Managing IP is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

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 site and ros bottom lb

More from across our site

Civil society and industry representatives met in Geneva on Thursday, September 28 to discuss a potential expansion of the TRIPS waiver
Sources say the beta version of the USPTO’s new trademark search tool is a big improvement over the current system but that it isn’t perfect
Canadian counsel weigh in on the IP office’s decision to raise trademark filing fees in 2024 and how they’re preparing clients
We provide a rundown of Managing IP’s news and analysis coverage from the week, and review what’s been happening elsewhere in IP
Shira Perlmutter, US Register of Copyrights, discussed the Copyright Office's role in forming generative AI policy during a House of Representatives hearing
The award marks one of the highest-ever damages received by a foreign company in a trademark infringement suit in China
Two orders denying public access to documents have reignited a debate over a lack of transparency at the new court
Rouse’s new chief of operations and the firm’s CEO tell Managing IP why they think private equity backing will help it conquer Europe
Brian Landry, partner at Saul Ewing, reveals how applicants can prosecute patent applications in the wake of the Federal Circuit's In re Cellect ruling
Ronelle Geldenhuys of Australia’s Foundry IP considers the implications complex computer technologies such as AI have on decision-making