2010 Supreme(Mad) 3637

High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE D. MURUGESAN & THE HONOURABLE MR. JUSTICE M. SATHYANARAYANAN
Infotech Software Dealers Association
Versus
Union of India, Ministry of Finance Department of Revenue, New Delhi & Others
W.P. Nos. 3811 & 18886 of 2009
Decided On :Decided On : 24-08-2010

The Parliament has the legislative competency to bring in enactments to include certain services provided or to be provided in terms of information technology software for use in the course or furtherance of business or commerce to mean a taxable service, in terms of the residuary Entry 97 of List I of Schedule VII of the Constitution of India, 1950.

Headnote:

SOFTWARE - TAXATION - SALE OR SERVICE - LEGISLATIVE COMPETENCY - CONSTITUTION OF INDIA, 1950 - ARTICLES 245, 265, 268A - ARTICLE 366(12), (29A)(D) - FINANCE ACT, 1994 - SECTION 65(105)(ZZZE) - FINANCE (NO.2) ACT, 2009 - WHETHER SOFTWARE IS GOODS - WHETHER TRANSACTION AMOUNTS TO SALE OR SERVICE - WHETHER PARLIAMENT HAS LEGISLATIVE COMPETENCY TO BRING IN AMENDED PROVISIONS OF SECTION 65(105)(ZZZE) BY VIRTUE OF POWERS UNDER ENTRY 97 OF LIST I OF SCHEDULE VII OF THE CONSTITUTION OF INDIA, 1950 - HELD, SOFTWARE IS GOODS - TRANSACTION MAY NOT AMOUNT TO SALE IN ALL CASES AND MAY VARY DEPENDING UPON THE END USER LICENCE AGREEMENT - PARLIAMENT HAS LEGISLATIVE COMPETENCY TO BRING IN ENACTMENTS TO INCLUDE CERTAIN SERVICES PROVIDED OR TO BE PROVIDED IN TERMS OF INFORMATION TECHNOLOGY SOFTWARE FOR USE IN THE COURSE OR FURTHERANCE OF BUSINESS OR COMMERCE TO MEAN A TAXABLE SERVICE, IN TERMS OF THE RESIDUARY ENTRY 97 OF LIST I OF SCHEDULE VII - CHALLENGE TO THE AMENDED PROVISION CANNOT BE ACCEPTED SO LONG AS THE RESIDUARY POWER IS AVAILABLE - APPLICABILITY OF THAT PROVISION WOULD DEPEND UPON THE INDIVIDUAL TRANSACTIONS WHICH COULD BE ESTABLISHED BEFORE THE AUTHORITIES AS AND WHEN THE DEMAND IS MADE - AMENDED PROVISION CANNOT BE HELD TO BE UNCONSTITUTIONAL ON THE GROUND THAT THE PARLIAMENT LACKS THE LEGISLATIVE COMPETENCY.

Fact of the Case:

Petitioner, an association of software resellers, challenged the constitutional validity of Section 65(105)(zzzze) of the Finance Act, 1994 (as amended by Finance (No.2) Act, 2009), which brought information technology software under the definition of "taxable service" and thereby subjected it to service tax. The petitioner contended that software is goods and the transaction involving its sale is not liable to service tax, and that the Parliament lacked legislative competency to enact the impugned provision under Entry 97 of List I of Schedule VII of the Constitution of India, 1950, which deals with the residuary power of taxation. The respondents, on the other hand, argued that software is not merely goods but also involves an element of service, and that the Parliament had the legislative competence to impose service tax on the same under Entry 97 of List I.

Finding of the Court:

The court held that software is goods within the meaning of Article 366(12) of the Constitution of India, 1950, which defines "goods" as including all materials, commodities, and articles. The court further held that the transaction involving the sale of software may not amount to a sale in all cases and may vary depending upon the End User Licence Agreement (EULA) entered into between the parties. The court also held that the Parliament has the legislative competency to bring in enactments to include certain services provided or to be provided in terms of information technology software for use in the course or furtherance of business or commerce to mean a taxable service, in terms of the residuary Entry 97 of List I of Schedule VII of the Constitution of India, 1950. Accordingly, the court dismissed the challenge to the impugned provision on the ground that the Parliament lacked the legislative competency to enact the same.

Issues: 1. Whether software is goods within the meaning of Article 366(12) of the Constitution of India, 1950? 2. Whether the transaction involving the sale of software amounts to a sale in all cases? 3. Whether the Parliament has the legislative competency to bring in enactments to include certain services provided or to be provided in terms of information technology software for use in the course or furtherance of business or commerce to mean a taxable service, in terms of the residuary Entry 97 of List I of Schedule VII of the Constitution of India, 1950?

Ratio Decidendi: 1. Software is goods within the meaning of Article 366(12) of the Constitution of India, 1950, which defines "goods" as including all materials, commodities, and articles. 2. The transaction involving the sale of software may not amount to a sale in all cases and may vary depending upon the End User Licence Agreement (EULA) entered into between the parties. 3. The Parliament has the legislative competency to bring in enactments to include certain services provided or to be provided in terms of information technology software for use in the course or furtherance of business or commerce to mean a taxable service, in terms of the residuary Entry 97 of List I of Schedule VII of the Constitution of India, 1950.

Final Decision: The court dismissed the writ petitions challenging the constitutional validity of Section 65(105)(zzzze) of the Finance Act, 1994 (as amended by Finance (No.2) Act, 2009), holding that the software is goods and whether the transaction would amount to sale or service would depend upon the individual transaction and for the reason of that challenge, the amended provision cannot be held to be unconstitutional so long as the Parliament has the legislative competency to enact law in respect of tax on service in exercise of powers under Entry 97 of List I of Schedule VII. Consequently, the miscellaneous petitions were also dismissed.