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Software consists of carrier medium such as CD, Floppy and coded data. Softwares are categorized as standardized software or canned software and specific software or customized software. Standardized software or Canned software is mass market product designed and created for sale to more than one person and it is designed in such a way that large number of people can use it on a variety of hardware. It is also called as "Packaged Software" or "Standard Software" or "Normal Software" or "Branded Software". It is generally available in packaged form off the shelf in retail outlets. On the other hand, Customised Software means the software created for a single person or a specific customer to meet his specific requirement and it is also called as "Tailor-made Software" or "Specific Software".


An amendment was brought to Section 65(105) of Chapter V of Finance Act, 1994 through Finance Act No.2 of 2009, whereby a new clause (zzzze) was introduced to Section 65(105). Sub-section (105) of Section 65 of the Finance Acat, 1994 defines the expression "taxable service" and by virtue of the new provision of clause (zzzze), the information technology software was also brought under the meaning of "taxable service" and charged to Service Tax.


The question whether standardized software or canned software and specific software or customized software are goods and whether their supply will be a sale or service and whether the Parliament has the legislative competency to bring in the amended provisions of Section 65(105)(zzzze) by virtue of the powers under Entry 97 of List I of Schedule VII of the Constitution of India, was under consideration before the High Court of Madras in the case of Infotech Software Dealers Association.


In their judgement dated 24.08.2010, the High Court = STO 2010 Mad 307 held that the developer or the creator of a software, keeps back the copyright of each software, be it canned, packaged or customised, and what is transferred to the user is only the right to use with copyright protection. By that agreement, even the developer does not sell the software as such. By that Master End-User License Agreement, the distributors again enter into an End-User License Agreement for marketing the software as per the conditions stipulated therein. When a transaction takes place between the distributors of the software with 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 of India, 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. It was also held by the High Court that the Parliament has the legislative competency to bring in enactments to include certain services provided or to be provided in terms of information technology software for use in the course or furtherance of business or commerce to mean a taxable service, in terms of the residuary Entry 97 of List I of Schedule VII. Software is goods and whether the transaction would amount to sale or service would depend upon the individual transaction. It is the specific case of the respondents that pursuant to the amended provision, so far no demand has been raised against any of the members of the petitioner-Association and in the event such demands are made, the members of the petitioner-Association can challenge such demands depending upon the nature of transaction and may consequently resist the imposition of tax by showing that the transaction is only a sale and not a service.


The above judgement of the High Court of Madras although do not decide the issue finally, has ruled that, whether the act of supply of software is a sale or service will depend upon the nature of the transaction i.e. the rights which accrue to the end-user from the transaction will decide whether the transaction is a sale or service. In any transaction involving supply of standardized or Canned software or Customized or tailor made software the copyright of the software remains with the creator and only the permission to use such a software is transferred to the end-user, whereas in the case of sale of such software to the end-user by some person other than the creator, only the contents of such software gets transferred to the end-user.


Presently all Customized or tailor made software are charged to Service Tax, whereas all standardized or canned software are subject to Central Excise Duty and VAT. By virtue of the above judgement of the High Court of Madras, the department may contemplate to even levy Service Tax on all standardized or canned software in addition to other levies.





Category Service Tax, Other Articles by - MONISH BHALLA 



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