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CASE NO.:

Appeal (civil) 2582 of 1998

PETITIONER:

Tata Consultancy Services

RESPONDENT:

State of Andhra Pradesh

DATE OF JUDGMENT: 05/11/2004

BENCH:

S.B. Sinha

JUDGMENT:

J U D G M E N T

WITH

CIVIL APPEAL NOs. 2584, 2585 & 2586/98

S.B. SINHA, J :

INTRODUCTION:

Whether an intellectual property contained in floppies, disks or CD-

ROMs would be 'goods' within the meaning of Andhra Pradesh General

Sales Tax Act, 1957 (hereinafter called as 'the Act') is the question involved

in this appeal which arises out of a judgment and order dated 12th December,

1996 passed by the Andhra Pradesh High Court.

"Goods" : Meaning

The said expression has been defined in Section 2(b) to, inter alia,

mean all kinds of moveable property and includes all materials, articles and

commodities. The amplitude of the said expression is required to be

considered with a view to answer the question involved in this appeal.

The expression 'goods' is not a term of art. Its meaning varies from

statute to statute. The term 'goods' had been defined in the Act as also in

Clause (12) of Article 366 of the Constitution 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.

In Jagir Singh and Others Vs. State of Bihar and another, etc. etc.,

AIR 1976 SC 997] it is stated:

"20. The general rule of construction is not only to

look at the words but to look at the context, the

collocation and the object of such words relating to

such matter and interpret the meaning according to

what would appear to be the meaning intended to

be conveyed by the use of the words under the

circumstances. Sometimes definition clauses

create qualification by expressions like "unless the

context otherwise requires"; or "unless the

contrary intention appears"; or "if not inconsistent

with the context or subject-matter". "Parliament

would legislate to little purpose", said Lord

Macnaghten in Netherseal Co. v. Bourne, (1889)

14 AC 228, "if the objects of its care might

supplement or undo the work of legislation by

making a definition clause of their own. People

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cannot escape from the obligation of a statute by

putting a private interpretation on its language."

The courts will always examine the real nature of

the transaction by which it is sought to evade the

tax."

In Words and Phrases, Volume 7A, Permanent Edition at page 590,

'commodity' has been defined as under:

"A "commodity" is an article of trade, a movable

article of value; something that is bought and sold.

U.S. v. Sischo, D.C. Wash., 262 F. 1001, 1005.

The term "commodity" includes every movable

thing that is bought or sold except animals.

Peterson v. Currier, 62 III. App. 163.

"Commodity" meaning that which affords

convenience or advantage, especially in

commerce, including everything movable which is

bought and sold. McKeon v. Wolf, 77 III. App.

325."

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. It is not much in dispute that 'goods' would comprehend

tangible and intangible properties, materials, commodities and articles and

also corporeal an incorporeal materials, articles and commodities. If a

distinction is sought to be made between tangible and intangible properties,

materials, commodities and articles and also corporeal and incorporeal

materials, the definition of goods will have to be rewritten of comprising

tangible goods only which is impermissible. This Court, therefore, will have

to confine itself to the question as to whether the concerned software would

come within the purview of "goods". 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 "includes". Such an expression is

also of wide amplitude. [See Pradeep Kumar Biswas Vs. Indian Institute of

Chemical Biology, (2002) 5 SCC 111, para 5 & 6].

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. [See Scientific

Engineering House Pvt. Ltd. Vs. Commissioner of Income-tax, Andhra

Pradesh (1986) 1 SCC 11].

RE: SUBMISSION OF BEHALF OF THE APPELLANT

Reference by Mr. Sorabjee to the provisions of Copyright Act, in my

opinion, was not apposite.

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. [See Jagatram Ahuja Vs. Commr. of Gift-tax,

Hyderabad AIR 2000 SC 3195, p. 3201]

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

statute and more so when the same is not dealing with any cognate subject.

