Amounts Paid By Indian Companies To Use Foreign Software Not 'Royalty';Not Income Taxable In India; No TDS Liability : Supreme Court

Settling an important issue in the income tax law, the Supreme Court on Tuesday held that the amounts paid by Indian companies for the use of softwares developed by foreign companies do not amount to 'royalty' and that such payment do not give rise to income which is taxable in India.Therefore, there is no liability for Indian companies to deduct tax at source with respect to purchase of software from foreign companies."..the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act", the court held.A bench comprising Justices R F Nariman, Hemant Gupta and BR Gavai rejected the argument of the Income Tax Department that the purchase of software is taxable as income arising out of India.The Court held that here is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. Therefore, the consequences of Section 201 of the Income Tax Act will not fall on the resident companies for not deducting TDS from foreign software companies.The bench was hearing a batch of over 86 appeals which challenged the decisions of various High Courts holding that consideration paid for purchase of foreign software amounts to 'royalty'.No copyright over softwares given; so payment for user-license agreement does not amount to royaltyThe Court noted that the End User License Agreements (EULA) of the softwares do not transfer or assign the copyright over the software. What is granted to the distributor is only a non-exclusive, non-transferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user."In all these cases, the "licence" that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights containedin sections 14(a) and 14(b) of the Copyright Act, but is a "licence" which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act", the judgment authored by Justice RF Nariman observed.The judgment used the following illustration to explain the point :"If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence".Sale of goodsThe Court said that the transaction is akin to a sale of goods as held by the SC in the case Tata Consultancy Services v. State of A.P., 2005 (1) SCC 308."What is "licensed" by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by this Court in the context of a sales tax statute in Tata Consultancy Services v. State of A.P., 2005 (1) SCC 308", the judgment observed.Double Taxation Avoidance Agreement to applyThe Court noted that the terms of Double Taxation Avoidance...

Amounts Paid By Indian Companies To Use Foreign Software Not 'Royalty';Not Income Taxable In India; No TDS Liability : Supreme Court

Manu Sebastian

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