The Andhra Pradesh High Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh (1997) 105 STC 421 (AP), held that computer software which are contained in floppies or discs like ARC-INFO, Wordstar, Foxpro, Wings, etc. (i.e. branded softwares) are moveable property or articles or identifiable commodity and they would fall within the meaning of ‘goods’. The significant findings in this case are as follows:
(a) The software contained in physical objects is clearly ‘goods’.
(b) The computer software is classified into (i) “off the Shelf” and (ii) supply of software which is tailor made to the customer’s particular requirements,
(c) The Court was unable to accept the contention that merely because software is ‘intellectual property’, it cannot be treated as ‘goods’ as being too broad a statement. In view of the contention by the appellant that the software being intellectual property and being product of thoughts, creativity and intellectual efforts, considering the importance of the matter having global implications, referred the matter to a larger bench.

Recently a Constitution Bench of the Supreme Court in Tata Consultancy Services vs. State of AP (2004) 271 ITR 401 held that notwithstanding the fact that computer software is intellectual property, whether it is conveyed in diskettes, floppy, magnetic tapes or CD ROMs, whether canned (shrink-wrapped) or uncanned (customized), whether it comes as part of the computer or independently, whether it is branded or unbranded, tangible or intangible, it is a commodity capable of being transmitted, transferred, delivered, stored, processed, etc. and therefore, it is ‘goods’ liable to sales tax.

The licence fee charged for the use of computer software is also held to be liable to sales tax/value added tax in view of the expanded definition of ‘sale’ in different States sales tax and Central sales tax statutes, which includes transfer of the right to use goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.

Taking into account and referring the decision of Supreme Court in Tata Consultancy services vs. State of Andhra Pradesh, gist of which is given above, and in supersession of all earlier clarifications/circulars, Central Board of Excise and Customs (CBEC) has issued a clarification (effective from 7.10.20050 on levy 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. 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. ‘Maintenance or repair’ (as defined under section 65(64) of the said Act), means any service provided in relation to maintenance or repair or servicing of any goods or equipment.
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.

The vendor of intellectual property right (IPR) in software enforces observance of strict conditions available to IPR owners under copyright laws. Without exception, ownership of IPR in software is retained by the ‘Licensor’, the licensee is charged either on time basis or productivity basis.

The Copyright Act, 1957 provides the definition of ‘copyright’ which includes computer progammes as literary work and selling or giving on commercial rental copies thereof constitutes exploitation of copyright.

In service tax regulations, service tax is leviable on IPR which excludes copyright. However definition of copyright is not provided in the said regulations. Considering the definition of copyright in the Copyright Act, a view may be taken that provision of licence to use computer software should not be chargeable to service tax.

Even the category of ‘consulting engineering services’ has excluded computer hardware and software engineering and thus development of software is not liable to service tax under this category as well.

The value of software in a physical form such as magnetic tape or disc imported into India is subjected to customs duty on the ground that what is imported is commodity. At the same time, since import of software is generally under a licence from the foreign licensor, the lump sum payments made for using the software are regarded as payment of royalty within the meaning under Explanation 2 of section 9(1)(vi) of the Income-tax Act and taxed accordingly. 

The relevant provisions of the Income-tax Act provides that any lump sum payment for obtaining use of systems software supplied by a non-resident manufacturer along with the computer hardware will not be subjected to income-tax. This tax concession will not be available in relation to payments in respect of systems software imported otherwise than under an approved Computer Software Export Scheme or where the software is supplied separately or independently of the computer hardware even though the software has been developed or marketed by the supplier of the Computer software.

The treatment of income tax on computer software under ‘royalty’ in this regard may be ascertained in detail.