# TATA CONSULTANCY SERVICES v. STATE OF ANDHRA PRADESH

- **Citation:** [2004] Supp. 5 S.C.R. 1040
- **Court:** Supreme Court of India
- **Decided:** 2004-11-05
- **Case number:** Civil Appeal No. 2582 of 1998
- **Bench:** N. Santosh Hegde, S.N. V Aria Va, B.P. Singh, H.K. Sema, S.B. Sinha
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/tata-consultancy-services-v-state-of-andhra-pradesh-20274
- **Pages:** 41

## Headnote

Andhra Pradesh Sales Tax Act, 1957-Section 2(h) and (n) and section
C 5-Computer Software Packages-If 'goods' and assessable to Sales TaxHeld: Computer Software is intellectual corporeal property-Once intellectual
property is put on to a media, in the form of books or canvas or computer
discs or cassettes, and is marketed, it would become 'goods '-Sale is not of
the media which has very little value-Software and the media cannot be split
up-Buyer purchases and pays for the intellectual property and not the media- ,
D Furthermore, software programmes, canned and uncanned are capable of
abstraction, consumption and use and which can be transmitted, transferred,
delivered, stored and possessed-Hence, transaction sale of computer software
is sale of 'goods' within the meaning of the term 'goods' defined in the Act
and as such assessable to Sales Tax.
E
Sales Tax: Term 'goods '-Scope of-Held: Term 'goods' is very wide
and includes all types of movable properties, tangible or intangible-Test to
determine whether a property is 'goods', for levy of Sales Tax is whether the
concerned item is capable of abstraction, consumption and use and whether
it can be transmitted, transferred, delivered, stored, possessed-It is noi whether
F the property is tangible or intangible or incorporeal-Andhra Pradesh Sales
Tax Act, 1957-Section 2(h)-Constitution of India, 1950-Article 366(12).
Words and Phrases:
'Goods '-Meaning of in the context of Article 366(12) of the Constitution
G of India and section 2(h) Andhra Pradesh General Sales Tax Act, 1957.
H
The question which arose for consideration was whether the canned
software - Computer Software Packages sold by the appellant-Computer
Consultancy can be termed to be 'goods' and as such assessable to Sales
1040
TATA CONSULTANCY SERVICES v. STATE OF A.P.
1041
/
~
Tax under the Andhra Pradesh General Sales Tax Act, 1957.
A
Dismissing the appeals, the Court
HELD: Per S.N. Variava, J (for himself and N. Santosh Hegde J, B.P.
Singh J and, H.K. Serna J)
B
1.1. The term "goods" as used in Article 366 (12) of the Constitution
of India and as defined under the Andhra Pradesh General Sales Tax Act,
1957 is very wide and includes all types of movable properties, whether
those properties be tangible or intangible. In India, the test to determine
whether a property is 'goods', for purposes of sales tax, is not whether c
the property is tangible or intangible or incorporeal. The test is whether
the concerned item is capable of abstraction, consumption and use and
whether it can be transmitted, transferred, delivered, stored, possessed etc.
(1064-B, F)
1.2. Computer Software is intellectual corporeal property. D
Intellectual property, once it is put on to a media, whether it be in the
form of books or canvas (in case of painting) or computer discs or cassettes,
and marketed would become 'goods'. A.software programme may consist
of various commands which enable the computer to f>erform a designated
task. The copyright in that programme may remain with the originator
of the programme. But the moment copies are made and marketed, it E
becomes goods, which are susceptible to sales tax. There is no difference
between a sale of a software programme on a CD/floppy disc from a sale
of music on a cassette/CD or a sale of a film on a video cassette/CD. In all
such cases, the intellectual property has been incorporated on a media for
purposes of transfer. Sale is not just of the media which by itself has very F
little value. The software and the media cannot be split up. The buyer
purchases and pays for intellectual property and not the me.dia-the disc
or the CD. Furthermore, software programmes, both canned and
uncanned are capable of abstraction, consumption and use and which can
be transmitted, transferred, delivered, stored, possessed etc. Thus, a
transaction of sale of computer software is clearly a sale of 'goods' within G
the meaning of the term as defined in the Act. (1064-C, D, E; 1065-C)
Commissioner of Sales Tax, M

## Text

_Characters 0–39,971 of 96,642. This is a partial read: ask again with offset=39971 for what follows._

A
TATA CONSULTANCY SERVICES
v.
STATE OF ANDHRA PRADESH
NOVEMBER 5, 2004
B
[N. SANTOSH HEGDE, S.N. V ARIA VA, B.P. SINGH, H.K. SEMA AND
S.B. SINHA, JJ.]
