The Supreme Court on Tuesday held that the amount paid by Indian companies for the use of software developed by foreign companies cannot be termed as royalty and does not give rise to any income that is taxable in India.
A bench comprising Justices R.F. Nariman, Hemant Gupta and B.R. Gavai said: “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, there is no liability for Indian companies to deduct tax at source in connection with purchase of software from foreign companies.
The top court declined to entertain the Centre’s argument that distribution of copyrighted computer software would constitute the grant of an interest in copyright under section 14(b)(ii) of the Copyright Act, thus necessitating the deduction of tax at source under section 195 of the Income Tax Act.
In its 226-page verdict, the top court said: “There 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.”
The verdict has come on over 80 appeals, which challenged the decisions of various high courts, which ruled that amounts paid for purchase of foreign software amounts to royalty.
Citing the distribution agreement, the top court said it shows that 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.
The bench observed that the amount paid by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which the software is embedded in hardware.
“This may be then further resold by the distributor to the end-user in India, with the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all,” added the top court.
The bench said that when it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user. The top court noted this cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the End User Licence Agreement.
The Karnataka High Court had ruled that the Indian importers were liable for deduction of tax at source, which has been set aside by the top court.