‘No TDS when Indian firms pay to use foreign software’

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The Supreme Court on Tuesday held that tax deductible at source is not applicable to Indian companies for amounts paid to foreign software 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 by Justice Nariman would have an effect on software majors such as IBM India Ltd, Sasken Communications Tech Ltd, Sonata Information Technology, Rational Software Corporation India Ltd, Samsung Electronics and Engineering Analysis Centre of Excellence Pvt. Ltd.

The judgment was based on cross appeals filed by the Revenue authorities and assessees alike on the question as to whether 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 Income Tax Act.

Justice Nariman reasoned that payment of royalty is made 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 the source.

“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 explained.

The court reasoned that EULA for use of a product imposes restrictive conditions upon the Indian end-user and does not part with any interest relatable to any rights under the Copyright Act.

“By no stretch of imagination can the payment for such computer software amount to royalty… The conclusion that when computer software is licensed for use under an EULA, what is also licensed is the right to use the copyright embedded therein, is wholly incorrect,” Justice Nariman observed.

The judge followed up with a simple illustration to explain his point. “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,” he wrote.

The judgment covers four categories of purchases and use of foreign computer software.

They include cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. Second, cases in which resident Indian companies act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.

The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users.

The last and fourth include cases in which computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.

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