Introduction

Some of us may argue that transfer of software is a “supply of goods” and others may treat it as “supply of service”. Can such transfer of software be considered as supply of goods in one situation and “supply of services” in another? Efforts have been made in this article to bring clarity on this.

Can a Software Programme be termed as “Goods” under GST Law?

Let us understand the above mentioned question having regard to the rate of GST.

1. Notification No. 1/2017-IT (Rate), read with Notification No. 1/2017-C.T. (Rate), if pre-developed or pre designed software is supplied in any medium / storage (commonly) brought off-the-shelf) or made available through the use of encryption keys, the same is treated as a “supply of goods” classifiable under the Heading 8523 of the above notification and tax shall be charged at the rate of 18%.

2. Notification No. 17/2017-C.T.(Rate) read with notification no. 8/2017-IT (Rate), “supply of services” of the description as specified hereunder, falling under heading 9973, shall be levied at the rates specified below:

   1. Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology Software – tax rate @ 12%.

   2. Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology Software tax rate @ 12%.

Information Technology Software:

1. Let us understand the meaning of Information Technology Software. It means any representation of instructions, data, sound or image, including software code and object code, recorded in a machine readable form and capable of being manipulated or providing inter activity to a user by means of a computer or an automatic data processing machine or any other device or equipment – para 4, explanation (v) of Notification No. 11/2017-CT (Rate) and No. 8/2017-IT (Rate) both dated 28-6-2017 effective from 1-7-2017.

2. The term “Intellectual Property Rights (IPR)” has not been defined in GST Law, M.F. (D.R.) Circular No. 82/8/2004-TRO dated 10-9-2004 states as follows:

“Intellectual property emerges from application of intellect which may be in the form of an invention, design, product, process, technology, book, goodwill etc. legislation in India are made in respect of Intellectual Property Rights (IPRs) such as patients, designs, trademarks and copyrights.

Can the Software be treated as “Goods” or “Services” in GST?

A software is an intellectual property having value. GST law does not recognize or make distinction between tangible and intangible property. Under GST law, the definition of “goods” makes it clear that all property whether tangible or intangible capable of being moved would fall within the definition of goods. Goods has following attributes: (a) utility (b) capable of being bought and sold (c) capable of being sold, transferred, delivered, stored and possessed.

If a software whether customised or non-customised satisfies the attributes mentioned above, the same could be treated as “Goods”. It is very essential for an article to be termed as “Goods”, it is its marketability.

It is important to note that when a person purchases a software programme especially canned software implanted in some tangible medium,, he does not become owner of such software programme, but only a license holder, i.e., he is not entitled to use, enjoy the software embedded in the said media, he cannot use of its own will.

Refer: Tata Consultancy Services Vs. State of Andhra Pradesh (2004) 178 ELT 22 (SC). The said judgment is discussed below:

Tata Consultancy Services v. State of Andhra Pradesh

Appellant provided consultancy services including computer consultancy services. They used to prepare and load on un-canned software and also cell canned software. Appellants were licensees with permission to such license these packages to others.

The software is classified into two parts, namely canned software and customized software. Canned software means a software that is designed and created for sale to more than one person and is designed in such a way that large number of people can use its on a variety of hardware and it is also called “Packaged Software” or “Normal Software” or “Branded Software”. On the other hand, customized software means the software created for a single person or a specific customer to meet the specific requirement and it is also called as “Tailor made Software” or “Specific Software (Refer: Infotech Software Dealers Vs. Uol). The Commercial Tax Officer, Hyderabad, passed a provisional order of assessment under the provisions of Andhra Pradesh General Sales Tax Act, 1957 holding that the software was goods.

The question that was raised in this appeal was whether the canned software sold by the Appellant could be termed to be “goods” and as such assessable to sales tax under the said Act.

Arguments of the Appellant:

Appellant submitted before the Hon’ble Court that the term “Goods” defined in Section 2(h) of the Act include tangible moveable property and the words “all materials, articles and commodities also cover only tangible moveable property”.

The said Act defined as “Canned Software” as under:

“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 a 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 modification constitutes no more than half of the price of the sale.

The matter came before Supreme Court – The observations of Hon’ble Supreme Court – The following issue was Hon’ble Supreme Court. Whether or not a software programme (which by its very nature is incorporated and intangible) which had become an inextricable part of the disc would fall within the definition of the terms “Goods” so as to attract AP sales tax?

Hon’ble Supreme Court observed that we are not concerned with a programme which is not a part of the disk but a programme contained in a disk.

Observations by S.N. Variava J

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 moveable properties, whether tangible or intangible. Hon’ble Court was in agreement with the observations made the Court in Associated Cement Companies Ltd. 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 marked, 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 paintings) or computer discs or cassettes, and marked would become “goods”, we see no difference between a sale of software programme on a CD/floppy disc from a sale of music on a cassette / CD or sale of film on a video cassette in all such cases, the intellectual property has been incorporated on a media for the purposes of transfer sale is not just of the media which by itself has very little value. The software and 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 of 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 / incorporated property which is capable of obstruction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.