Andhra Pradesh Sales Tax Act, 1957-Section 2(h) and (n) and section
C 5-Computer Software Packages-If 'goods' and assessable to Sales TaxHeld: Computer Software is intellectual corporeal property-Once intellectual
property is put on to a media, in the form of books or canvas or computer
discs or cassettes, and is marketed, it would become 'goods '-Sale is not of
the media which has very little value-Software and the media cannot be split
up-Buyer purchases and pays for the intellectual property and not the media- ,
D Furthermore, software programmes, canned and uncanned are capable of
abstraction, consumption and use and which can be transmitted, transferred,
delivered, stored and possessed-Hence, transaction sale of computer software
is sale of 'goods' within the meaning of the term 'goods' defined in the Act
and as such assessable to Sales Tax.
E
Sales Tax: Term 'goods '-Scope of-Held: Term 'goods' is very wide
and includes all types of movable properties, tangible or intangible-Test to
determine whether a property is 'goods', for levy of Sales Tax is whether the
concerned item is capable of abstraction, consumption and use and whether
it can be transmitted, transferred, delivered, stored, possessed-It is noi whether
F the property is tangible or intangible or incorporeal-Andhra Pradesh Sales
Tax Act, 1957-Section 2(h)-Constitution of India, 1950-Article 366(12).
Words and Phrases:
'Goods '-Meaning of in the context of Article 366(12) of the Constitution
G of India and section 2(h) Andhra Pradesh General Sales Tax Act, 1957.
H
The question which arose for consideration was whether the canned
software - Computer Software Packages sold by the appellant-Computer
Consultancy can be termed to be 'goods' and as such assessable to Sales
1040
TATA CONSULTANCY SERVICES v. STATE OF A.P.
1041
/
~
Tax under the Andhra Pradesh General Sales Tax Act, 1957.
A
Dismissing the appeals, the Court
HELD: Per S.N. Variava, J (for himself and N. Santosh Hegde J, B.P.
Singh J and, H.K. Serna J)
B
1.1. The term "goods" as used in Article 366 (12) of the Constitution
of India and as defined under the Andhra Pradesh General Sales Tax Act,
1957 is very wide and includes all types of movable properties, whether
those properties be tangible or intangible. In India, the test to determine
whether a property is 'goods', for purposes of sales tax, is not whether c
the property is tangible or intangible or incorporeal. The test is whether
the concerned item is capable of abstraction, consumption and use and
whether it can be transmitted, transferred, delivered, stored, possessed etc.
(1064-B, F)
1.2. Computer Software is intellectual corporeal property. D
Intellectual property, once it is put on to a media, whether it be in the
form of books or canvas (in case of painting) or computer discs or cassettes,
and marketed would become 'goods'. A.software programme may consist
of various commands which enable the computer to f>erform a designated
task. The copyright in that programme may remain with the originator
of the programme. But the moment copies are made and marketed, it E
becomes goods, which are susceptible to sales tax. There is no difference
between a sale of a software programme on a CD/floppy disc from a sale
of music on a cassette/CD or a sale of a film on a video cassette/CD. In all
such cases, the intellectual property has been incorporated on a media for
purposes of transfer. Sale is not just of the media which by itself has very F
little value. The software and the media cannot be split up. The buyer
purchases and pays for intellectual property and not the me.dia-the disc
or the CD. Furthermore, software programmes, both canned and
uncanned are capable of abstraction, consumption and use and which can
be transmitted, transferred, delivered, stored, possessed etc. Thus, a
transaction of sale of computer software is clearly a sale of 'goods' within G
the meaning of the term as defined in the Act. (1064-C, D, E; 1065-C)
Commissioner of Sales Tax, Madhya Pradesh, Indore v. Madhya Pradesh
Electricity Board, Jabalpur (196911 SCC 200; Associated Cement Companies
Ltd. v. Commissioner of Customs, (20011 4 SCC 593 and State of A.P. v. H
-(
National Thermal Power Corpn. ltd. and Ors., (2002) 5 SCC 203, relied on.
1042
SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.
A
H. Anraj v. Government of Tamil Nadu, (1986) 1 SCC 414; M P.
Cement Manufacturers' Association v. State of M P. and Ors., (2004) 2 SCC
249 and Commissioner of Central Excise, Pondicherry v. Mis Acer India Ltd,
JT (2004) 8 SC 53, referred to.
St. Albans City and District Council v. International Computers, (1996)
B 4 All ER 481; Commerce Union Bank v. Tidwell, 538 S.W.2d 405; Stale of
Alabama v. Central Computer Services, INC 349 So. 2d 1156; The First
National Bank of Fort Worth v. Bob Bullock, 584 S.W. 2d 548; First National
BankofSpringfieldv. Department of Revenue, 421NE2d 175; Compuserve,
INC. v. Lindley, 535 N.E. 2d 360; Northeast Datacom, Inc., et al v. City of
C Wallingford, 563 A2d 688; South Central Bell Telephone Co. v. Sidney J.
D
E
F
Barthelemy 643 So.2d 1240; Comptroller of the Treasury v. Equitable Trust
Company, 464 A.2d 248; Chittenden Trust Co. v. Commissioner of Taxes, 465
A.2d 1100; University Computing Company 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, referred to.
