The Supreme Court on Tuesday said that tax deduction at source is not applicable to Indian companies for the amount paid for the use or re-sale of computer software to foreign software manufacturers and suppliers through end-user license agreements (EULA).
In a relief to Indian buyers, Justice Rohinton F. A three-judge bench headed by Nariman held that the consideration paid by him for the use or sale of computer software could not be considered to be the payment of “royalties for the use of copyrights in computer software”. .
Justice Nariman’s 223-page decision will affect software majors such as IBM India Limited, Sasken Communications Tech Limited, Sonata Information Technology, Rational Software Corporation India Limited, Samsung Electronics and the Engineering Analysis Center of Excellence Private Limited. Limited
The decision was based on cross appeals filed by revenue officials and assessing alike the question of whether the money paid by Indian buyers to foreign, “non-resident” software suppliers amounted to a royalty, and thus, a tax deduction under the source Source for Income Tax Act.
Justice Nariman argued that royalties are paid only for the exclusive use of the copyright of a work.
Here, computer software is sold as a CD to an Indian buyer under a non-exclusive license. Then, the Indian buyer only gets the right to use the software. He does not get any copyright on the software. Therefore, the amount paid for computer software from a foreign manufacturer does not qualify as royalty for which tax should be deducted at source.
“When, under a non-exclusive license, an end-user gets the right to use computer software as a CD, the end-user only gets the right to use the software and nothing more . The end-user does not get any rights, which the owner continues … 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. Is therefore the amount of transfer of an exclusive right of the owner of the copyright in the work, ”Justice Nariman pointed out.
The court argued that the EULA imposes restrictive conditions on the Indian end-user for the use of a product and does not participate with any interest for any right under the Copyright Act.
“Royalty from any type of imagination cannot be paid for such computer software amount … The conclusion is that when computer software is licensed for use under an EULA, what is licensed is also copyrighted. The right to use is completely wrong, Justice Nariman observed.
The judge made a simple illustration to illustrate his point. “An obvious example is the buyer of a book or a CD / DVD, who becomes the owner of the physical article, but does not become the owner of the copyright contained in the work, remaining exclusively with the copyright owner,” he wrote .
The decision covers four categories of purchase and use of foreign computer software.
They include cases in which computer software is purchased directly from end-users resident in India from a foreign, non-resident supplier or manufacturer. Second, cases in which resident Indian companies purchase computer software from foreign or non-resident suppliers or manufacturers and then convey the same to Indian resident users.
The third category concerns cases in which the distributor is a foreign, non-resident vendor who, after purchasing the software from a foreign, non-resident vendor, is similar to resident Indian distributors or end-users.
The last and fourth include cases in which computer software is pasted onto hardware and sold as an integrated unit / device to foreign distributors, non-resident suppliers to Indian distributors or end users.