APRIL 17, 2017

By Neeraj Prasad, IRS(C&CE)

THERE is a prevalent notion that all types of software has been categorised as service in schedule II of the CGST Act 2017 (The word Act comes as a relief given the roller coaster journey of GST). But is this understanding correct ? To find an answer to this we need to time travel and enter the past !!

Rulings on Software which could effect the GST treatment of Software ( still !!):

- Software is the set of instructions that allows physical hardware to function and perform computations in a particular manner, be in word processor, web browser or the computer's operating system. These expressions are in contrast with the hardware which are the physical components of a computer system – LML Ltd. V. CC - 2010-TIOL-75-SC-CUS .

- In Tata Consultancy Services v. State of Andhra Pradesh – 2004-TIOL-87-SC-CT-LB, it has been held that canned software (i.e. computer software packages sold off the shelf) like Oracle, Lotus Master-Hey etc. as 'goods'. The copyright in the program may remain with originator of programme, but the moment copies are made and marketed, they become 'goods'. It was held that test to determine whether a property is 'goods' for purpose 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. Even intellectual property, once it is put on a media, whether it be in form of books or canvas (in case of painting) or computer discs or cassettes and marketed would become goods. In all such cases, intellectual property has been incorporated on a media for purpose of transfer. The buyer is purchasing the intellectual property and not the media, i.e. the paper or cassette or discs or CD. There is no distinction between 'branded' and 'unbranded' software. Unbranded software can also be goods. In both cases, the software is capable of being abstracted, consumed and used. In both the cases, the software can be transmitted, transferred, delivered, stores, possessed etc. [SC upheld decision of AP High Court reported in Tata Consultancy Services v. State of AP (1997) 105 STC 421 (AP HC DB)].

- In Bharat Sanchar Nigam Ltd. V. UOI – 2006-TIOL-15-SC-CT-LB (SC 3 member bench), following extract from decision in case of Tata Consultancy Services v. State of Andhra Pradesh was quoted with approval and adopted. 'A goods' may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold and (c) capable of being transferred, delivered stored and possessed. If a software, whether customised or non-customised satisfies these attributes, the same would be goods'.

In Infotech Software Dealers Assn. v. UOI – 2010-TIOL-620-HC-MAD-ST, Constitutional validity of service tax on software was upheld. It has been held that whether the transaction would amount to sale or service would depend upon the individual transaction. A transaction can be exclusive sale or exclusive service or a case where both elements of sales and service is involved, depending on End User License Agreement with ultimate customer of software. It was observed that when software is sold through medium of internet in form of downloadable, it does not fit in ambit of 'IT software of any media' and then when only password is given and not CD, it does not satisfy requirement of being goods.

- In Sasken Communication Technologies Ltd. V. Jt. CCT (Appeals) - 2011-TIOL-707-HC-KAR-ST, assessee entered into agreement with its clients for development of software. Assessee provided its trained staff who would develop software according to specifications of customer. The assessee would have no right or claim on software developed. The software developed would be absolute property of the customer. It was held that this is not a contract for sale of software. It was also not a 'works contract' as it is not a composite contract consisting of sale of goods and provision of service. It is only contract for service simplicitor. The transaction is leviable to service tax. Vat is not payable on this transaction.

- The European Court of Justice (ECJ) in 2012 decided the case of UsedSoft GmbH v Oracle International Corp essentially ruled that: downloaded software with a perpetual licence was the "functional equivalent" of a physical product and as such the rights holder's ability to control subsequent distribution was exhausted as in effect a sale had taken place.

The entry (d), under clause 5 of Schedule II which is essentially about the supply of services Schedule II of the CGST Act 2017 states:

"development,design,programming,customization,adaptation,upgradation, enhancement, implementation of information technology software"

These wordings are a reflection of the way ITSS was defined under the Finance Act, 1994. Hence, the said entry is essentially about the activities involved in developing software and not about software per se. Also this entry is required to be read with the definition of goods in the CGST Act.

The rulings referred above will thus continue to determine whether the issue under reference is about the product or the process. Software re-living the entire debate of being a goods or services given its treatment in GST need not necessarily be an inevitability, if the past is given its due!!

Alphonse Karr became editor of   Le Figaro in 1839. His   epigrams   are legend especially "plus ça change, plus c'est la même chose" (the more it changes, the more it's the same thing), usually translated as "the more things change, the more they stay the same".

That's precisely the case of Software under GST!!

(The opinion expressed in the article is strictly personal.)