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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 & S.B. Sinha

JUDGMENT: JUDGMENT

WITH CIVIL APPEAL NOs. 2584, 2585 & 2586/98

Delivered by S.B.SINHA, J  S. N. VARIAVA, J

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

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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  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.  

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[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]

       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

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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."

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

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transaction is, in instance, the transfer of intangible  personal property and, as such, is not taxable. Under the  Illinois Use Tax Act\005."

       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

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also recognized that computer programs are intangible  property when the court stated :

       "\005Prior to encoding the tape, the  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

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term, and thus, is tangible personal property, taxable  under ’ 56-21 of the City Code."

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

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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,  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."

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       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  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

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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  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

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seeks to achieve."

Referring to its earlier decisions, this Court opined :

"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

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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  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.   

================================================================                                                          

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

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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  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

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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  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:

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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  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.  

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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."

       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

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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  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

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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  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

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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  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

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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  "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

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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.  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

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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  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

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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 :  "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

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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  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

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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: "...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.