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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: N. Santosh Hegde, S. N. Variava, B. P. Singh & H. K. Sema

JUDGMENT: J U D G M E N T

(With C. A. Nos. 2584, 2585 and 2586 of 1998)

S. N. VARIAVA, J.

                These Appeals are against the Judgment dated 12th December,  1996 of the Andhra Pradesh High Court.  The Appeals have been  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  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 have developed those software.   The Appellants are licensees with permission to sub-licence these  packages to others.  The canned software programmes are  pragrammes 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 of the Andhra Pradesh General Sales Tax Act, 1957  [hereinafter called ‘the said Act’] holding that the software were  goods.  The Commercial Tax Officer accordingly levied sales tax on this  software.  The Appellate Deputy Commissioner of Commercial Taxes  also held that the software were goods and liable to tax.  However, the  matter was remanded back for purposes of working out the tax.         The further Appeal, filed by the Appellants, before the Sales Tax  Appellate Tribunal, Andhra Pradesh, was dismissed on 1st 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, 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.            To consider this question, it is necessary to first look at the  relevant 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

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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 appropriation to the  contract of sale or purchase by the seller or by  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  purchase of goods situated at more places than  one, the provisions of clause (a) shall 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 deemed to have taken  place.

(1)     When the goods are transferred from a  principal to his selling agent and from the selling

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agent to his purchaser, or  

(2)     When the goods are transferred from the  seller to a buying agent and from the buying  agent to his principal, if the agent is found in  either of the cases aforesaid,--

(i)     to have sold the goods 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 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  on behalf of his principal; or

(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."  

       Section 5 provides as follows:

"5. Levy of tax on sales or purchases of  goods

(1)     Save as otherwise provided in this Act,  every dealer shall pay 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.

(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 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  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

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in respect of any sale of such goods effected  by him."     

       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 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 that can be readily accessed by the processing unit of the  computer.  It is stated that in 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 drives.  In the book, ‘the  nature of software’ is defined as follows: "The Nature of Software 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 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-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\027and no  one could challenge your actions since you  have paid valuable 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.   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 sold and  resold, the software embedded in these media  are intangible and fall into a very different  category."

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       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 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 "Computer" and "Computer Programme" in The Copyright  Act, 1957.  These read as follows: "Computer" includes any electronic or similar  device having information processing  capabilities".

"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 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 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 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 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 vs. Tidwell  reported in 538 S.W.2d 405; State of Alabama vs. Central  Computer Services, INC reported in 349 So. 2d 1156; The First  National Bank of Fort Worth vs. Bob Bullock reported in 584  S.W.2d 548; First National Bank of Springfield vs. Department of  Revenue reported in 421 NE2d 175; Compuserve, INC. vs. Lindley  reported in 535 N.E. 2d 360 and Northeast Datacom, Inc., et al vs.  City of Wallingford reported in 563 A2d 688.  In these cases, it has  been held that ‘computer software’ is tangible personal property.  The  reasoning for arriving at this conclusion is basically that the  information contained in the software programs can be introduced into  the user’s computer by several different methods, namely, (a) it could  be programmed manually 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 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

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tapes, etc. the logic or intelligence of the program remains intangible  property.  It is held that it is this intangible property right 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 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 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 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 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 American Courts have taken a different view.  Some of  those cases are South Central Bell Telephone Co. vs. Sidney J.  Barthelemy reported in 643 So.2d 1240; Comptroller of the  Treasury vs. Equitable Trust Company reported in 464 A.2d 248;  Chittenden Trust Co. vs. Commissioner of Taxes reported in 465  A.2d 1100; University Computing Company vs. Commissioner of  Revenue for the State of Tennessee reported in 677 S.W.2d 445  and Hasbro Industries, INC. vs. 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 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 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 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 held 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

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device.  It has been held that the fact that 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.  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  only acquires ownership of that particular copy of the novel or song  but not the intellectual property in the novel or song.         Mr. 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 is tangible or intangible.  Mr. Dwivedi  submitted that the definition of the term "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 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 term "goods" includes all materials, commodities and  articles.  He submitted that the legislative power, 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, Madhra Pradesh,  Indore vs. Madhya Pradesh Electricity Board, Jabalpur reported  in (1969) 1 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:

"The reasoning which prevailed with the High  Court was that a well-defined 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  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.  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

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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, transferred, delivered, stored or possessed etc.  are "goods" for the purposes of sales tax.  The submission 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 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 the case  of software, both canned and uncanned, all of these are possible.      