Observations by J.S.B. Sinha

The definition of “goods” in sale of Goods Act is also of wide import which means every kind of moveable 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. If a distinction is sought to be made between tangible and intangible properties, materials, commodities and articles and also compared and in compared materials, the definition of goods will have to be re written 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. It is true that Court found that Computer Software. 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 programmes was coded on a tangible medium such as a computer tape.

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 the 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 programme but programmed contained in the disk.

A software may be intellectual property but such personal intellectual property contained in a medium is bought and sold. It is an article of value. It is sold in various forms like floppies, disks, CD-ROMs, punch cards, magnetic tapes etc. Each one of the mediums in which the intellectual property is contained is a marketable commodity. They are visible to senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regards leviability of tax under the fiscal statute, it may not make a difference. A programme containing instructions in computer language is subject matter of a license. 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.

Hon’ble Supreme Court made the observations that in situations where a software programmes through electronic medium / internet satisfies the prerequisites / attributes of goods which are:

1. Its utility;

2. Capable of being bought and sold, and

3. Capable of transmitted, transferred, delivered, stored and possessed on the point of determination of “Goods” and therefore, such supply should be treated as “supply of goods” instead of “supply of services”. However, at this juncture, it is important to advert to Schedule II of the CGST Act which classifies certain activities or transactions as “supply of goods” or “supply of services”. As per para 5(c) of the Schedule II of the CGST Act, following two activities relating to “Intellectual Property Rights (“IPR”) shall be taxable as “supply of service”.

   1. Temporary transfer of IPR by the owner or such IPR to any person for a consideration, or

   2. Permitting the use or enjoyment of any IPR by the owner of such IPR to any person for a consideration.

Moreover, as per para 5(d) of the Schedule II “Development, Design, Programming, Customisation, Adoption, Upgradation, Enhancement or Implementation of Information Technology software shall be treated as “supply of services”.

Therefore, from the above discussion, following conclusions may safely be drawn.

1. Supply of canned software (which invariably contains EULA through electronic medium / internet would always be treated as “supply of service” as per Schedule II, para 5 (c).

2. Supply of canned software (which invariably contains EULA) through tangible medium like CD/DVD/ Pen Drive might be treated as “Supply of Goods” as per decision of the Hon’ble Supreme Court in TCS v. SOAP. Interestingly, though the CGST Act defines development of software as “Service” software in physical form (branded as well as trailor made), “Information Technology Software” is goods in Customs Tariff Act under heading 8523 80 20.

3. Supply of customized software through any medium would be treated as “Supply of Services” as per Schedule II, para 5(d). However, supply of software which is not designed and developed specific to any customer and sold without any customization, qualifies as “Supply of Computer Software as Goods” classifiable under Heading 8523 (refer in 2020 (36) G.S.T.L. 411 (AAR GST – Kar.)/[2020] 118 Taxmann.com 98 (AAR Karnataka).

It would be worthwhile to note the following:

1. Temporary or permanent transfer of IPR falls in service classification under Section 7 of the Act and Heading 9973, which covers renting and leasing services.

2. Software in physical form is “goods” and has classification in GST Tariff Heading 8523 80 20. Software, service in non-physical form comes under service group 9973, licensing services for right to use computer software and data bases falls under service tariff 997331.

3. Permission to allow brand name would be classified as “supply of services” as “Intellectual Property Service” to licensee / manufacturer and brand owner will be liable to pay service tax (now GST). C.B.E. & Co. Letter No. 249/1/2006-CX-4 dated 27th October, 2008 (20 STT 16 (St.) (Clarification in respect of alcoholic liquor, but principle applies in all cases. Refer Hero Honda Motors v. CST 21 Taxmann.com 117 = 2012 (27) S.T.R. 409 (Tribunal).

4. Temporary or permanent transfer or permitting use or enjoyment of Intellectual Property Rights (IPR) in respect of goods (other than software) falls under service heading 9973, whereas, temporary or permanent transfer or permitting use or enjoyment of Intellectual Property Rights (IPR) in respect of software falls under service group 99733.

Temporary Transfer of IPR (other than software) is service. The GST rate of 12% (6% CGST and 6% SGST/UTGST) or 12% IGST. Permanent transfer of IPR (other than software) is “goods” and GST rate is 12% (6% CGST plus 6% CGST / UTGST) or 12% IGST. The HSN classification is “Any chapter Sr. No. 243 of Schedule II of Notification No. 1/2017 – CT (Rate) both dated 28th June, 2017 inserted with effect from 15th November, 2017.

However, Temporary or permanent transfer of IPR of software or permitting the use or enjoyment of IPR in respect of Information Technology software is service. The GST rate is 18% or 18% IGST vide Sr. No. 17(ii) of Notification No. 11/2017-C.T. (Rate) and No. 8/2017 I.T. (Rate) both dated 28th June, 2017.

Conclusion

The above mentioned law relating to transfer of software programme is complicated and unfriendly for the taxpayers. It will affect adversely the liquidity of taxpayers to the extent of restrictions and obstacles.