/persons who had developed that software. The appellants were licencees with permission to sub-licence these packages to others. The canned software programmes were 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. The question raised in this appeal was whether the canned software sold by the appellants could be termed as `goods'.
The Supreme Court first referred to the definition of `goods' under the Sales Tax Act. This is wide enough to cover all kinds of movable property other than actionable claims, stocks, shares and securities, and includes all materials, articles and commodities including the goods involved in the execution of a works contract, or 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 a contract of sale and also includes motor spirit.
The word `sale' is defined under the Andhra Pradesh law to cover 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, pledge of, or a charge on goods.
The Supreme Court considered several American cases â€” Commerce Union Bank v Tidwell (538 S. W. 2d 405); State of Alabama v Central Computer Services (INC 349 So. D 1156); First National Bank of Fort Worth v Bob Bullock (584 S. W. 2d 548); First National Bank of Springfield v Department of Revenue (421 NE 2d 175); Compuserve, INC. v Lindley (535 N. E. 2d 360) and Northeast Datacom, Inc., et al v City of Walingford (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:
(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;
(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.
A contrary view has however been taken in other cases. Some of those cases are South Central Bell Telephone Co. v Sidney J. Barthelemy (643 So. 2d 1240); Comptroller of the Treasury v Equitable Trust Co. (464 A. 2d 248); Chittenden Trust Co. v Commissioner of Taxes (465 A. 2d 1100); University Computing Co. v Commissioner of Revenue for the State of Tennessee (677 S. W. 2d 445) and Hasbro Industries, Inc. v John H. Norberg, Tax Administrator (487 A. 2d 124). In these cases, courts have held that when stored on a magnetic tape, disc or computer chip, the software or a set of instructions is physically manifested in machine readable form by arranging electrons, by use of an electric current, to create either a magnetised or unmagnetised space. This machine-readable language or code is the physical manifestation of information in binary form.
It was held 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. The program is developed in the seller's computer; the seller then duplicates the program copy on software and transports the duplicates to the buyer's computer. The duplicate is fed into the buyer's computer and copied on a memory device.
In the aforesaid cases, the courts held that 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 was 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. This arrangement of matter recorded on tangible medium constitutes a corporeal body.
After considering the aforesaid decisions, the Supreme Court held that software may be intellectual property but such personal intellectual property contained in a medium is bought and sold. It is, therefore, an article of value. It is sold in various forms â€” floppies, disks, CD-ROMs, punch cards, magnetic tapes, and so on.
Each one of the mediums in which the intellectual property is contained is a marketable commodity. They are visible to the senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regards leviability of the tax under a fiscal statute, it may not make a difference. A program containing instructions in computer language is the subject-matter of a licence. It is useful to the buyer, who intends to use the hardware â€” the computer â€” to enable him to obtain the desired results. It indisputably becomes an object of trade.
These mediums containing the intellectual property are not only easily available in the market for a price, but are circulated as a commodity in the market. Simply because an instruction manual designed to instruct use and installation of the program is supplied with the software, the same would not necessarily mean that it would cease to be `goods'. Such instructions contained in a manual are supplied with several other goods including electronic ones. What is essential for an article to become "goods" is its marketability. The software marketed by the appellants in the present case was indisputably canned software and, thus, was liable to sales tax.
When a program is created, it is necessary to encode it, upload the same and thereafter unload. Indian law does not make any distinction between `tangible' and `intangible' property. A `good' may be tangible or intangible.
It would be regarded as goods, provided it has the attributes thereof having regard to (a) its utility; (b) capability of being bought and sold; and (c) capability of being transmitted, transferred, delivered, stored and possessed. If software, whether customised or otherwise, satisfies these attributes, the same would be "goods".
The aforesaid decision, though rendered under the sales tax law, has far reaching implications in the sense that its rationale could be applied where an Indian company imports software. Since such software falls within the definition of "capital asset" under Section 2(14) of the Income-Tax Act, 1961 which includes any movable property, payment made for such purchase may not attract tax in India in the hands of a foreign supplier if the property in the goods are transferred outside India.
Of course, mere granting of licence to use software would be treated as royalty, both under the Income-Tax Act, 1961 and the Double Taxation Avoidance Agreements. On the other hand, if software is transferred and such transfer takes place outside India, no profits thereon earned by the foreign company would accrue in India or be deemed to accrue in India under Section 9(1)(i). .
Therefore, no tax would be payable by a foreign company which transfers software as an outright sale to an Indian party. When there is no liability under the income-tax law, no Double Taxation Avoidance Agreement can impose a liability because the object of the agreement is to avoid tax and not to create a liability which does not exist under the law of a contracting state.
Thus, the Supreme Court's verdict will have wide ramifications which will go beyond the ambit of the sales tax law, and may be applicable under other statutes in appropriate and relevant circumstances.