The Law Relating to Computers and the Internet by Rahul Matthan;
Software Engineering by Roger S. Pressman, referred to.
1.3. There is no distinction between branded and unbranded
software. In both cases, the software is capable of being abstracted,
consumed and use and can ~e transmitted, transferred, delivered, stored,
possessed etc. Thus, even unbranded software, when it is marketed/sold,
may be goods. (1065-B-C)
Per S.B. Sinha, J. (Concurring):
1.1. The term 'goods' had been defined in the Andhra Pradesh
General Sales Tax Act, 1957 as also in Clause (12) of Article 366 of the
Omstitution to include all materials, commodities and articles. Commodity
is an expression of wide connotation and includes every thing of use or
value which can be an object of trade and commerce. The amplitude of
G the said expression is required to be considered. The expression 'goods'
is not a term of art. Its meaning varies from statute to statute. (1065-H)
H
Jagir Singh and Ors. v. State of Bihar and Anr., etc. AIR (1976) SC
997, referred to.
r
I
__.
TATA CONSULTANCY SERVICES v. STATE OF A.P.
1043
~
Words and Phrases, Volume (7A, Permanent Edn p 590, referred to. A
1.2. The definition of 'goods' in Sales of Goods Act is also of wide
import which means every kind of movable property. Property has been
defined therein to mean the general property in goods and not merely a
special property. The term 'goods' would comprehend tangible and
B
intangible properties, materials, commodities and articles and also
corporeal and incorporeal materials, articles and commodities and if a
distinction is sought to be made, the definition of goods will have to be
rewritten of comprising tangible goods only which is impermissible. In the
Constitution, 'goods' as such is not defined. An expansive definition with
the said expression has been given which is indicated by the expression c
"includes". Such an expression is also of wide amplitude. When the word
'includes' is used in an interpretation clause, it must be construed as
comprehending not only such things as they signify according to their
nature and import but also those things which the interpretation clause
declares that they shall include. [1066-H; 1067-A-B-C-D]
D
Pradeep Kumar Biswas v. Indian Institute of Chemical Biology, [2002]
5 SCC 111 and Scientific Engineering House Pvt. Ltd. v. Commissioner of
Income-tax, Andhra Pradesh [1986] 1 SCC 11, relied on.
2.1. In interpreting an expression used in a legal sense, the courts E
are required to ascertain the precise connotation which it possesses in law.
It is furthermore trite that a court should not be over zealous in searching
ambiguities or obscurities in words which are plain. It is now well-settled
that when an expression is capable of more than one meaning, the Court
would attempt to resolve that ambiguity in a manner consist.ent with the
purpose of the provisions and with regard to the consequences of the F
alternative constructions. [1076-F-H; 1077-A]
Indian Handicrafts Emporium and Ors v. Union of India and Ors.,
[2003] 7 SCC 589 and Ramesh Mehta v. Sanwal Chand Singhvi and Ors.,
JT (2004) Supp. 1 SC 274, relied on.
G
Inland Revenue Commissioner v. Rossminster Ltd, (1980) 1 All ER 80;
Clark and Toke/ey Ltd. (t/a Spellbrook) v. Oakes, (1998) 4 All ER 353 and
In Inland Revenue Commissioners v. Trustees of Sir John Aird's Settlement,
(1984) Ch. 382, referred to.
........
H
1044
SUPREME COURT REPORTS (2004] SUPP. 5 S.C.R.
A
"Statutory Interpretation "by Francis Bennion pp.368-369, referred to.
2.2. A statute ordinarily must be literally construed. Such a literal
construction would not be denied only because the consequence to comply
the same may lead to a penalty. Proceeding on the basis that there existed
a dichotomy, the Court ultimately held that the resolution will have to be
B reached by reading the entire statute as a whole. ;[1077-H; 1078-AJ
Indian Handicrafts Emporium and Ors. v. Union of India and Ors.,
[2003] 7 SCC 589; Reema Aggarwal v. Anupam and Ors., [2004) 3 SCC 199;
Bairam Kumawat v. Union of India and Ors., [2003) 7 SCC 628 and Swedish
C Match AB and Anr. v. Securities and Exchange Board, India & Anr., (2004)
7 SCALE 158, relied on.
D
2.3. So long natural meaning for the charging section is adhered to
and when the law is certain, then a strange meaning thereto should not
be given. (1078-FJ
Indian Banks' Association, Bombay and Ors. v. Mis. Devkala
Consultancy Services and Ors. JT (2004) 4 SC 587, relied on.
2.4. In absence of incorporation or reference, it is trite that it is not
permissible to interpret a word in accordance with its definition in other
E statute and more so when the same is not dealing with any cognate subject.
