Taxation of Software Transactions in India

Abstract

The present millennia has witnessed a tremendous growth in the Information Technology field in India and the software transactions, both domestic and foreign, have grown manifold during this period. The International and domestic software companies have found India as a market with an immense potential for their off-shelf as well as customised products. As the underlying intellectual property rights in the software is subject to the copyright laws, the transfer of proprietary rights involved in a purchase of software totally differs from the sale of traditional goods and services. Even though the medium of storage of software, like a CD Rom or a memory card, is tangible the inherent intangible nature of the software for which the purchaser is paying brings in an element of ambiguity, making it difficult to draw a definite boundary to define the transaction either as a sale of good or extension of service. Under the present indirect tax laws these software transfers are subject to sales tax/VAT, service tax or both, many a time resulting in double taxation of such transfers. The net effect of this is an increase in the effective price of the software which is ultimately borne by the purchaser. Even though Hon’ble Supreme Court had in Tata Consultancy Services v. State of Andhra Pradesh brought in some clarification to the prevailing ambiguities, the question as to whether the sale of a software is to be classified as a sale of good or a service is yet to be answered concretely which is evidenced by the subsequent clarification given under the Education guide released by CBEC and the subsequent writ applications filed before various High Courts in this regard.This paper attempts to understand the nature of software transactions and how the same stands different from the traditional sale of goods. An attempt is made herein to understand whether the software transaction can be fit into watertight compartments of Sale of Goods or service, in the light of the Judgement given by various legal forums.