Revenues from software program: No extra a dispute

The taxation battlefield in India has been witness to a variety of advanced points being fought over by the taxman and the taxpayer in long-drawn disputes, spanning over years. A few of these disputes achieve notoriety, not only for the sophisticated questions of regulation concerned therein, but in addition as a result of they end in divergent rulings from the assorted Excessive Courts (HC). Lately, one such dispute has been settled by the Supreme Court docket (SC).

The dispute pertains to taxation of funds made by Indian residents (both distributors or end-users) in consideration for buy of software program from overseas, non-resident suppliers/producers. This text will talk about some key factors of the SC choice and also will word some takeaways.

The case disposes off an enormous batch of appeals each from the aspect of the Income and the taxpayer. The SC has neatly categorised the assorted reality conditions concerned on this lengthy dispute into the next Four classes:

1.) Class 1 – Buy of pc software program by an end-user (Indian resident) immediately from the overseas, non-resident provider or producer of the mentioned software program
2.) Class 2 – Buy of pc software program from overseas, non-resident provider or producer, by Indian entities, who act as distributer/reseller of the software program and resell the software program to resident Indian end-users
3.) Class 3 – Buy of pc software program from overseas, non-resident provider or producer, by overseas, non-resident distributer/reseller who resells the software program to resident Indian distributors or end-users.
4.) Class 4 – When the pc software program is affixed onto a {hardware} and each this software program and {hardware} are offered as an built-in unit/tools by overseas, non-resident suppliers to Indian distributors or end-users.


The SC, in mild of the abovementioned Four classes of reality conditions, determined the next points:

a.) Whether or not funds made by Indian, resident end-users or distributors to overseas, non-resident producers/suppliers of pc software program as consideration for the use or resale of the software program (as per the related distribution agreements/EULAs) are within the nature of ‘royalty’?

b.) If the above funds are within the nature of royalty, then are they exigible to tax as ‘revenue’ in India, thus making the Indian end-users/distributors liable to deduct tax at supply as per Part 195(1), ITA?


The primary query thought-about was whether or not it’s the ITA definition or the DTAA definition of ‘royalty’ which applies within the reality conditions earlier than the court docket. The SC held that in a state of affairs the place a DTAA is relevant, if any time period is outlined in a DTAA, then that time period must be given the that means as given underneath the DTAA. In case, a time period if not outlined within the DTAA then the definition of the time period have to be taken from the municipal legal guidelines of the contracting states, until they’re repugnant to the provisions of the DTAA. Thus, the time period ‘royalty’, being outlined within the DTAA, is to be understood as per its definition within the related DTAA. Then again, ‘copyright’, not being outlined within the related DTAA, have to be understood within the context of the municipal las governing the identical in India. Therefore, the Indian Copyright Act, 1957 (CRA) assumes relevance to grasp the that means of ‘copyright’.

On the that means of ‘Copyright’

On the that means of the time period ‘copyright’ in respect of pc software program, the next essential observations have been made by the SC:

  • By advantage of Part 16, CRA, the time period ‘copyright’ is to be understood solely as it’s outlined in Part 14, CRA.
  • Below the scheme of CRA, ‘copyright’ is an unique, intangible proper granted to the copyright-owners. It’s unbiased of any materials substance.
  • With respect to pc software program, the bundle of unique rights granted to the copyright-owner is contained in Part 14 (a) and (b) of the CRA. The essence of those unique rights granted to the copyright-holder of a pc software program is the proper to breed the software program and exploit such replica by means of sale, license and so forth.
  • Switch of copyright means switch of any of the rights talked about in Part 14(a) & (b), CRA.

On the ‘actual’ nature of transactions

To see if there’s any copyright concern arising within the info, the Court docket emphasised on the significance of understanding the actual nature of the transactions. The actual nature of a transaction is known after studying the agreements as an entire. 1 The Court docket then went on to extract and analyse a few of the pattern agreements (EULAs and distributor/reseller/remarket agreements) concerned in every of the Four classes of transactions listed above. Following essential factors have been famous by the SC:

