(2021) 432 ITR 471 (SC)
Income deemed to accrue or arise in India; double taxation relief; TDS on specified payments
No. What is transferred is a copyrighted article, not a right in the copyright. Such payments are business profits, not royalty, under the relevant treaties, and no tax need be withheld where the non-resident has no permanent establishment in India.
Are payments by Indian resellers and end users to non-resident suppliers for shrink-wrapped or licensed computer software in the nature of royalty, attracting withholding tax?
The Court heard a very large batch of appeals — over a hundred — which it grouped into four categories: software purchased directly by an Indian end user from a foreign supplier; software purchased by an Indian distributor or reseller from a foreign supplier for resale to Indian end users; software sold by a foreign supplier to a foreign distributor for onward resale into India; and software bundled with hardware sold as an integrated unit. In each case the Revenue treated the payment as royalty for the use of copyright, requiring withholding under Section 195, and treated the payers as assessees in default where no tax had been deducted. The licences involved permitted the licensee to use the software for its own business purposes but prohibited reverse engineering, commercial exploitation, sub-licensing and reproduction for distribution.
Decisions of the Karnataka High Court had favoured the Revenue while the Delhi High Court had taken the contrary view, producing a sharp conflict. The Supreme Court resolved it across all four categories in a single judgment.
For the assessee
What the licensee acquires is a copy of a computer programme with a limited right to use it, not any interest in the copyright itself. Under the copyright legislation, a licence permitting use without the right to reproduce for sale or otherwise exploit the copyright transfers no part of the copyright. The treaty definition of royalty requires payment for the use of, or the right to use, a copyright, which is absent. Since the treaty definition is narrower than the domestic one, the treaty prevails.
For the Revenue
Payment is made for the right to use software in which copyright subsists, and the domestic definition of royalty, as expanded by the explanations inserted with retrospective effect, expressly covers consideration for the use of computer software. The transaction confers rights that would otherwise constitute infringement, which shows that copyright rights are being licensed.
The Court drew the central distinction between the transfer of a right in the copyright and the sale of a copy of the copyrighted work. Under the Copyright Act, the exclusive rights comprising copyright are the rights to reproduce, issue copies, perform, adapt and translate the work. A licence that merely permits the licensee to use the software for its internal purposes, while prohibiting reproduction for distribution, commercial exploitation and sub-licensing, transfers none of those exclusive rights. What passes is a copyrighted article, and the payment for it is consideration for goods, not for the use of copyright. The Court held that the treaty definition of royalty, requiring payment for the use of or the right to use a copyright, was therefore not satisfied. It further held that where the treaty definition is narrower than the domestic one, the treaty prevails by virtue of Section 90(2), and that a retrospective amendment to the domestic definition cannot enlarge a term defined in a treaty — a treaty being a bilateral instrument that cannot be varied by unilateral domestic legislation. Finally, applying its earlier decision in GE India Technology Centre, the Court held that the obligation to withhold under Section 195 arises only where the sum is chargeable to tax, so no withholding was required. A very large volume of demands was accordingly set aside.
The leading authority on cross-border software payments, and the reason a very large volume of withholding demands was set aside. Under the IT Act 2025 the analysis runs through Section 9, treaty relief under Section 159, and the consolidated withholding provision in Section 393. It is critical to note the decision turns on treaty protection: where no treaty applies, or where the counterparty is in a jurisdiction without a suitable treaty, the wider domestic definition can still operate. The reasoning has been extended in later cases to cloud services and database subscriptions, though each turns on the rights actually granted.