       This Court in the case of H. Anraj vs. Government of Tamil  Nadu, reported in (1986) 1 SCC 414, had, in the context of Bengal  Finance (Sales Tax) Act, 1941, occasion to consider whether lottery  tickets were goods.  It has been submitted that the lottery tickets were  an actionable claim as the essence of a lottery was a chance for a prize  for a price.  This Court noted the definition of "goods" and held that  the term "moveable property", for the purposes of sales tax, could not  be taken in a narrow sense.  It was held that incorporeal rights, like  copyright or an intangible thing like electric energy, were regarded as  goods exigible to sales tax and, therefore, entitlement to a right to  participate in a draw, which was beneficial interest in movable  property, would fall within the definition of "goods".

       The question whether electricity can be termed as "goods" again  arose before a Constitution Bench of this Court in State of A. P. vs.  National Thermal Power Corpn. Ltd. & Ors. reported in (2002) 5  SCC 203.  This Court, noticing the earlier authorities, held that the  definition of "goods" in Article 366 (12) of the Constitution of India was  very wide and included all kinds of movable properties.  It was held  that the term "movable property" when considered with reference to

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"goods" as defined for the purposes of sales tax cannot be taken in a  narrow sense.  It was held that merely because electric energy was  not tangible or would not be moved or touched like, for instance, a  piece of wood or a book it would not cease to be movable property  when it had all the attributes of such property.  It was held that  electricity was capable of abstraction, consumption and use which, if  done dishonestly, was punishable under Section 39 of the Indian  Electricity Act, 1910.  It was held that electric energy could be  transmitted, transferred, delivered, stored and possessed in the same  way as any other movable property.  It was held that electricity was  thus "goods" within the meaning of the Sales Tax Act.         Thereafter, in the case of M. P. Cement Manufacturers’  Association vs. State of M. P. & Ors., reported in (2004) 2 SCC  249, the question was whether the levy of cess on generation of  electricity by the M. P. Upkar Adhiniyam, 1981, as substituted by M. P.  Upkar (Sanshodhan) Adhyadesh, 2001, was valid.  It was held that  there was no legislative competence in the State to levy cess as the  Parliament had exclusive legislative competence in this respect by  virtue of Entry 84 in List I of Schedule 7.  However, in this case also it  has been held that electricity was "goods" and that the State would  have competence to levy tax on the sale and consumption of electricity  but could not levy cess on the production of electricity.           In the case of Associated Cement Companies Ltd. vs.  Commissioner of Customs, reported in (2001) 4 SCC 593, the  question was whether customs duty was leviable on technical material  supplied in the form of drawings, manuals and computer disc, etc.   The further question was if customs duty was leviable how it was to be  valued.  In that case also it was inter alia argued that custom duty  could not be levied as the drawings, designs diskettes, etc. were not  goods and that they only constituted ideas.  It had been submitted  that what was being transferred was technology, i.e., the knowledge  or know-how and thus, even though this may be valuable, it was  intangible property and not goods.   This Court noted Section 2 (22) of  the Customs Act, which defined "goods" as follows:    "2.(22)(a) vessels, aircrafts and vehicles; (b) stores; (c) baggage; (d) currency and negotiable instruments; and (e) any other kind of moveable property."

