Whether the payment made by Indian residents for purchase of computer software from foreign suppliers/manufacturers can be termed as ‘royalty’?

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Computer software purchased directly by a resident   end-user from a foreign non-resident supplier/manufacturer.

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Indian companies acting as distributors or resellers of non-resident suppliers and then reselling it to Indian end-users.

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Non-resident Foreign vendor who purchases software from a non-resident seller and resells to Indian distributors or end-users.

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Software affixed onto hardware and sold as an integrated unit by non-resident suppliers to resident Indian distributors or end-users.

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The purchase by the resident Indian distributor of the computer software for onward sale, is a transaction of sale of goods. Even the end user only received a limited license to use the product by itself.

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The definition of “royalties” under the DTAA did not extend to derivative products of the Copyright. It is settled law that taxability of income would be governed by the provisions of the DTAA, as they are more beneficial to the assessee. Further, the OECD Model Tax Convention on Income and Capital (OECD Commentary), the United Nations Model and the United States Internal Revenue Code, etc., do not treat sale of a copyrighted article as royalty.

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Amendment made to Section 9(1)(vi) in 2012 could not be applied retrospectively to assessment years prior to 2012.

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As per Section 14(b)(ii) of the Copyright Act, the foreign supplier’s distribution right would not extend to the sale of copies of the work to other persons beyond the first sale.

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Explanation 2(v) to Section 9(1)(vi) of the Act merely clarifies the law from 1976 when Section 9 (1)(vi) of the Act was first brought into force.

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DTAAs would not apply to “persons” in Section 195 of the Act who are not assessees.

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As per judgment passed in PILCOM v CIT, [2020 SCC OnLine SC 426] (PILCOM), in terms of Section 194E of the Act, tax has to be deducted at source irrespective of whether tax is otherwise payable by the non-resident assessee.

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In some cases, since the software adaptation could be made, albeit, for installation and use on a particular computer, Copyright is parted with by the original owner.

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Under Section 52(1)(a) of the Copyright Act, making copies or adaptation of a computer programme from a legally obtained copy for non-commercial, personal use would not amount to infringement; therefore, the converse would amount to infringement.

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The doctrine of first sale/principle of exhaustion will not apply to distributors.

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The judgment of Tata Consultancy Services v State of AP [2005 (1) SCC 308](Tata Consulting) wherein, for purpose of sales tax law, it was held that software recorded on compact discs are goods,  cannot be applicable to the Act.

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Upon application of the DTAA, provisions of the Act can only be applied to the extent they are more beneficial to the assessee.

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Tax Deduction at Source under Section 195 of the Act can only be made if a non-resident is liable to pay tax under the charging provision in Section 9 read with Section 4 of the Act and the DTAA. The judgment of PILCOM would not be applicable to the present case.

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As per amended Sections 14(b)(ii) and 52(1)(aa), making of copies or adaptation of a computer programme in order to utilise the said computer programme for the purpose for which it was supplied, or make back-up copies does not constitute infringement of Copyright and does not amount to parting with copyright.

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The EULAs have to be read as a whole to ascertain the true nature of a transaction. What is licensed is sale of a physical object which contains an embedded computer programme and is, therefore, sale of goods as per Tata Consulting.

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Explanation 4 to Section 9(1)(vi) of the Act cannot have retrospective application.