Copyright Act and the Sales Tax Act are also not statutes in pari materia
and as such the definition contained in the former should not be applied
in the latter. [1067-E-F)
State of Kera/av. Mathai Verghese and Ors., [1986) 4 SCC 746 and
F Feroze N. Dotivala v. P.M Wadhwani and Ors., (2003) 1 SCC 433 and
Jagatram Ahuja v. Commr. of Gift-tax, Hyderabad AIR (2000) SC 3195,
relied on.
2.4. Although normally a taxing statute is to be strictly construed
G but when the statutory provision is reasonable akin to only one meaning,
the principles of strict construction may not be adhered to. In a fiscal
statute plain meaning rule is applied. {1078-G)
H
Commnr. of Central Excise, Pondicherry v. Mis. ACER India Ltd., (2004)
8 SCALE 169, relied on. ·
TATA CONSULTANCY SERVICES v. STATE OF A.P.
1045
""·
Partington v. Attorney-General, (1869) LR 4 HL 100, referred to,
A
3.1. A software may be intellectual property but such personal
intellectual property contained in a medium is bought and sold. It is an
article of value. It is sold in various forms like - floppies, disks, CD-RO Ms,
punch cards, magnetic tapes, etc. Each one of the mediums in which the
B
intellectual property is contained is a marketable commodity. They are
visible to senses. They may be a medium through which the intellectual
property is transferred but for the purpose of determining the question
as regard leviability of the tax under a fiscal statute, it may not make a
difference. A programme containing instructions in computer language
is subject matter of a licence. It has its value to the buyer. It is useful to c
the person who intends to use the hardware, viz., the computer in an
effective manner so as to enable him to obtain the desired results. It
indisputably becomes an object of trade and commerce. 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. Only
because an instruction manual designed to instruct use and installation D
of the supplier programme is supplied with the software, the same would
not necessarily mean that it would cease to be 'goods'. Such instructions
contained in the manual are supplied with several other goods including
electronic ones. [1078-H; 1079-A-DI
·. 3.2. A Software programme would become goods provided it has the E
attributes thereof having regard to (a) its utility; (b) capable of being
bought and sold; and (c) capable of transmitted, transferred, delivered,
stored and possessed. If a software whether customized or non-customized
satisfies these attributes, the same would be goods. Unlike the American
Courts, Supreme Court of India has also not gone into the question of F
severability. [1080-A-B-C)
Associated Cement Companies Ltd v. Commissioner of Customs, [20011
4 SCC 593; H. Anraj v. Government of T.N. (19861 1 SCC 414; Sunrise
Associates v. NCT of Delhi, (2000) 10 SCC 420 and Commnr. of Central
G
Excise, Pondicherry v. Mis. ACER India Ltd, 2004 (8) SCALE 169, referred
to.
Pont Data Australia Pty Ltd v. ASX Operations Pty Ltd and Anr., (1990)
93 Australian Law Reports 523; ASX Operations Pty Ltd and Australian
"
Stock Exchange Ltd and Pont Data Australia Pty Ltd FED No. 710 Trade H
1046
SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.
A Practices (1991) ATPR para 41-069 97 ALR 513/19 IPR 323 27 FCR 460;
·if:'
Advent Systems Ltd v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991); Colonial
Life Insurance Co. v. Electronic Data Systems Corp., 817 F. Supp. 235; First
National Bank of Springfield v. Department of Re'!enue, 421 N.F. 2d 175 85
1112d 84, 421 NE2d 175; Comptroller of the Treasury v. Equitable Trust
•,
B
Company, 464 A.2d 248; Commerce Union Bank v. Tidwell, 538;*
Compuserve, INC v. Lingley 535 N.E. 2d 360; Northeast Datacom, Inc. et al.
v. City of Wallingford, 212 Conn.639, 563 A2d 688; South Central Bell
Telephone Co. v. Sidney J. Barthelemny, et al. 643 So. 2d 1240: 36 A.L.R.
5th 689; St. Albans City and District Council v. International Computers,
(1996) (4) All ER 481; STATE-CASE APP·CT, OH-TAXRPTR 402·978
c Ohio Board of Tax Appeals, Aeroquip Cop p 9 of 12, referred to.
Computer Software or Printout Transactions as subject to State Sales
or use Tax by Linda A. Sharp, J.D. 36 ALR 5th 33,_referred to.
4. The court cannot rewrite the provisions of law which clearly is
D the function of the Legislature which interprets them. If a canned software
otherwise is 'goods', the Court cannot say it is not because it is an.
intellectual property which would tantamount to rewriting the judgment.
(1080-DJ
E
Madan Lal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Ltd
(1962) Suppl. 3 SCR 973, relied on.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2582 of
1998.
F
From the Judgment and Order .dated 12.12.96 of the Andhra Pradesh
High Court in T.R.C. No. 99 of I 996.
WITH
C.A. Nos. 2584, 2585 and 2586 of 1998.