       It is thus to be seen that under the Customs Act, apart from  what had been specified therein, any other kind of moveable property  constituted goods.  This Court held as follows: "27. According to Section 12 of the Customs Act,  duty is payable on goods imported into India. The word  "goods" has been defined in Section 2(22) of the Customs  Act and it includes in clause (c) "baggage" and clause (e)  "any other kind of moveable property". It is clear from a  mere reading of the said provision that any moveable  article brought into India by a passenger as part of his  baggage can make him liable to pay customs duty as per  the Customs Tariff Act. An item which does not fall within  clauses (a), (b), (c) or (d) of Section 2(22) will be  regarded as coming under Section 2(22)(e). Even though  the definition of the goods purports to be an inclusive one,  in effect it is so worded that all tangible moveable articles  will be the goods for the purposes of the Act by residuary  clause (e) of Section 2(22). Whether moveable article  comes as a part of a baggage, or is imported into the  country by any other manner, for the purpose of the  Customs Act, the provision of Section 12 would be  attracted. Any media whether in the form of books or  computer disks or cassettes which contain information  technology or ideas would necessarily be regarded as  goods under the aforesaid provisions of the Customs Act.

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These items are moveable goods and would be covered by  Section 2(22)(e) of the Customs Act. .........................................................................  33. It is true that what the appellants had wanted  was technical advice on information technology. Payment  was to be made for this intangible asset. But the moment  the information or advice is put on a media, whether paper  or diskettes or any other thing, that what is supplied  becomes a chattel. It is in respect of the drawings, designs  etc. which are received that payment is made to the  foreign collaborators. It is these papers or diskettes etc.  containing the technological advice, which are paid for and  used. The foreign collaborators part with them in lieu of  money. It is, therefore, sold by them as chattel for use by  the Indian importer. The drawings, designs, manuals etc.  so received are goods on which customs duty could be  levied.  34. The decision of Winter v. Putnam case (938 F  2nd 1033 (9th Cir 1991) is also of no help to the  appellants as in that case it was the quality of information  regarding mushrooms which was not regarded as a  product even though the encyclopaedia containing the  information was regarded as goods. Here we are not  concerned with the quality of information given to the  appellants. The question is whether the papers or diskettes  etc. containing advice and/or information are goods for the  purpose of the Customs Act. The answer, in our view, is in  the affirmative.  ......................................................................... 41. Significantly Chapter 49 also includes items  which have substantial intellectual value as opposed to the  value of the paper on which it is put. Newspapers,  periodicals, journals, dictionaries etc. are to be found in  Chapter 49 wherein maps, plans and other similar items  are also included, while Chapter 97 talks about original  engravings. It is clear that intellectual property when put  on a media would be regarded as an article on the total  value of which customs duty is payable.  42. To put it differently, the legislative intent can  easily be gathered by reference to the Customs Valuation  Rules and the specific entries in the Customs Tariff Act.  The value of an encyclopaedia or a dictionary or a  magazine is not only the value of the paper. The value of  the paper is in fact negligible as compared to the value or  price of an encyclopaedia. Therefore, the intellectual input  in such items greatly enhances the value of the paper and  ink in the aforesaid examples. This means that the charge  of a duty is on the final product, whether it be the  encyclopaedia or the engineering or architectural drawings  or any manual.  43. Similar would be the position in the case of a  programme of any kind loaded on a disc or a floppy. For  example in the case of music the value of a popular music  cassette is several times more than the value of a blank  cassette. However, if a pre-recorded music cassette or a  popular film or a musical score is imported into India duty  will necessarily have to be charged on the value of the final  product. In this behalf we may note that in State Bank of  India v. Collector of Customs ((2000) 1 SCC 727 : (2000)  1 Scale 72) the Bank had, under an agreement with the  foreign company, imported a computer software and  manuals, the total value of which was US Dollars  4,084,475. The Bank filed an application for refund of  customs duty on the ground that the basic cost of software  was US Dollars 401.047. While the rest of the amount of

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US Dollars 3,683,428 was payable only as a licence fee for  its right to use the software for the Bank countrywide. The  claim for the refund of the customs duty paid on the  aforesaid amount of US Dollars 3,683,428 was not  accepted by this Court as in its opinion, on a correct  interpretation of Section 14 read with the Rules, duty was  payable on the transaction value determined therein, and  as per Rule 9 in determining the transaction value there  has to be added to the price actually paid or payable for  the imported goods, royalties and the licence fee for which  the buyer is required to pay, directly or indirectly, as a  condition of sale of goods to the extent that such royalties  and fees are not included in the price actually paid or  payable. This clearly goes to show that when technical  material is supplied whether in the form of drawings or  manuals the same are goods liable to customs duty on the  transaction value in respect thereof.  44. It is a misconception to contend that what is  being taxed is intellectual input. What is being taxed under  the Customs Act read with the Customs Tariff Act and the  Customs Valuation Rules is not the input alone but goods  whose value has been enhanced by the said inputs. The  final product at the time of import is either the magazine  or the encyclopaedia or the engineering drawings as the  case may be. There is no scope for splitting the  engineering drawing or the encyclopaedia into intellectual  input on the one hand and the paper on which it is scribed  on the other. For example, paintings are also to be taxed.  Valuable paintings are worth millions. A painting or a  portrait may be specially commissioned or an article may  be tailor-made. This aspect is irrelevant since what is  taxed is the final product as defined and it will be an  absurdity to contend that the value for the purposes of  duty ought to be the cost of the canvas and the oil paint  even though the composite product, i.e., the painting, is  worth millions.  45. It will be appropriate to note that the Customs  Valuation Rules, 1988 are framed keeping in view the  GATT protocol and the WTO agreement. In fact our rules  appear to be an exact copy of GATT and WTO. For the  purpose of valuation under the 1988 Rules the concept of  "transaction value" which was introduced was based on the  aforesaid GATT protocol and WTO agreement. The shift  from the concept of price of goods, as was classically  understood, is clearly discernible in the new principles.  Transaction value may be entirely different from the classic  concept of price of goods. Full meaning has to be given to  the rules and the transaction value may include many  items which may not classically have been understood to  be part of the sale price.  46. The concept that it is only chattel sold as chattel,  which can be regarded as goods, has no role to play in the  present statutory scheme as we have already observed  that the word "goods" as defined under the Customs Act  has an inclusive definition taking within its ambit any  moveable property. The list of goods as prescribed by the  law are different items mentioned in various chapters  under the Customs Tariff Act, 1997 or 1999. Some of  these items are clearly items containing intellectual  property like designs, plans, etc.  47. In the case of St Albans City and District Council  v. International Computers Ltd. ((1996) 4 All ER 481) Sir  Ian Glidewell in relation to whether computer programme  on a disc would be regarded as goods observed at p. 493  as follows :

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"Suppose I buy an instruction manual on the  maintenance and repair of a particular make of car. The  instructions are wrong in an important respect. Anybody  who follows them is likely to cause serious damage to the  engine of his car. In my view, the instructions are an  integral part of the manual. The manual including the  instructions, whether in a book or a video cassette, would  in my opinion be ’goods’ within the meaning of the 1979  Act, and the defective instructions would result in a breach  of the implied terms in Section 14.  If this is correct, I can see no logical reason why it  should not also be correct in relation to a computer disc on  to which a program designed and intended to instruct or  enable a computer to achieve particular functions has been  encoded. If the disc is sold or hired by the computer  manufacturer, but the program is defective, in my opinion  there would prima facie be a breach of the terms as to  quality and fitness for purpose implied by the 1979 Act or  the 1982 Act."  48. The above view, in our view, appears to be  logical and also in consonance with the Customs Act.  Similarly in Advent Systems Ltd. v. Unisys Corpn. (925 F  2d 670 (3d Cir 1991)) it was contended before the Court in  the United States that software referred to in the  agreement between the parties was a "product" and not a  "good" but intellectual property outside the ambit of the  Uniform Commercial Code. In the said Code, goods were  defined as "all things (including specially manufactured  goods) which are moveable at the time of the identification  for sale". Holding that computer software was a "good" the  Court held as follows :  "Computer programs are the product of an  intellectual process, but once implanted in  a medium they 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 it  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 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’."  49. We are in agreement with the aforesaid  observations and hold that the value of the goods imported  would depend upon the quality of the same and would be  represented by the transaction value in respect of the  goods imported."  

