TATA CONSULTANCY SERVICES Vs. STATE OF ANDHRA PRADESH

JUDGEMENT

(1.) 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.

(2.) 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 use less; 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 riot 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 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 programme's 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, [jt 1996 (11) SC 458 = 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.

(3.) 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, video tape, audio tape or books; that the distinction between books, films, video tapes, 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 and Country of Mobile, [200-622, Supreme Court of Alabama (1996) ], the Court said, "sol ware 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.