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Software Royalty – Achieved ‘NIRWANA’?

CS           : Computer Software

ITA         : Indian Income Tax Act

Software Royalty – Judicial Dilemma:

[2005] Motorola Case Special Bench ITAT Delhi- COMPUTER SOFTWARE being ‘Copyrighted’ article not ‘copyright’ Not taxable both under ITA and relevant DTAA.

[2010] Gracemac Case ITAT Delhi- Take different view almost similar facts, COMPUTER SOFTWARE whether ‘Copyrighted’ article or ‘copyright’ Taxable.

[2012] Samsung Case Karnataka HC- COMPUTER SOFTWARE being ‘Copyrighted’ article is for the use of ‘copyright’ Taxable both under ITA and Indo-US DTAA.

[2012] Retrospective Amendment in S-9(1)(vi) inserted Explanation-4 to define COMPUTER SOFTWARE as royalty in whatever form/media.

[2013] Infrasoft Case Delhi HC – COMPUTER SOFTWARE being ‘Copyrighted’ article not ‘copyright’ Not taxable under Indo-US DTAA.

[2021) Engineering Analysis SC– COMPUTER SOFTWARE embedded in hardware and click-wrapped COMPUTER SOFTWARE are not Royalty.

What is Computer Software, ‘Copyrighted’ article and ‘copyright?’

As per Explanation 3 to Section 9(1)(vi) ITA, “computer software” means any computer programme recorded on any disc, tape perforated media or other information storage device and includes any such programme or any customized electronic data.

Computer programme (Computer Software) has been defined under Section- 2(ffc) of the Copyright Act to mean a set of instructions expressed in words, codes, and schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result.

When we peruse the definition of  “copyright” as per Section 14 (b) of the Copyright Act, 1957 along with definition of ‘Computer Programme’, right vesting in the transferee in case of transfer of ‘copyright’ are much wider as compared the right vesting in the transferee/purchaser in case of transfer of ‘copyrighted article’. The computer programme per se i.e. copyright and copy of computer programme i.e. copyrighted article are two different things. Under OECD MC also copyright and copyrighted article are two different things.

End User Licence Agreement (EULA) only authorizes the user to make the copy of the computer software on his computer for his own use only, therefore, end user buys only copyrighted article.

Importantly, the 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 to make up back-up copies as a temporary protection against loss, destruction or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement of copyright under section 52(1)(aa) of the Copyright Act. In short, what is referred to in section 52(1)(aa) of the Copyright Act would not amount to reproduction so as to amount to an infringement of copyright.

If personally legally obtained copies of a computer programme are to be exploited for commercial use, it would necessarily amount to an infringement of copyright.

Way forward

The scope of Royalty under Income tax act is very wide after the amended definition of Royalty in 2012 which the Apex Court ruled out to be applicable w.e.f. 1.6.1976. Taxpayers in India are taking very cautious approach in Withholding Tax on software royalty other than embedded software and click-wrapped software with limited right to use and where software royalty is specifically included in  tax treaties like Malaysia, Morocco, Namibia, Russia, Trinidad & Tobago, Turkmenistan, Kazakhstan and Kyrgyz Republic. Now the question, “Software Royalty – Achieved ‘NIRWANA’?” is to be answered accordingly.

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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