No TDS applicability for amount Paid to use Foreign Software: SC

The Supreme Court has held that no TDS is applicable on the amounts paid by Indian companies for the use of softwares developed by foreign companies in the case of Engineering Analysis Centre of Excellence Private Limited versus The Commissioner of Income Tax.

The SC ruled over a Batch of 86 appeals which were grouped into 4 categories:

• The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer.
• The second category of cases deals with resident Indian companies that 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 fourth category includes cases wherein 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.

The Judgement has set aside the decision of Karnataka High Court of 2011 wherein the HC held that the amounts paid to foreign software suppliers, amounted to royalty and thus Indian purchaser was obliged to deduct TDS.

The court noted that the End User License Agreement/Distribution agreement do not grant the copyright over the software but in fact is a "licence" which imposes restrictions or conditions for the use of computer software. The same doesn't constitute to transfer of copyright either to the distributor or to the end-user.

The Bench comprising of Justices R.F. Nariman, Hemant Gupta and B.R. Gavai used the illustration to explain the aforesaid position:

If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same.

On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterised as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence

The SC held that the amounts paid by Indian companies for the use of computer softwares developed by foreign companies do not amount to 'royalty' as the same does not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright and thus such payment do not give rise to income which is taxable in India. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. And accordingly the court held that in none of the aforementioned four categories, the payments for using foreign software amounts to 'royalty' which is taxable in India.

Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act.

The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.

  Report