[See State of Kerala Vs. Mathai Verghese & Ors. (1986) 4 SCC 746, p. 753

and Feroze N. Dotivala Vs. P.M. Wadhwani & Ors. (2003) 1 SCC 433, p.

442]

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It may not be necessary for us to rely upon the decisions of this Court

in H. Anraj Vs. Government of T.N. [(1986) 1 SCC 414] the correctness

whereof has been doubted in Sunrise Associates Vs. NCT of Delhi [(2000)

10 SCC 420]. It is also not necessary to rely upon the Australian decision,

Pont Data Australia Pty Ltd. Vs. ASX Operations Pty Ltd. & Anr. [1990

(93) Australian Law Reports 523] which is said to have been reversed in Re:

ASX Operations Pty Ltd. and Australian Stock Exchange Ltd. and Pont Data

Australia Pty Ltd.[FED No. 710 Trade Practices (1991) ATPR para 41-069

97 ALR 513/19 IPR 323 27 FCR 460.

However, we may notice that the Federal Court of Australia while

reversing the judgment was of the opinion that as the definition of 'goods'

contained in Sub-Section (4) of Section 4 of the TP Act included gas and

electricity, the same would not be held to mean further including "encoded

electrical impulses". It was, however, noticed:

"We should add that in Toby Constructions

Products Pty Ltd. v Computa Bar (Sales) Pty Ltd.

(1983) 2 NSWLR 48, Rogers J. held that a sale of

a computer system, comprising both hardware and

software, was a sale of "goods" within the

meaning both of the Sale of Goods Act 1923

(N.S.W.) and the warranties implied by Part V of

the TP Act. His Honour said (supra) at 54), with

reference to United States authorities, that he did

not wish it to be thought he was of the view that

software by itself may not be "goods". This is a

question which is left open after the present

appeal, which, as will be apparent, has decided a

narrower point."

The standard works on software by Mr. Rahul Matthan and Mr. Roger

S. Pressman, relied upon by Mr. Sorabjee, may be relevant for proper

understanding as to what a software is and what is the nature and character

of software and in ordinary parlance may contrast a book, ordinary video or

audio cassette but it is well settled that the applicability of the statute would

depend upon its purport and object. Taxability of a software has its history

in other countries. Its journey in American courts started in the Seventies.

There had been a difference of opinion in different jurisdictions as regards

taxability of the software. The majority of the courts held that it is

intangible property, but the Federal Supreme Court said that it is not so. The

State Legislatures made amendments as a result whereof a shift in the

approach started. Having regard to the changes in definition even the

American Courts began holding that tax can be imposed on such softwares.

In Advent Systems Ltd. vs. Unisys Corpn, 925 F. 2d 670 (3rd Cir.

1991), relied on by Mr. Sorabjee, the court was concerned with

interpretation of uniform civil code which "applied to transactions in goods".

The goods therein were defined as "all things (including specially

manufactured goods) which are moveable at the time of the identification for

sale". It was held :

"Computer programs are the product of an intellectual

process, but once implanted in a medium are widely

distributed to computer owners. An analogy can be

drawn to a compact disc recording of an orchestral

rendition. The music is produced by the artistry of

musicians and in itself is not a "good," but when

transferred to a laser-readable disc becomes a readily

merchantable commodity. Similarly, when a professor

delivers a lecture, it is not a good, but, when transcribed

as a book, it becomes a good.

That a computer program may be copyrightable as

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intellectual property does not alter the fact that once in

the form of a floppy disc or other medium, the program

is tangible, moveable and available in the marketplace.

The fact that some programs may be tailored for

specific purposes need not alter their status as "goods"

because the Code definition includes "specially

manufactured goods."

The topic has stimulated academic commentary with

the majority espousing the view that software fits

within the definition of a "good" in the U.C.C.

Applying the U.C.C. to computer software transactions

offers substantial benefits to litigants and the courts.

The Code offers a uniform body of law on a wide range

of questions likely to arise in computer software

disputes: implied warranties, consequential damages,

disclaimers of liability, the statute of limitations, to

name a few.

