Cross-border Payments for Use of Software not Taxable as Royalty, SC

Buyer only gets the right of use, not the intellectual property of the software

The Supreme Court today held that Indian companies need not deduct tax for the amount they pay foreign manufacturers and suppliers for use or re-sale of computer software through end-user licence agreements (EULA).

In a relief for Indian buyers, a three-judge Bench led by Justice Rohinton F. Nariman said the consideration paid by them for use or sale of computer software cannot be considered a payment of “royalty for the use of copyright in the computer software”.

The 223-page judgment will impact software majors such as IBM India, Sasken Communications Tech, Sonata Information Technology, Rational Software Corporation India, Samsung Electronics, and Engineering Analysis Centre of Excellence Pvt. Ltd.

The judgment was based on cross appeals by the Revenue authorities and assessees alike on the question of whether the money paid by Indian buyers to foreign, ‘non-resident’ software suppliers amounted to royalty and, thus, tax deductible at source under Section 195 of the I-T Act.

Justice Nariman reasoned that payment of royalty is only for exclusive use of copyright of a work. Here, the computer software is sold in the form of a CD to an Indian buyer under a non-exclusive licence. Again, the Indian buyer only receives the right to use the software. He does not get any copyright on the software. Hence, the amount paid for a computer software from a foreign manufacturer does not qualify as royalty for which tax should be deducted at source.

Right to use software

“When, under a non-exclusive licence, an end-user gets the right to use computer software in the form of a CD, the end-user only receives a right to use the software and nothing more. The end-user does not get any of the rights that the owner continues to retain... It is wrong to say that when a copyrighted article is sold, the end-user gets the right to use the intellectual property rights embodied in the copyright which would therefore amount to transfer of an exclusive right of the copyright owner in the work,” Justice Nariman elaborated.

The judge it followed up with a simple illustration: “An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner.”

The judgment covers four categories of purchases and use of foreign computer software. One, software purchased directly by an end-user, resident in India, from a foreign, non-resident, supplier or manufacturer.

Two, resident Indian companies acting as distributors or resellers, by purchasing the software from foreign suppliers.

Three, wherein the distributor is a foreign vendor, who, after purchasing the software from another foreign seller, resells it to resident Indian distributors or end-users.

And, four, where the software is built onto hardware and sold as an integrated unit/equipment by foreign suppliers to resident Indian distributors or end-users.