States can tax sale of software

TCS, Nasscom lose appeal.

Tata Consultancy Services and the National Association of Software and Services Companies (Nasscom) lost an appeal in the Supreme Court against taxation of software.

The dispute was based on whether software was intellectual property or a commodity on which sales tax can be levied. A five-judge Constitution bench headed by Justice Santosh Hegde dismissed the appeal yesterday. The judgment means all state governments can impose sales tax on software.

"The judgment may affect the price paid by the user and affect the speed of penetration of PCs in the country, and also give an impetus to pirated software," said Kiran Karnik, Nsscom president.

Andhra Pradesh declared in 1994 that software in floppy discs, CDs and CD-ROMs was subject to the state sales tax act as they were physical goods.

TCS challenged the decision on the grounds that software was an intellectual and intangible property which was only stored or transmitted in floppies and discs, and that it therefore could not be taxed like a commodity.

TCS took the matter to the district courts in the state, which confirmed the state's stand. The state high court also ruled that all branded software was subject to the state tax.

TCS then took the matter to the Supreme Court, which had said when it first heard the case in 2001 that it had "global implications (and) required deeper and further consideration."

There was another batch of appeals before the same Bench challenging the imposition of Customs duty on software. The court stated that those cases would be decided by another Bench on the principle laid down in the sales tax judgment.

Karnik, however, said the overall scenario would not be affected by this judgment as the value-added tax regime was likely to substitute the existing sales tax regime.

TCS shares ended 0.7 percent lower at Rs 1,163.90 today while Infosys Technologies Ltd. slipped to 1,976.10, 0.6 percent off yesterday's four-year high.