The importance of software to the commercial world

and the advantages to be gained by the uniformity

inherent in the U.C.C. are strong polity arguments

favoring inclusion. The contrary arguments are not

persuasive, and we hold that software is a "good"

within the definition in the Code."

In Colonial Life Insurance Co. vs. Electronic Data Systems Corp. 817

F. Suppl. 235 (supra), Advent Systems Ltd. (supra) was followed.

Linda A. Sharp, J.D., in an Article titled "Computer Software or

Printout Transactions as subject to State Sales or Use Tax", published in 36

ALR 5th 33, noticed the development of law as well as technological

development of computers and opined that a tape containing a copy of a

canned programme does not lose its tangible character because its content is

a reproduction of the product of intellectual effort just as the phonorecord

does not become intangible because it is a reproduction of the product of

artistic effort. The learned author referred to a large number of case laws

wherein such a statement of law was enunciated. In the article various

statutes defining software as tangible goods had also been taken notice of.

Strong reliance has been placed by Mr. Sorabjee on a judgment of

Illinois Supreme Court in First National Bank of Springfield vs. Department

of Revenue, [421 N.E.2d 175, 85 III2d 84, 421 NE2d 175], wherein software

was held to be intangible personal property on the premise :

"The tapes were certainly not the only medium

through which the information could be transferred. In

this way, the tapes differ from a movie film, a

phonograph record or a book, whereby the media used

are the only practicable ways of preserving those

articles. Thus, while those articles and the apes are

similar in that they physically represent the transfer of

ideas or artistic processes, whereas computer programs

are separable from the tapes. Not only may software

information be conveyed any number of ways, but it may

even be copied off of the tapes and stored, sing another

medium. (see Bryant & Mather, Property Taxation of

Computer Software, 18 N.Y.L.F. 59, 67 (1972). In short,

it is not the tapes which are the substance of the

transaction is, in instance, the transfer of intangible

personal property and, as such, is not taxable. Under the

Illinois Use Tax Act\005."

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The said decision was rendered in 1981. However, subsequently in

Comptroller of the Treasury vs. Equitable Trust Company [464 A.2d 248],

an earlier decision of the Tennessee Court in Commerce Union Bank vs.

Tidwell, [538 *473 S.W.2d 405], as also First National Bank of Springfield

(supra), were considered wherein it was observed :

"We can take judicial notice, based on modern human

experience, that the technology, exists for producing a

copy of a movie film on disc, of a phonograph record on

tape, and of a book on microfiche. We have previously

discussed how the program copy is not separated from

the tape, when it is used in the computer. See B.U. Note,

supra, at 188-89. To remove the program copy from the

magnetic tape requires that it be overwritten, or

obliterated in a magnetic field, in the way in which one

dictating on tape makes corrections or wipes the tape

clean."

Thus, the court found a change in the concept and noticed a departure

from earlier view that the computer software was intangible property. The

argument of severability which had held the field was also negatived.

Noticing several other judgments, it was held :

"What is troublesome about (the tax court)

approach is the fact that, while a substantial portion of

the software is of a tangible nature, i.e. punched cards,

magnetic tapes, instructions covering operation or

applications, (for property tax purposes) the remainder

consists of personal services to be rendered after

purpose\005."

In the aforementioned premise, it also negatived the contention which

incidentally has been raised by Mr. Sorabjee that the price paid for a copy

of a canned programme reflects the cost of developing the programme which

the proprietor hopes to recover, with profit, by spreading the cost among its

customers, stating :

"\005Simply because the canned program on tape is much

more expensive than the typical phonorecord, the

program tape is not any less tangible."