G
Mohan Parasaran, Additional Solicitor General, Soli J. Sorabjee,
G.S.Jetley, Rakesh Dwivedi, Gopal Jain, Sanjeev Sen, Mrs. Manik
Karanjawala, Ms. Nandini Gore, Ms. Reetu Sharma, Ms. Pragya Bhagel,
A.K. Prasad, R.N. Karanjawala, Pradeep S. Jetly, Ajit S. Bhasme, Jay Kishor
Singh, Rajesh Kumar, Ms. Niranjana Singh, Abhishek Choudhary, Manoj ·
Saxena, Gourav Bhatia, Gaurav Dhama, Adarsh Upadhyay, Mrs. Vim la Sinha,
I\..
H Mohan Prasad Mehria, A. Subba Rao, K. Swamy, B. Krishna Prasad, Atul Y.
TATA CONSULTANCY SERVICES v. STATE OF A.P. [VARIAVA,J.)1047
Chitale, Pallav Sisodia, Ray Vikram Nath and Mrs. Suchitra Atul Chitale A
with them for the appearing parties.
The Judgment of the Court was delivered by
S.N. V ARIA VA, J. These Appeals are against the Judgment dated 12th
December, 1996 of the Andhra Pradesh High Court. The Appeals have been B
placed before this Bench pursuant to an Order of this Court dated 16th
January, 2002.
Briefly stated the facts are as follows :
The Appellants provide consultancy services including Computer C
Consultancy Services. As part of their business they prepare and load on
customers' computers custom made software (for sake of convenience
hereinafter referred to as 'uncanned software') and also sell Computer Software
Packages off the shelf (hereinafter referred to as 'canned software'). The
canned Software Packages are of the ownership of companies/persons, who D
have developed those software. The Appellants are licensees with permission
to sub-licence these packages to others. The canned software programmes are
programmes like 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 E
of the Andhra Pradesh General 8ales Tax Act, 1957 [hereinafter called 'the
said Act'] holding that the software were goods. The Commercial Tax C'fficer
accordingly levied sales tax on this software. The Appellate Deputy
Commissioner of Com.nercial Taxes also held that the software were goods
and liable to tax. However, the matter was remanded back for purposes of F
working out the tax.
The further Appeal, filed by the Appellants, before the Sales Tax
Appellate Tribunal, Andhra Pradesh, was dismissed on I st April, 1996. The
Appellants then filed a Tax Revision Case in the Andhra Pradesh High Court,
which has been dismissed by impugned Judgment dated 12th December, G
1996.
The question raised in this Appeal is whether the canned software sold·
by the Appellants can be termed to be "goods" and as such assessable to sales
tax under the said Act.
H
1048
SUPREME COURT REPORTS [2004) SUPP. 5 S.C.R.
A
To consider this question, it is necessary to first look at the relevant
B
c
D
E
F
G
H
provisions.
Section 2(h) of the said Act reads as follows:
"2(h) 'goods' means all kinds of movable property other than
actionable claims, stocks, shares and securities, and includes all
materials, articles and commodities including the goods (as goods or
in some other form), involved in the execution of a works contract or
those 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
the contract of sale and also includes motor spirit."
"Sale" is defined in Section 2(n) as follows:
"2(n) 'Sale' with all its grammatical variations and cognate expressions
means 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 or pledge of, or a charge on goods.
Explanation I : A delivery of goods on the hire-purchase or any
system of payment by instalments shall, notwithstanding the fact that
the seller retains the title in the goods, as security for payment of the
price, be deemed to be a sale.
Explanation II : (a) Notwithstanding anything contained in the Indian
Sale of Goods Act, 1930 (Central Act III of 1930) a sale or purchase
of goods shall be deemed, for the purpose of this Act to have taken
place in the State, wherever the contract of sale or purchase· might
have been made, if the goods are within the State.
(i) in the case of specific or ascertained goods, at the time the contract
of sale or purchase is made; and
(ii) in the case of unascertained or future goods, at the time of their
'~,
TATA CONSULTANCY SERVICES v. STATE OF A.P. [VARIAVA,J.] 1049
appropriation to the contract of sale or purchase by the seller or by A
the purchaser, whether the assent of the other party is prior or
subsequent to such appropriation.
(b) Where there is a single contract of sale or purcha~e of goods
situated at more places than one, the provisions of clause (a) shall
B
apply as if there were separate contracts in respect of the goods at
each of such places.
Explanation III : Notwithstanding anything contained in this Act or
in the Indian Sale of Goods Act, 1930 (Central Act III of 1930), two
independent sales or purchases shall for the purposes of this Act, be c
deemed to have taken place.
( l) When the goods are transferred from a principal to his selling
agent and from the selling agent to his purchaser, or
(2) When the goods are transferred from the seller to a buying agent D
and from the buying agent to his principal, if the agent is found in
either of the cases aforesaid,-
(i) to have sold the gooJs at one rate and to have passed on the sale
proceeds to his principal at another rate; or
(ii) to have purchased the goods at one rate and to have passed them E
on to his principal at another rate; or
(iii)not to have accounted to his principal for the entire collections or
deductions made by him, in the sales or purchases effected by him o.n
behalf of his principal; or
F
(iv)to have acted for a fictitious or non-existent principal.