  • Each settlement expressly states that there’s no switch of copyright within the software program to both the end-user or the distributor.
  • Distributor solely will get a non-exclusive, non-transferrable license to resell the software program with none proper to make use of the identical. Distributor doesn’t get any of the unique rights contained in Part 14(a)& (b), CRA. Therefore, the funds by the distributor is just for the sale of software program as ‘items’, whether or not as saved in a medium or embedded in {hardware}.
  • Finish-user will get a restricted proper to make use of the software program by making a duplicate/back-up copy of the identical as per the license settlement. There is no such thing as a additional proper to change, reverse-engineer, switch, sub-license or reproduce the software program in any method, on the market or switch, in contravention of the license.
  • The ‘license’ granted to the end-user shouldn’t be a ‘license’ underneath Part 30, CRA. ‘License’ underneath Part 30, with respect to software program, transfers an curiosity in all or any unique rights contained in Part 14(a) & (b), CRA. No such proper or curiosity is granted to the end-user underneath the EULA.
  • The Court docket additionally particularly referred to SBI v. Collector of Customs  to spotlight the distinction between proper to breed and proper to make use of a pc software program. Proper to make use of doesn’t quantity to parting of the copyright by the copyright-owner whereas proper to breed does.
  • Possession of copyright in a software program is distinct and totally different from possession of the bodily materials wherein the copyrighted software program could also be embodied. Thus, mere proper to make use of the software program doesn’t embody proper to make use of the copyright embodied within the software program.

Thus, the Court docket held that the actual nature of the involved transactions is solely sale of software program as sale of ‘items’ and nothing extra. On an amusing word, the Court docket additionally makes a pointed reference to the proforma of a certificates issued underneath Annexure B of the Round no. 10/2002 issued by the Income. On this certificates the Income itself makes a distinction between ‘remittances for royalties’ underneath the related DTAA and ‘remittances for provide of article or pc software program.’ This, the Court docket says, reveals that the Income itself is making a distinction between royalty funds and funds for software program as ‘items’, with the latter being handled as enterprise revenue if the requisite circumstances are happy.

On the that means of ‘Royalty’ as per ITA and DTAA

Subsequent, the SC analysed the definition of royalty in each the DTAA and the ITA. The Court docket famous that as per exhaustive definition within the DTAA, ‘royalty’ means funds of any form as a consideration for “using or proper to make use of any copyright.” Acknowledging that the ITA definition contained in Clarification 2 to Part 9(1)(vi), was a lot wider, and fewer useful to the assessee, than the DTAA definition, the Court docket noticed that the ITA definition speaks of “switch of all or any rights (together with the granting of a license) in respect of any copyright, literary, inventive or scientific work.”

The Court docket held that in case of funds made for the switch in respect of a copyright in a software program, the switch ‘is referable to’ and should essentially be of all or any of the rights contained in Part 14(a) & (b), CRA, as a way to appeal to royalty provisions. The switch could also be by license or in any other case. If switch is by means of license, then it have to be understood as per Part 30, CRA. The switch by means of ‘license’ have to be a switch of an curiosity in any or the entire rights contained in Part 14(a) & (b), CRA.

Equally, with respect to the phrase “use of or proper to make use of any copyright” as showing within the DTAA definition, the SC held that the identical place could be obtained underneath Clarification 2 to Part 9(1)(vi), ITA to the extent that there have to be a switch of all or any of the rights contained in Part 14(a) & (b), CRA for rationalization 2 to Part 9(1)(vi), ITA to use.


This fierce dispute on the difficulty of taxation of funds for software program, ongoing since greater than a decade, has lastly been put to relaxation by the SC. The taxpayers now all heave a sigh of aid, having acquired the suitable judicial benediction. The dispute, for probably the most a part of it, is settled and there’s hardly any ambiguity left within the judgement to be exploited by the Income. But, there are some questions which should be addressed, nonetheless ancillary they might appear.

Having coated solely Four classes of transactions, the affect of the judgement must be thought-about on transactions the place other than the mere proper to make use of/proper to resell, some extra rights are given to the client, e.g. proper to customise/make substantial modification to the software program as per the precise requirement of the client. Additional, the affect of Equalisation Levy provisions, introduced into impact from 01.04.2020, on these funds made within the aforesaid Four classes of transactions additionally must be checked out in mild of this judgement. This judgement has created waves, hitting not solely the precise points it addressed, but in addition different associated points.

The affect of this choice will even be felt in different essential disputes pending earlier than the SC and HC involving expanded scope of taxable revenue underneath Part 9, ITA vis-à-vis a narrower taxing proper underneath DTAAs. Will probably be much more intriguing the place sure phrases not outlined in DTAAs are given a man-made and expanded that means underneath the ITA. For instance, applicability of expanded definition of ‘course of’ in Part 9(1)(vi) to satellite tv for pc broadcasting instances.

Will probably be fascinating to see how the above occasions will unfold, now that this iconic judgement has made one other mark in favor of taxpayers.



Views expressed above are the creator’s personal.


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