(2005) 271 ITR 401 (SC)
Income deemed to accrue or arise in India; double taxation relief — software characterisation
Canned software sold off the shelf is goods. Once a programme is put on a medium and marketed, it becomes a marketable commodity capable of being bought, sold, transmitted and stored, notwithstanding that copyright subsists in the underlying programme.
Is packaged or canned computer software sold on a medium 'goods', or is it intangible property outside the concept of goods?
The appellant sold both software developed to a customer's specification and standardised packaged software supplied on discs and similar media. The State treated the packaged software as goods liable to sales tax on its full value. The appellant contended that what the customer paid for was intellectual property and the right to use it, and that an intangible of that kind could not answer the description of goods, the medium being merely incidental. The dispute therefore turned on the characterisation of software supplied in standardised form.
The Andhra Pradesh High Court held the software to be goods. The matter came before the Supreme Court, which examined the concept of goods and its application to a copyrighted work supplied on a medium. Although decided under sales tax legislation, the judgment is reported in the income tax reports and has been relied on extensively in income tax disputes over software payments.
For the assessee
What is supplied is the intellectual content of a programme in which copyright subsists. The disc is a mere vehicle. Intellectual property is not a tangible commodity and cannot be goods; the transaction is properly characterised as the grant of a right to use, not a sale of an article.
For the Revenue
Once a programme is recorded on a medium and offered for sale over the counter, it has all the attributes of merchandise — it can be bought, sold, transferred, delivered, stored and possessed. The presence of copyright in the underlying work does not prevent the copy from being a marketable commodity.
The Court held that a computer programme recorded on a medium and marketed in standardised form is goods. It reasoned that the test is whether the item has the attributes of utility, capability of being bought and sold, and capability of being transmitted, transferred, delivered, stored and possessed. Canned software satisfies each of these: it is produced, packaged, priced and sold like any other article of commerce. The Court held that the subsistence of copyright in the underlying programme does not alter the character of the copy that changes hands, drawing the distinction between the intellectual property itself and the medium-borne copy in which it is embodied. It acknowledged that software developed specifically for a customer may stand differently, since what passes there may be the fruit of a service rather than a commodity off the shelf. The judgment thus separated the copyrighted work from the copy of it that is sold — the very distinction later carried into income tax law.
Decided under sales tax legislation rather than the Income Tax Act, so it determines no income tax question directly. Its importance here is the distinction it draws between a copyright and a copy of the copyrighted work — the reasoning the Supreme Court carried into Engineering Analysis to hold that payments for software licences are not royalty. Where a cross-border software payment is characterised under Section 9 and treaty relief under Section 159 of the IT Act 2025, this is the foundation on which that analysis rests.