Explanation IV : A transfer of right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred payment or
other valuable consideration shall be deemed to be a sale."
G
Section 5 provides as follows:
"5. levy of tax on sales or purchases of goods
"
(l) Save as otherwise provided in this Act, every dealer shall pay a H
1050
SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.
•{/
A
tax under this Act for each year on every rupee of his turnover of
sales or purchases of goods in each year irrespective of the quantum
of his turnover at the rate of tax and at the points of levy specified
in the Schedules.
B
(2) For the purpose of this section and other provisions of this Act,
the turnover which a dealer shall be liable to pay tax shall be
determined after making such deductions from his total turnover, and
in such manner as may be prescribed.
(3) The taxes under this section shall be assessed, levied and collected
c
in such manner, as may be prescribed:
PROVIDED that
(i) in respect of the same transaction, the buyer or the seller but not
both, as determined by such rules as may be prescribed, shall be
D
taxed;
(ii) Where a dealer has been taxed in respect of the. purchase of any
goods, in accordance with the rules referred to in clause (i) of this
proviso, he shall not be taxed again in respect of any sale .of such
goods effected by him."
E
Mr. Sorabjee submitted that the term "goods" in Section 2(h) only
includes tangible moveable property and the words "all materials, articles
and commodities" also cover only tangible moveable property. He submitted
that computer software is not tangible moveable property. In support of his
submission, he relied upon certain observations in the book "The Law Relating
F to Computers and the Internet" by one Mr. Rahul Matthan, wherein it has
been stated that a software program is essentially a series of commands
issued to the hardware of the computer that enables the computer to perform
in a particular manner. It is stated that to make it effective, therefore, the
sequence of commands must be physically stored on a portion of the computer
G
that can be readily accessed by the· processing unit of the computer. It is
stated that \n order for this, the programs should be reduced to a physical
form so that it is capable of being stored. It is stated that the programs are
therefore of a nature that they may be recorded on magnetic media (much
like the recording of audio or video on cassettes and tapes) but that in cases
of software, the programmes are recorded on floppy drives, CDs or hard
(
H drives. In the book, the nature of software' is defined as follows:
-
TATA CONSULTANCY SERVICES v. STATE OF A.P. [VARIAVA,J.]1051
"The Nature of Software
A
What then, is the software program? If a person goes to a store to
purchase an item of software, he will most likely be given a box
containing a series of floppy discs or a single CD-ROM and some
instructional material. Within the floppy discs or the CD-ROM will
be all the components of the program that one requires· to copy (for B
install) onto the hard disc of the computer, in order that the program
can function.
So is the CD-ROM that you have purchased, the software? If the
answer to that question is yes, the corollary would be that the CD- C
ROM containing the software program, becomes the sale and exclusive
property of the person who bought it and can be sold or distributed
fully. If you purchase a soap, you become the sole owner of that soap
and you could re-sell it, cut it into pieces and distribute it or, unhygienic
though it may sound, even hire it out to various people to use - and
no one could challenge your actions since you have paid valuable D
consideration and purchased the product and thereby have accrued
the sole right to deal with that item. If that applies to the soap, why
could it not apply to the CD-ROM?
The answer to that question lies in understanding the basic
difference between a software program and other traditional goods. E
As already discussed, software is a series of instructions. While it
may be housed in a floppy disc or a CD-ROM or the hard disc of the
computer, the item referred to as software is the series of commands
that operates the computer. Though the floppy disc, the CD-ROM
and the hard disc are each tangible commodities that could be bought F
sold and resold, the software embedded in these media are intangible
and fall into a very different category."
Mr. Sorabjee also relied upon a book "Software Engineering" by Roger
S. Pressman, wherein it has been stated that a Software is an instruction that
when executed provides desired function.and performances. It is stated that G
a SoftWare is composed of programs, data and documents. Each of these
items comprises a configuration that is created as part of the software
engineering process.
Mr. Sorabjee also drew the attention of the Court to the definitions of
H
1052
SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.
·- A "Computer" and "Computer Programme" in The Copyright Act, 1957. These
read as follows:
"Computer" includes any electronic or similar device having
information processing capabilities".
B
"Computer programme" means a set of instructions expressed in
words, codes, schemes or in any other form, including a machine
readable medium, capable of causing a computer to perform a
particular task or achieve a particular result."
Mr. Sorabjee submitted that the definitions show that a computer
C programme falls within the definition of literary work and is intellectual
property of the programmer.
Mr. Sorabjee submitted that a computer software is nothing but a set of
commands, on the basis of which the computer may be directed to perform
. D the desired function. He submitted that a software is completely unlike a
book or a painting. He submitted that when the customer purchases a book
or a painting what he gets is the final product itself. Mr. Sorabjee submitted
that in cases of software the consumer does not get any final product but all
that he gets is a-set of commands which enable his computer to function. He
submitted that having regard to its nature and inherent characterstic, software
E is intangible property which cannot fall within the definition of the term
"goods" in Section 2(h) of the said Act.