In Compuserve, INC vs. Lingley [535 N.E. 2d 360], the court

disagreed with the opinions contained in the earlier judgments and stated

the law in the following terms :

"\005Thus, the essence of the transaction in the sale

of computer software was the purchase of nontaxable

intangible information. The Missouri Supreme Court in

James and the Texas Court of Civil Appeals in First

National Bank of Fort Worth also used an essence-or-

purpose-of- the-transaction test to determine that

computer software is intangible property.

The Supreme Court of Ohio in Interactive

Information Systems, Inc. vs. Limbach (1985), 18 Ohio

st. 3d 309, 311, 18 OBR 356, 357-358, 480 N.E. 2d 1124,

1126, in determining the taxability of computer hardware

also recognized that computer programs are intangible

property when the court stated :

"\005Prior to encoding the tape, the

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appellee is dealing with intangibles-ideas, plans,

procedures, formulas, etc.; and, although these

intangibles are in some respects transformed or

converted (or 'organized') into a different state or

form, such transformation or conversion is not

'manufacturing' because no 'material or thing' has

been transformed or converted." (Emphasis sic.)

The Supreme Court of Ohio also distinguished that

the tapes were tangible, while the computer information

was intangible.

The courts that have found computer software to

be tangible have based their decisions on the fact that the

computer program was coded on a tangible medium, such

as a computer tape. See Citizens & Southern Systems,

Inc. vs. South Carolina Tax Comm. (1984), 280 S.C.

138, 311 S.E. 2d 717; Hasbro Industries, Inc. vs. Norberg

(R.I. 1985), 487 A.2d 124; Chittenden Trust Co. v. King

(1983), 143 Vt. 271, 465 A.2d 1100; and Comptroller of

the Treasury v. Equitable Trust Co. (1983), 296 Md. 459,

464 A.2d 248 (finding that only noncustomized

computer software is tangible property)."

It is true that in Compuserve, Inc. (supra), the court found that the

computer software developed by the appellants therein was intangible

property, but a perusal of the said judgment shows the other views of the

other courts were noticed therein wherein computer software was held to be

a tangible property on the ground that the computer programme was coded

on a tangible medium such as a computer tape.

Northeast Datacom, Inc. et al. vs. City of Wallingford [212

Conn.639, 563 A2d 688, was rendered on the premise of the severability

doctrine. The said judgment, however, was rendered keeping in view the

statute levying tax on personal property wherein the phrase "tangible

personal property' was added by amendment in 1961 by Public Act 61 No.

24.

In South Central Bell Telephone Co. v. Sidney J. Barthelemny, et al.

[643 So. 2d 1240 : 36 A.L.R. 5th 689], the Supreme Court of Louisiana

noticed the definition of 'tangible personal property' which was in the

following terms :

"Personal property which may be seen, weighed,

measured, felt or touched, or is in any other manner

perceptible to the senses. The term 'tangible personal

property' shall not include stocks, bonds, notes or other

obligations or securities."

It was held :

"The term "tangible personal property" set forth in

the City Code, and its synonymous Civil Code concept

"corporeal movable", must be given their property

intended meaning. Physical recordings of computer

software are not incorporeal rights to be comprehended

by the understanding. Rather, they are part of the

physical world. For the reasons set out below, we hold

the computer software at issue in this case constitutes

corporeal property under out civilian concept of that

term, and thus, is tangible personal property, taxable

under ' 56-21 of the City Code."

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The court, however, noticed that the shift in the trend was not

uniform. Having regard to the fact that the computer software became the

knowledge and understanding and upon discussing the characteristics of

computer software and classification thereof as tangible or intangible under

Louisiana law, it was held :

"The software itself, i.e. the physical copy, is not

merely a right or an idea to be comprehended by the

understanding. The purchaser of computer software

neither desires nor receives mere knowledge, but rather

receives a certain arrangement of matter that will make

his or her computer perform a desired function. This 13

arrangement of matter, physically recorded on some

tangible medium, constitutes a corporeal body.

We agree with Bell and the court of appeal that the

form of the delivery of the software-magnetic tape or

electronic transfer via modem- is of no relevance.

