The Finance Bill. 2008 seeks to levy service tax on information Technology Software Service (ITSS).
Information Technology Software service has been subjected to service tax with effect from 16th May 2008 with the Government notifying the date of amendments by the Finance Act 2008 in the Finance Act 1994 which is statutory provision for levy of Service tax.
Service tax on Information Technology Software Service (ITSS) has been levied by inserting section 65 (105) (zzze) in the Finance Act, 1994. As defined by the Finance Act, 2008, information technology software means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.
Further, services provided by a consulting engineer in relation to advice, consultancy or technical assistance in the disciplines of both computer hardware engineering and computer engineering should also be subject to service tax.
Taxable service is service provided or to be provided to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including:-
(i) development of information technology software,
(ii) study, analysis, design and programming of information technology software,
(iii) adaptation, upgradation, enhancement, implementation and other similar services related to information technology software,
(iv) providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a database, advice on proprietary information technology software,
(v) acquiring the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products,
(vi) acquiring the right to use information technology software supplied electronically.
SOFTWARE- GOODS OR SERVICE:-
Before levying service tax on Information Technology Software service it becomes important to ascertain as to whether ‘Software’ are ‘goods’ or ‘service’:
Test for goods:
The term ‘goods’ is defined by section 2(7) of the Sales Of Goods Act, 1930 as: “’goods’ means every kind of movable property other than actionable claims and money; and includes stock and shares, 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.”
In the case of Tata Consultancy Services v. State of Andhra Pradesh constitutional bench of the Honorable Supreme Court held that: “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 being transmitted, transferred, delivered, stored and possessed.
Thus, the test as laid down in the case of Tata Consultancy Services v. State of Andhra Pradesh is that whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc.
Further, in case of B.S.N.L. v. Union of India, the Apex court held that ‘goods’ in a sale transaction remains primarily a matter of contract and intention. The seller and the purchaser should have ad idem as to the subject matter of sale or purchase to be considered as sale of goods under Sales of Goods Act. If as per terms and conditions of the agreement, the sole intention of the party and matter of the contract is for providing service, then the transaction can not be considered as sale of goods under Sale of Goods Act but will be subject matter of service tax and vice-versa.
Software qualifies as goods:
Board vide D.O.F. No.334/1/2008-TRU dated 29th February, 2008 clarified that software consists of carrier medium such as CD, Floppy and coded date. Software are categorized as “packaged software” and “customized software”. Packaged software is mass market product, available in packaged form off the shelf in retail outlets. Customised software is tailored to the specific requirement of the customer. Packaged software sold off the shelf, is treated as goods, and is leviable to excise duty. So, ‘Information Technology Software’ has two different interpretations by the same Government. For the purpose of excise levy, IT software is considered as ‘packaged software’ while for the purpose of levy of service tax, the very same head is considered as ‘customised software’
Even in the case of Tata Consultancy Services v. State of Andhra Pradesh the Apex court held that sale of canned software being capable of abstraction, consumption, use, transmission, transfer, delivery, storage, possession etc. is liable to sales tax. The Apex court further observed that there is no distinction between branded and unbranded software. In both cases, the software is capable of being abstracted, consumed and used. In both cases the software can be transmitted, transferred, delivered, stored, possessed etc. Thus even unbranded software, when it is marketed/ sold, may be goods.
The Apex Court had further observed that in the case of unbranded software there were other questions such as “situs of contract of sale and/or whether the contract is a service contract.” The Apex court had pointed out that “in India, the test, to determine whether a property is ‘goods’, for purposes of 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, possessed etc. Admittedly, in case of software, both canned and uncanned, all of these are possible.
Also, it depends on the terms and conditions of the agreement, and the intention of the seller and the purchaser. If the sol intention of the parties and matter of the contract is sale of ‘goods’, then the transaction cannot be considered as providing service but will be subject matter of sales tax.
WHETHER SERVICE TAX CAN BE LEVIED:
As far as, whether service tax can be levied on software is concerned, the following Circular No. 81/2/2005-ST issued by the Board makes it clear that any software developed in a media goods and not service.
“Leviability of service tax on maintenance or repair of software.
Board has examined the leviability 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.
2. Supreme Court in the case of Tata Consultancy Services vs State of Andhra Pradesh (Civil Appeal no 2582 0f 1998) has observed that all the tests required to satisfy the definition of goods are possible in the case of software and in computer software the intellectual property has been incorporated on media for the purpose of transfer and software and media cannot be split up. Therefore, sale of computer software falls within the scope of sale of goods. Supreme Court has also observed that they are in agreement with the view that there is no distinction between branded and unbranded software.
3. Branded software, also known as canned software, sold off the shelf, is transferred in a media and is sold as such and the Supreme Court has decided that such branded software falls within the definition of goods. In the case of unbranded / customized software, the supplier develops the software and thereafter transfers the software so developed in a media and it is taken to the customer’s premises for loading in their system. Thus, in the case of unbranded / customized software also, the intellectual property namely software is incorporated in a media for use. Supreme Court has held that software in a media is goods.”
Further, Article 366(29A)(d) of he Constitution empowers state to levy VAT on the transfer of the tight to use the goods.
The Parliament amended the Constitution to insert Clause 29-A in Article 366 of the Constitution of India, sub-clause (a) to (f) whereof read thus:
(29-A) “tax on the sale or purchase of goods” includes -
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,
and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.
Thus, levy of service tax on Information Technology Software is unconstitutional as they are subject to VAT or sales tax and this move of the Government is unconstitutional.
CONCLUSION:
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-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.
It also, depends on the terms and conditions of the agreement, and the intention of the seller and purchaser. If the sole intention of the parties and matter of the contract is sale of ‘goods’, then the transaction cannot be considered as providing service but will be subject matter of sales tax.
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