Whether service tax or vat on sale of software (Both packaged and tailored)

Normally Service Tax is payable to the Central Government when a service is offered, while VAT is applicable when a product is sold and paid to the State Government.

There is a confusion that arises of whether ‘software’ is to be sold as goods and hence liable for sales tax (VAT) or considered as ‘services’ and liable for a Service Tax or both.

Packaged softwares are products that are sold off the shelf. Examples of the products that would fall under this are Microsoft, Autodesk, Adobe and several security software packages for computers. This will also include accounting software from Tally.Whether service tax or vat on sale of software (Both packaged and tailored)

The sale price of the software includes free initial installation and implementation of the software. This includes customisation to suit the customers, but without changing the basic structure of the software or its performance.

The copyright in the software is protected and always remains the property of the creator. What is sold is the right to use the software.

The sale is with a condition for exclusive use of the software by the customer at the exclusion of others. The sale gives absolute possession and control to the purchaser/user of the right to use the software.

The sale normally gives a warranty period and after the said period some annual maintenance charges are recovered for the services rendered, popularly called Annual Maintenance Contract (AMC).

At present the sale is subjected to tax under the State Value Added Tax Act and AMC is subjected to Service Tax.

This article will try to resolve this issue as to whether service tax or VAT on sale of Software (both packaged and tailored software).


1. Is the software ‘Goods’ ?

The question is very important and is relevant to decide its taxability.

The question assumes importance, because if it is ‘Goods’, it is subjected to tax under the VAT. If it is not goods, then it may be subjected to Service Tax.

‘Goods’ is defined  as :

Goods means every kind of moveable property not being newspapers, actionable claims, money, stocks, shares, securities or lottery tickets and includes livestocks, growing crop, grass and trees and plants including the produce thereof including property in such goods attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.”

‘Goods’ has been defined under all the relevant acts very widely and includes the right to use any goods

which can be sold.

There have been many instances where the courts of law had occasions to examine whether the software is goods. Although with some limitations, but the most relevant on the subject was the case of :

(i) Tata Consultancy Services v. State of A.P., (2004) 271 ITR 401 (SC)

This is a landmark judgment of the Supreme Court of India, on the definition of ‘Goods.’ A detailed discussion on the same throws light on the term in the correct perspective.

Tata Consultancy Services (TCS) provides consultancy services including computer consultancy services. They prepare and load on customers’ computers custom-made software and also sell ready-made computer software packages off the shelf. The readymade software is also known as canned software.

The assessing officer, first appellate authority and the Sales Tax Tribunal Andhra Pradesh held that canned softwares are goods and sales tax is leviable on their sale.

TCS filed a tax revision case to the Hon. Andhra Pradesh High Court, which was dismissed.

The appellant preferred an appeal before the Supreme Court and the question raised in the appeal was whether canned software sold by the appellant can be termed to be ‘goods’.

The appellant submitted that the term ‘goods’ in S. 2(h) of the Andhra Pradesh General Sales Tax Act only includes tangible moveable property, and the words ‘all material articles and commodities’ also cover only tangible moveable property, and computer software is not tangible moveable property.

The appellant further submitted that the definition of ‘computer’ and ‘computer programme’ in the Copyright Act, 1957 shows that a computer programme falls within the definition of Literary Work and is intellectual property of the programmer.

The appellant also submitted that computer software is nothing but a set of commands, on the basis of which the computer may be directed to perform the desired function.

It was further contended by the appellant that software is unlike a book or a painting. When the customer purchases a book or a painting, what he gets is the final product itself and in the case 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.

It was further argued that having regard to its nature and inherent characteristic, software is intangible property which cannot fall within the definition of the term ‘goods’ in S. 2(h) of the Andhra Pradesh General Sales Tax Act.

The Supreme Court did not agree with these arguments and held as under :

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 these properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd., (2001) 124 STC 59. 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 media, whether it be in the form of books or canvas (in case of painting) or computer disks 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 purpose of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films, the buyer is purchasing the intellectual property and not the media; i.e., the paper or cassette or disc or CD. Thus a transaction of 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.

The Supreme Court dismissed the appeal and held that canned software is “goods”.

This judgment more or less has defined the test to decide what is goods and the event when it becomes goods i.e.,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 media, whether it be in the form of books or canvas (in case of painting) or computer disks or cassettes, and marketed would become “goods”.

Is Service Tax leviable on such transactions of software?

Ans: – Service tax has come up with totally a new regime of negative list. Except the negative list services all other services are taxable services.

There are many confusing issues of whether VAT or Service tax would be leviable on the transaction.

In the case of software both packaged and tailored are kind of intellectual property rights (IPR). According to the declared list if the Intellectual property rights are for temporary use then it will be under the levy of service tax. And If it is for permanent use then State VAT would apply.


Software both (packaged and tailored) have been held goods – then VAT should apply . However in many cases , both service tax and VAT is paid – mainly because the seller of software does not want to take risk and buyer of software is not in dictating position.

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