However, we disagree with Bell and the court of appeal

that the essence or real object of the transaction was

intangible property . That the software can be transferred

to various media i.e. from tape to disc, or tape to hard

drive, or even that it can be transferred over the telephone

lines, doles not take away from the fact that the software

was ultimately recorded and stored in physical form upon

a physical object. See Crockett, supra, at 872-74; Shontz,

at 168-70; Cowdrey, supra, at 188-90. As the court of

appeal explained, and as Bell readily admits, the

programs cannot be utilized by Bell until they have been

recorded into the memory of the electronic telephone

switch. 93-1072, at p. 6, 631 So.2d at 1342. The essence

of the transaction was not merely to obtain the intangible

"knowledge" or "information", but rather, was to obtain

recorded knowledge stored in some sort of physical form

that Bell's computers could use. Recorded as such, the

software is not merely an incorporeal idea to be

comprehended, and would be of no use if it were.

Rather, the software is given physical existence to make

certain desired physical things happen.

One cannot escape the fact that 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 disc, tape, hard drive, or other device.

Crockett, supra, at 871072; Cowdrey, Supre, at 188-90.

That the information can be transferred and then

physically recorded on another medium is of no moment,

and does not make computer software any different than

any other type of recorded information that can be

transferred to another medium such as fil, video tape,

audio tape, or books."

It was further opined :

"It is now common knowledge that books, music,

and even movies or other audio/visual combinations can

be copied from one medium to another. They are also all

available on computer in such forms as floppy disc, tape,

and CD-ROM. Such movies, books, music, etc\005.can all

be delivered by and/or copied from one medium to

another, including electrical impulses with the use of a

modem. Assuming there is sufficient memory space

available in the computer hard disc drive such movies,

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books, music, etc\005.can also be recorded into the

permanent memory of the computer such as was done

with the software in this case.

93-1072, at p. 4, 5. 631 So.2d at 1346-47

(dissenting opinion). See also Shontz. Supra, at 168-170;

Harris, supra, at 187.

That the information, knowledge, story, or idea,

physically manifested in recorded form, can be

transferred from one medium to 15 another does not

affect the nature of that physical manifestation as

corporeal, or tangible. Shontz, supra, at 168-170.

Likewise, that the software can be transferred from 1248

one type of physical recordation, e.g., tape, to another

type, e.g., disk or hard drive, does not alter the nature of

the software, Shontz, supra, at 168-170; it still has

corporeal qualities and is inextricably intertwined with a

corporeal object. The software must be stored in

physical form on some tangible object somewhere\005"

Reversing the findings of the court below that the computer software

constitutes intellectual property, it was opined :

"In sum, once the "information" or "knowledge" is

transformed into physical existence and recorded in

physical form, it is corporeal property. The physical

recordation of this software is not an incorporeal right to

be comprehended. Therefore we hold that the switching

system software and the data processing software

involved here is tangible personal property and thus is

taxable by the City of New Orleans."

St. Albans City :

Mr. Sorabjee submitted that this Court Associated Cement Companies

Ltd. Vs. Commissioner of Customs [(2001) 4 SCC 593] has misapplied the

principles contained in St. Albans City and District Council Vs. International

Computers [1996 (4) All ER 481].

Our attention in this behalf has been drawn to the judgment of Sir Iain

Glidewell which is in the following terms:

"During the course of the hearing, the word

'software' was used to include both the (tangible)

disk onto which the COMCIS program had been

encoded and the (intangible) program itself. In

order to answer the question, however, it is

necessary to distinguish between the program and

the disk carrying the program.

In both the Sale of Goods Act, 1979, s 61,

and the Supply of Goods and Services Act 1982,

s.18, the definition of goods includes 'all personal

chattels other than things in action and money'.

Clearly, a disk is within this definition. Equally

clearly, a program, of itself, is not."

