Cross-border payments for sale of software not taxable as 'Royalty': Supreme Court

The Supreme Court on Tuesday ruled that payments received by non-residents as consideration for sale of license of computer software to Indian companies/ entities is not taxable as 'Royalty..The Court held that amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers or suppliers, as consideration for the resale or use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software..Such payments, therefore, do not give rise to any "income taxable in India" and hence, the buyers of software are not liable to deduct any tax at source. .A Bench of Justices Rohinton Nariman, Hemant Gupta and BR Gavai allowed the appeals filed by assesses in this regard while dismissing the appeals of the Income Tax Department (IT department).The IT department had sought to tax money received from sale of software as royalty. It was their contention that the Indian entities to whom the software license was granted should deduct tax at source before making payment to the foreign seller..Companies had opposed the same contending that the transaction between the foreigner seller and Indian companies is in the nature of sale and not licensing. Hence, the income generated cannot be classified as royalty but only as business income..The court held that 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.".In one of the cases which was in appeal before the Supreme Court, the Karnataka High Court had found that what was sold by way of computer software included a right or interest in copyright, which thus gave rise to the payment of royalty and would be an income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, requiring the deduction of tax at source..The Supreme Court addressed this aspect by adverting to the meaning of copyright with respect to computer software as provided in Section 14(b)(ii) of the Copyright Act, 1957. .The object of section 14(b)(ii) of the Copyright Act, in the context of a computer program, is to interdict reproduction of the said computer programme and consequent transfer of the reproduced computer, the Court opined. The Section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction of the same for sale or commercial rental, it held. ."Once it is understood that the object of section 14(b)(ii) of the Copyright Act is not to interdict the sale of computer software that is “licensed” to be sold by a distributor, but that it is to prevent copies of computer software once sold being reproduced and then transferred by way of sale or otherwise, "it becomes clear that any sale by the author of a computer software to a distributor for onward sale to an end-user, cannot possibly be hit by the said provision," the Court ruled..Section 14(b)(ii) of the Copyright Act makes it clear that it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental “any copy of the computer programme”. .A distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within the scope of Section 14(b)(ii) of of Copyright Act.."The sale or commercial rental spoken of in section 14(b)(ii) of the Copyright Act is of 'any copy of a computer programme', making it clear that the section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction of the same for sale or commercial rental," it was held..Therefore, distribution of copyrighted computer software will not constitute 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, the Court concluded. .[Read Judgment]