Mr. Sorabjee submitted that the question as to whether software is
tangible or intangible property has been considered by the American Courts.
He fairly pointed out that in America there is a difference of opinion amongst
F the various Courts. He submitted that, however, the majority of the Courts
have held that a software is an intangible property. He showed to the Court
a number of American Judgments, viz., the cases of Commerce Union Bank
v. Tidwell, reported in 538 S.W.2d 405; State of Alabama v. Central Computer
Services, INC reported in 349 So. 2d 1156; The First National Bank of Fort
G Worth v. Bob Bullock, reported in 584 S.W.2d 548; First National Bank of
Springfield v. Department of Revenue, reported in 421 NE2d 175; Compuserve,
INC. v. Lindley, reported in 535 N.E. 2d 360 and Northeast Datacom, Inc.,
et al v. City of Wallingford, reported in 563 A2d 688. In these cases, it has
been held that 'computer software' is intangible personal property. The
reasoning for arriving at this conclusion is basically that the information
H contained in the software programs can be introduced into the user's computer
...
TATA CONSULTANCY SERVICES v. STATE OF A.P. [VARIAVA,J.] 1053
~""
by several different methods, namely, (a) it could be programmed manually A
by the originator of the program at the location of the user's computer,
working from his own instructions or (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 B
discs, containing the program developed by the vendor. It has been noticed
that usually the vendor will also provide manuals, services and consultation
designed to instruct the user's employees in the installation and utilization of
the supplied program. It has been held that even though the intellectual
process is embodied in a tangible and physical manner, that is on the punch
cards, magnetic tapes, etc. the logic or intelligence of the program remains c
intangible property. It is held that it is this intangible property rig~t which is
acquired when computer software is purchased or leased. It has been held
that what is created and sold is information and the magnetic tapes or the
discs are only the means of transmitting these intellectual creations from the
originator to the user. It has been held that the same information could have D
been transmitted from the originator to the user by ·way of telephone lines or
fed directly into the user's computer by the originator of the programme and
that as there would be no tax in those cases merely because the method of
transmission is by means of a tape or a disc, it does not constitute purchase
of tangible personal property and the same remains intangible personal
property. It has been held that what the customer paid for is the intangible E
knowledge which cannot be subjected to the personal property tax. In these
cases, difference is sought to be made between purchase of a book, music
cassette/video or film and purchase of software on the following lines:
"When one buys a video cassette recording, a book, sheet music or
a musical recording, one acquires a limited right to use and enjoy the F
material's content. One does not acquire, however, all that the owner
has to sell. These additional incidents of ownership include the right
to produce and sell more copies, the right to change the underlying
work, the right to license its use to other and the right to transfer the
copyright itself. It is these incidents of the intellectual, intangible G
competent of the software property that Wallingford has impermissibly
assessed as tangible property by linking these incorporeal incidents
with the tangible medium in which the software is stored and
transmitted."
~
It has been fairly brought to the attention of the Court that many other H
1054
SUPREME COURT REPORTS [2004) SUPP. 5 S.C.R.
A American Courts have taken a different view. Some of those cases are South
Central Bell Telephone Co. v. Sidney J. Barthelemy reported in 643 So.2d
(1240); Comptroller of the Treasury v. Equitable Trust Company, reported in
464 A.2d 248; Chittenden Trust Co. v. Commissioner of Taxes reported in
465 A.2d 1100; University Computing Company v. Commissioner of Revenue
B for the State of Tennessee, reported in 677 S.W.2d 445 and Hasbro Industries,
INC v. John H. Norberg, Tax Administrator reported in 487 A.2d 124. In
these cases, the Courts have held that when stored on magnetic tape, disc or
computer chip, this software or set of instructions is physically manifested in
machine readable form by arranging electrons, by use of an electric current,
to create either a magnetized or unmagnetized space. This machine readable
C language or code is the physical manifestation of the information in binary
form. It has been noticed 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. It has been noticed that the program is developed in the
seller's computer then the seller duplicates the program copy on software and
transports the duplicates to the buyer's computer. The duplicate is read into
D the buyer's computer and copied on a memory device. It has been held that
the 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 has been_ held that the purchaser does not receive mere knowledge
E but receives an arrangement of matter which makes his or her computer
perform a desired function. It has been held that this arrangement of matter
recorded on tangible medium constitutes a corporeal body. It has been ;1eld
that a software recorded in physical form becomes inextricably intertwined
with, or part and parcel of the corporeal object upon which it is recorded, be
that a disk, tape, hard drive, or other device. It has been held that the fact that
F the information can be transferred and then physically recorded on another
medium does not make computer software any different from any other type
of recorded information that can be transferred to another medium such as
film, video tape, audio tape or books. It has been held that by sale of the
software programme the incorporeal right to the software is not transferred.