As regard utility of an instruction manual, it was observed:

"As I have already said, the program itself is not

'goods' within the statutory definition. Thus a

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matter of the program in the way I have described

does not, in my view, constitute a transfer of

goods. It follows that in such circumstances there

is no statutory implication of terms as to quality or

fitness for purpose."

The question which arose in that case was as to whether the defendant

therein had breached its contract to supply the plaintiffs with a computer

system to be used in administering their collection of community charge by

providing valid software which significantly overstated the relevant

population of their area and, thus, caused them to suffer a loss of revenue.

The suit for damages was allowed. It was held by the Court of Appeals that

the submission on behalf of the appellant was that the question as to whether

as between the plaintiffs and the defendant the plaintiffs dealt as consumer

or on the defendant's written standard terms of business within Section 3(1)

in the light of the definition of 'business' in Section 14 was answered in the

negative on the ground that one cannot be said to deal on another's standard

terms of business, negotiate with those terms before entering into the

contract.

Glidewell, J. noticed that in that case the evidence was that in relation

to many of the programme releases, an employee of ICL went to St. Albans'

premises where the computer was installed taking with him a disk on which

the new programme was encoded and himself performed the exercise of

transferring the programme into the computer. The learned Judge despite

holding that the programme itself is not 'goods' held that such term would

employ to all types of contracts that the programme will be reasonably

capable of achieving the intended purpose.

The definition of goods in the said Act does not merely include

personal chattels but all articles, commodities and materials. The definition

of goods in the said Act was wider in term than in Sale of Goods Act, 1979

and the Supply of Goods and Services Act 1982. Furthermore, here, we are

not concerned with a programme which is not a part of the disk but a

programme contained in a disk.

Strict Interpretation or Literal Interpretation :

We, in this case, are not concerned with the technical meaning of

computer and computer programme as in a fiscal statute plain meaning rule

is applied. [See Partington Vs. Attorney-General, (1869) LR 4 HL 100, p.

122]

In interpreting an expression used in a legal sense, the courts 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. [See Inland

Revenue Commissioner Vs. Rossminster Ltd. (1980) 1 All ER 80, p. 90]

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

consistent with the purpose of the provisions and with regard to the

consequences of the alternative constructions. [See Clark & Tokeley Ltd.

(t/a Spellbrook) Vs. Oakes [1998 (4) All ER 353].

In Inland Revenue Commissioners Vs. Trustees of Sir John Aird's

Settlement [1984] Ch. 382, it is stated:

"\005Two methods of statutory interpretation have at

times been adopted by the court. One, sometimes

called literalist, is to make a meticulous

examination of the precise words used. The other

sometimes called purposive, is to consider the

object of the relevant provision in the light of the

other provisions of the Act \026 the general

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intendment of the provisions. They are not

mutually exclusive and both have their part to play

even in the interpretation of a taxing statute."

In Indian Handicrafts Emporium and Others Vs. Union of India and

Others [(2003) 7 SCC 589] this Court expounded the theories of purposive

construction. [See also Ramesh Mehta Vs. Sanwal Chand Singhvi and Ors,

JT 2004 (Suppl.1) SC 274]

Francis Bennion in his oft quoted treatise "Statutory Interpretation" at

pages 368 & 369 states:

"Subsection (2) Where the enactment is

grammatically ambiguous, the opposing

constructions put forward are likely to be

alternative meanings each of which is

grammatically possible. Where on the other hand

the enactment is grammatically capable of one

meaning only, the opposing constructions are

likely to contrast an emphasized version of the

literal meaning with a strained construction. In the

latter case the court will tend to prefer the literal

meaning, wishing to reject the idea that there is

any doubt.

Example 149.2 In a tax avoidance case concerning

capital transfer tax, the Court of Appeal were

called on to construe the Finance Act 1975 Sch 5

para 6(7) as originally enacted. Counsel for the

Inland Revenue put forward several alternative

arguments on construction, but the court preferred

the one based on the unglossed literal meaning. It

may be conjectured however that the other

arguments helped to convince the court that the

Inland Revenue's case was to be preferred."