       To be noted that this authority is directly dealing with the  question in issue.  Even though the definition of the term "goods" in  the Customs Act is not as wide or exhaustive as the definition of the

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term "goods" in the said Act, it has still been held that the intellectual  property when it is put on a media becomes goods.        Mr. Sorabjee  submitted that whilst referring to the case of St. Albans City and  District Council vs. International Computers Ltd. [1996 (4) All E R  481] this Court missed the express finding of that Court to the effect  "clearly, a disk is within this definition.  Equally clearly, a program, of  itself, is not".  Mr. Sorabjee submitted that the English case clearly  holds that software programes are not goods.  He further submitted  that the observations of this Court in Associated Cements Case  (Supra) are in the context of valuation of imported goods and must  therefore not be taken into consideration whilst deciding whether  software is intangible, incorporeal intellectual property.  We are unable  to accept this submission of Mr. Sorabjee.  The observations have  been made not just in the context of valuation but to decide whether  the items imported were "goods".  Question of valuation would come  only if the items imported were "goods" on which custom duty could  be levied.         In the case of Commissioner of Central Excise, Pondicherry  vs. M/s Acer India Ltd., reported in JT 2004 (8) SC 53, this Court  has considered in detail what a software programme is.  After so  considering, it has been held that a computer and operative software  are different marketable commodities.  This Judgment would also have  been against the arguments canvassed by Mr. Sorabjee but for the  fact that this Court has itself clarified as follows:

"86. We, however, place on record that we have  not applied our mind as regard the larger  question as to whether the informations  contained in a software would be tangible  personal property or not or whether preparation  of such software would amount to manufacture  under different statues."       

       In our view, the term "goods" as used in Article 366 (12) of the  Constitution of India and as defined under the said Act are very wide  and include all types of movable properties, whether those properties  be tangible or intangible.  We are in complete agreement with the  observations made by this Court in Associated Cement Companies  Ltd. (supra).  A software programme may consist of various  commands which enable the computer to perform 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  becomes goods, which are susceptible to sales tax.  Even 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".  We see 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 little value.    The software and the media cannot be  split up.   What the buyer purchases and pays for is not the disc or the  CD.  As in the case of paintings or books or music or films the buyer is  purchasing the intellectual property and not the media i.e. the paper  or cassette or disc or CD.  Thus a transaction sale of computer  software is clearly a sale of "goods" within the meaning of the term as  defined in the said Act.  The term "all materials, articles and  commodities" includes both tangible and intangible/incorporeal  property which is capable of abstraction, consumption and use and  which can be transmitted, transferred, delivered, stored, possessed  etc.  The software programmes have all these attributes.         At this stage it must be mentioned that Mr. Sorabjee had pointed  out that the High Court has, in the impugned Judgment, held as  follows:

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"...In our view a correct statement would be  that all intellectual properties may not be  ‘goods’ and therefore branded software with  which we are concerned here cannot be said to  fall outside the purview of ‘goods’ merely  because it is intellectual property; so far as  ‘unbranded software’ is concerned, it is  undoubtedly intellectual property but may  perhaps be outside the ambit of ‘goods’".          [emphasis supplied]   

       Mr. Sorabjee submitted that the High Court correctly held that  unbranded software was "undoubtedly intellectual property".  Mr.  Sorabjee submitted that the High Court fell in error in making a  distinction between branded and unbranded software and erred in  holding that branded software was "goods".   We are in agreement  with Mr. Sorabjee when he contends that there is no distinction  between branded and unbranded software.  However, we find no error  in the High Court holding that branded software is goods.   In both  cases, the software is capable of being abstracted, consumed and use.    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.  We, however, are not dealing with this  aspect and express no opinion thereon because in case of unbranded  software other questions like situs of contract of sale and/or whether  the contract is a service contract may arise.         Before concluding, it must be mentioned that before the High  Court certain other questions were also raised.  However, those have  not been agitated or pressed before us.           In this view of the matter, we see no infirmity in the Judgment  of the authorities below or in the impugned Judgment.  Accordingly,  the Appeals shall stand dismissed with no order as to costs.