G It is held that the incorporeal right to software is the copyright which remains
with the originator. What is sold is a copy of the software. It is held that the
original copyright version is not the one which operates the computer of the
customer but the physical copy of that software which has been transferred
to the buyer. It has been held that when one buys a copy of a copyrighted
novel in a bookstore or recording of a copyrighted song in a record store, one
H only acquires ownership of that particular copy of the novel or song but not
TATA CONSULTANCY SERVICES v. STATE OF A.P. [VARIAVA, J.]1055
,....._
the intellectual property in the novel or song.
AMr. Dwivedi pointed out that the difference of opinion among the
various American Courts has arisen because under the American Statutes Act
what is taxable is "tangible personal property". He submitted that it is this
definition which required the American Courts to consider whether software B
is tangible or intangible. Mr. Dwivedi submitted that the definition of the
tenn "goods" in the said Act is a very wide definition. He submitted that
"goods" have been defined to mean all kinds of moveable property except
..,.
those specified, namely, actionable claims, stocks, shares and securities. He
pointed out that the definition includes all materials, articles and commodities.
He submitted that the words "all materials, articles and commodities" have c
been used in the said Act in the same sense as used in Article 366 (12) of
the Constitution of India. Article 366 provides that unless the context otherwise
requires, the expressions given therein would have the meanings respectively
assigned to them. Under Sub-clause (12), the tenn "goods" includes all
materials, commodities and articles. He submitted that the legislative power,
D
of the State to levy sales tax, is by virtue of Entry 54 of List II of Schedule
7. Mr. Dwivedi relied upon a number of cases of this Court, set out hereafter,
to show that the term "goods" has been held to include even incorporeal and/
or intangible properties.
In the case of Commissioner of Sales Tax, Madhya Pradesh, Indore v. E
Madhya Pradesh Electricity Board, Jabalpur reported in [1969] I SCC 200,
the question whether electricity was "goods" for the purposes of imposition
of sales tax under the Madhya Pradesh General Sales Tax Act, 1959. It was
noted that the definition of the term "goods" meant all kinds of "movable
property" and included "all materials, articles and commodities". It was held
as follows:
F
..
"The reasoning which prevailed with the High Court was that a welldefined distinction existed between the sale or purchase of "goods"
and consumption or sale of electricity otherwise there was no necessity
of having Entry No.53 but under Entry 53 taxes can be levied not
only on sale of electricity but also on its consumption which could G
,.
not probably have been done under Entry 54. It is difficult to derive
much assistance from the aforesaid entries. What has essentially to be
seen is whether electric energy is "goods" within the meaning of the
relevant provisions of the two Acts. The definition in terms is very
wide according to which "goods" means all kinds of movable property. H
A
B
c
D
E
1056
SUPREME COURT REPORTS (2004] SUPP. 5 S.C.R.
Then certain items are specifically excluded or included and electric
energy or electricity is not one of them. The term "movable property"
when considered with reference to "goods" as defined for the purposes
of sales tax cannot be taken in a narrow sense and merely because
electric energy is not tangible or cannot be moved or touched like, for
instance, a piece of wood or a book it cannot cease to be movable
property when it has all the attributes of such property. It is needless
to repeat that it is capable of abstraction, consumption and use which,
if done dishonestly, would attract punishment under Section 39 of the
Indian Electricity Act, 1910. It can be transmitted, transferred,
delivered, stored, possessed etc. in the same way as any other movable
property. Even in Benjamin on Sale, 8th Ed. Reference has been
made at p. 171 to· County of Durham Electrical etc. Co. v. Inland
Revenue, in which electric energy was assumed to be "goods". If
there can be sale and purchase of electric energy like any other
movable object, we see no difficulty in holding that electric energy
was intended to be covered by the definition of "goods" in the two
Acts. If that had not been the case there was no necessity of specifically
exempting sale of electric energy from the payment of sales tax by
making a provision for it in the schedules to the two Acts~ It cannot
be denied that the Electricity Board carried on principally the business
of selling, supplying or distributing electric energy. It would therefore
clearly fall within the meaning of the expression "dealer" in the two
Acts."
Thus this Court has held that the term "goods", for the purposes of
sales tax, cannot be given a narrow meaning. It has been held that properties
which are capable of being abstracted, consumed and used and/or transmitted,
F transferred, delivered, stored or possessed etc. are "goods" for the purposes
of sales tax. The subinission of Mr. Sorabjee that this authority is not of any
assistance as a software is different from electricity and that software is
intellectual incorporeal property whereas electricity is not, cannot be accepted.
In India the test, to determine whether a property is "goods", for purposes of
G sales tax, is not whether the property is tangible or intangible or incorporeal.
The test is whether the concerned item is capable of abstraction, consumption
and use and whether it can be transmitted, transferred, delivered, stored,
p~ssessed etc.