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. This aspect of the matter has been

considered by this Court in Indian Handicrafts Emporium (supra).

Proceeding on the basis that there existed a dichotomy, the Court ultimately

held that the resolution will have to be reached by reading the entire statute

as a whole. [See also Reema Aggarwal Vs. Anupam and Others, (2004) 3

SCC 199]

In Balram Kumawat Vs. Union of India and Others [(2003) 7 SCC

628] this Court held:

"The Courts will reject that construction which

will defeat the plain intention of the Legislature

even though there may be some inexactitude in the

language used. Reducing the legislation futility

shall be avoided and in a case where the intention

of the Legislature cannot be given effect to, the

Courts would accept the bolder construction for

the purpose of bringing about an effective result.

The Courts, when rule of purposive construction is

gaining momentum, should be very reluctant to

hold that Parliament has achieved nothing by the

language it used when it is tolerably plain what it

seeks to achieve."

Referring to its earlier decisions, this Court opined :

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"36. These decisions are authorities for the

proposition that the rule of strict construction of a

regulatory/penal statute may not be adhered to, if

thereby the plain intention of Parliament to

combat crimes of special nature would be

defeated."

[See also Swedish Match AB & Anr. Vs. Securities & Exchange Board,

India & Anr., 2004 (7) SCALE 158]

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.

[See Indian Banks' Association, Bombay and Ors. Vs. M/s. Devkala

Consultancy Services and Ors., JT 2004 (4) SC 587]

Although normally a taxing statute is to be strictly construed but when

the statutory provision is reasonable akin to only one meaning, the principles

of strict construction may not be adhered to. [See Commnr. of Central

Excise, Pondicherry Vs. M/s. ACER India Ltd., 2004 (8) SCALE 169]

Determination :

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 \026 floppies, disks, CD-ROMs, punch cards,

magnetic tapes, etc. Each one of the mediums in which the 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 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 of the supplier programme is supplied with the software, the

same would not necessarily mean that it would cease to be a 'goods'. Such

instructions contained in the manual are supplied with several other goods

including electronic ones. What is essential for an article to become goods

is its marketability.

At this juncture, we may notice the meaning of canned software as

under:

"(7) 'Canned ?software'?means that is not specifically

created for a particular consumer. The sale or lease of, or

granting a license to use, canned software is not

automatic data processing and computer services, but is

the sale of tangible personal property. When a vendor, in

a single transaction, sells canned software that has been

modified or customized for that particular consumer, the

transaction will be considered the sale of tangible

personal property if the charge for the modification

constitutes no more than half of the price of the sale."

[See STATE-CASE APP-CT,OH-TAXRPTR 402-978 Ohio Board of

Tax Appeals, Aeroquip Cop. Page 9 of 12]

The software marketed by the Appellants herein indisputably is

canned software and, thus, as would appear from the discussions made

hereinbefore, would be exigible to sales tax.

It is not in dispute that when a programme is created it is necessary to

encode it, upload the same and thereafter unloaded. Indian law, as noticed

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 12

by my learned Brother, Variava, J., does not make any distinction between

tangible property and intangible property. A 'goods' may be a tangible

property or an intangible one. It would become goods provided it has the

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 have also not gone into the question of severability.

Recently, in Commnr. Of Central Excise, Pondicherry Vs. M/s. ACER

India Ltd. [2004 (8) SCALE 169] this Court has held that operational

software loaded in the hard disk does not lose its character as tangible goods.

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. In Madan Lal Fakirchand Dudhediya vs. Shree

Changdeo Sugar Mills Ltd. [(1962) Suppl. 3 SCR 973], this Court held that

the court cannot rewrite the provisions of law which clearly is the function

of the Legislature which interprets them.

I respectfully agree with the opinion of Variava, J. that the appellant

herein is liable to pay sales tax on the softwares marketted by it and the

appeals should be dismissed.