All material subject to strictly enforced copyright laws. © 2022 Managing IP is part of the Euromoney Institutional Investor PLC group.

Supreme Court of India rules on royalty payments and foreign software companies

Sponsored by rna-400px.jpg
rupixen-com-pbgycq3-zx0-unsplash.jpg

Ranjan Narula and Rajiv Suri of RNA, Technology and IP Attorneys consider a Supreme Court ruling where income from a software sale by non-resident companies to resident is not a ‘royalty’ payment

In a landmark judgment, the Supreme Court of India, in the context of a tax dispute concerning the role and rights of an Indian distributor vis-à-vis foreign software owner, has opined that: 

  • Distribution of software to distributor/end user will not constitute grant of an interest in copyright in it; and 

  • It only grants a non-exclusive, non-transferable licence to resell computer software. 


The tax department sought to classify such a sale under ‘royalty’ payable on account of software sale to resident/s by non-resident companies.

The companies involved in this prolonged litigation included Samsung Electronics, IBM India, Sonata Information Technology, Infineon Technologies and GE India Technology Center.

The tax department argued that when the software is sold, the incorporated program is licenced to the end-user. According to the tax authorities, the Indian entity is granted the rights to exploit the IP or copyright in the software. Consequently, the payment for such purchases is tantamount to royalty income for the seller.

Hence, the department contended that the Indian entities were licencees of the software and should have deducted tax at source (TDS) before making payment to the foreign company.

On the other hand, Indian entities acting as a distributor of software companies had opposed this contention. The Indian entities argued that the transaction between the foreign software company and Indian entities is ‘sale’ and not ‘license’.

Court ruling

The Supreme Court concluded that:

·       The amount paid by the resident Indian software user either as end-users or distributors of non-resident computer software manufacturers or suppliers, for the resale or use of the computer software through end-user license agreements (EULA)/distribution agreements, is not royalty payment for the use of the copyright in the computer software;

·       Such a transaction does not give rise to any income taxable in India considering the distribution agreements/EULAs in the facts of the case/s do not create any interest or right in such distributors/end-users; and

·       No copyright in the computer program is transferred either to the distributor or to the software's ultimate end-user. 

Therefore, the income generated in foreign companies' hands cannot be classified as ‘royalty’ which is paid on grant of a license/s. It can only be classified as business income which would obviate the need for deducting any TDS in this transaction and thus pay tax on it. 

The Supreme Court, in its ruling, also looked into the meaning of copyright with respect to computer software as provided in Section 14(b)(ii) of the Copyright Act, 1957.

The object of this section in the context of a computer program is to prohibit reproduction of the said computer program and the consequent transfer of the reproduced computer.

The Supreme Court opined this section (of the Copyright Act) would only apply to making copies of the computer program and then selling them, i.e. reproduction of the same for sale or commercial rental.

In other words, 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 program".

A distributor who purchases computer software in material form and resells it to an end-user cannot be said to be granted rights that fall within the scope of Section 14(b)(ii) of the Copyright Act. Therefore, the distribution of copyrighted computer software will not constitute a grant of an interest in copyright under Section 14(b)(ii) of the Copyright Act.

The Supreme Court concluded that there are no necessitating circumstances created for treating it as business income, resulting in tax deduction at source under Section 195 of the Income Tax Act. 

Conclusion

The contentious issue emanated from the fact that the income tax department treats such payments made to non-residents for software purchase as ‘royalty’.

The Apex Court decision has put an end to a long debate vindicating the non-taxability stand on software payments. The Supreme Court upheld the taxpayers’ contention that these transactions are simple sales and do not entail licencing of any copyright which would have attracted royalty payments under the Income Tax Act. 

The judgment will impact hundreds of transactions involving foreign software companies dealing with Indian entities that import software for sale in India.

 

Ranjan Narula

Managing partner, RNA, Technology and IP Attorneys

E: rnarula@rnaip.com


Rajiv Suri

Partner, RNA, Technology and IP Attorneys

E: rsuri@rnaip.com



More from across our site

The US Supreme Court rejected an appeal on American Axle, dashing hopes of a judicial fix to patent eligibility uncertainty
The Copyright Office refused to grant protection on the basis that the authorship couldn’t be distinguished from the final work produced by the program
COVID vaccines top Clarivate’s new brands list; Fed Circuit reverses Coca-Cola’s TTAB win; Skechers sues Brooks; USPTO to retire Public PAIR tool; CCB sees cricket complaint
Lawyers should pay attention to APJs’ questions and remember that PTAB proceedings aren’t jury trials, say former PTAB judges
The USPTO cancelled ‘Galavava’ and 'Surfstar Wake' and partly cancelled ‘Heika’ this month
We have published all the 2022 rankings of the leading firms for patent litigation and protection work
In-house and private practice counsel say UK judges have raised the bar for preliminary injunction requests
António Campinos will serve another five years as EPO president – perhaps he’ll calm unrest at the office in that time
LGBTQ IP lawyers say using rainbow colours and posting solidarity messages on social media must be followed by concrete action
Brand owners bemoan counterfeiters’ latest wheeze and say enforcement authorities should get more involved
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree