Info tech Software Dealers Association Vs. UOI (Madras High Court), W.P .Nos. 3811 & 18886 of 2009, DATED: 24.08.2010
Facts in brief
• The petitioner, Info tech Software Dealers Association (“ISODA”), is a society of software re sellers (re-seller) engaged in resale of computer software products. The software sold by the society falls into three categories, namely, (i) Shrink Wrap Software; (ii) Multiple User Software/ Paper License and (iii( Internet Download.
• The re seller has the right to market the software under the Master End User License Agreement (“Master EULA”). However, the copyright of the software remains with the author.
• The software is supplied / licensed to the end user under the End User License Agreement (“EULA”) which is a legal contract between the software application author and the end user governing the usage of the software.
• The petitioner filed a writ petition in the High Court of Madras praying for issuance of the writ of Declaration to declare Section 65(105)(zzzze)* of Chapter V of Finance Act,1994 as unconstitutional and ultra vires of the legislative competence of the Parliament.
• The Petitioner challenged the constitutionality of Section 65(105)(zzzze)* on the ground that software is treated as goods and the EULA conveys a transfer of right to use goods and accordingly subject to sales tax/ VAT. Since there is no element of service present in such a transaction, the same cannot be subject to service tax. Consequently, only the State Governments are competent to make laws relating to it.
* This section defines the taxable service of Information Technology Software Service (“ITSS”.
Question before the Court
• The question before the Court was whether the provisions of Section 65(105)(zzzze) of Chapter V of the Finance Act, 1994 is within the legislative competence of the Parliament.
• The incidental question arising before the Court was whether software is goods and if so, whether supply/ license of software pursuant to the EULA would amount to sale of goods or rendering of services.
Decision of the High Court of Madras
• The High Court held that Section 65(105)(zzzze) does not relate to goods as such as it imposes service tax on services provided or to be provided in relation to information technology software. The same can be brought under Entry 97 of List 1 of Schedule VII which relates to the residuary powers of the Parliament to make laws. Thus, the Parliament has the legislative competence to make laws relating to it.
• The Hon’ble High Court following the decision of the Supreme Court of India in the case of Tata Consultancy Services held that software would be goods if it satisfies the following conditions, namely (a) utility (b) capable of being bought and sold (c) capable of transmitted, transferred, delivered, stored and possessed.
• Further, the Hon’ble High Court held that in the present case since the software is licensed / supplied pursuant to the EULA, there is no sale of software as such but transfer of right to use the data stored in the software which would amount to service and not sale of goods which would be a service and not sale.
• The Hon’ble High Court also observed that if software is sold through internet in the form of a download, it would not fit into Information Technology software of any media. Hence, if access is given through internet, when there is no CD or storage media, it would not be goods.
• The Court while upholding the Constitutionality of the levy held that whether a transaction would amount to sale or service depends upon the individual transaction.
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