Supreme Court of India rules on royalty payments and foreign software companies


In landmark decision, Supreme Court of India, in tax dispute over role and rights of an Indian distributor vis à vis owner of foreign software, considered that:

  • Distribution of the software to the distributor / end user will not constitute the grant of any copyright therein; and
  • It only grants a non-exclusive, non-transferable license to resell computer software.

The tax service has sought to classify such a sale as a “royalty” payable in respect of the sale of software to residents by non-resident companies.

Companies involved in this protracted litigation included Samsung Electronics, IBM India, Sonata Information Technology, Infineon Technologies and GE India Technology Center.

The tax department argued that when software is sold, the embedded program is licensed to the end user. According to the tax authorities, the Indian entity is granted the rights to exploit the intellectual property or copyright in the software. Therefore, payment for these purchases equates to royalty income for the seller.

Therefore, the department argued that the Indian entities licensed the software and should have withheld withholding tax (TDS) before making the payment to the foreign company.

On the other hand, Indian entities acting as a distributor of software publishers objected to this assertion. The Indian entities argued that the transaction between the foreign software company and the Indian entities is a “sale” and not a “license”.

Court decision

The Supreme Court concluded that:

· The amount paid by the Indian resident user of the software, as an end user or distributor of non-resident software manufacturers or suppliers, for the resale or use of the software under user license agreements final (EULA) / distribution agreements, is not payment of royalties for the use of copyright in computer software;

· Such a transaction does not give rise to any taxable income in India as the distribution agreements / EULA in the facts of the case do not create any interest or rights for these distributors / end users; and

· No copyright in the computer program is transferred to the distributor or end user of the software.

Therefore, the income generated in the hands of foreign companies cannot be classified as “royalties” which are paid upon the granting of one or more licenses. It can only be classified as business income, which would avoid having to deduct any TDS in this transaction and therefore pay tax on it.

The Supreme Court, in its decision, also considered the meaning of copyright in relation to computer software, as provided in section 14 (b) (ii) of the Copyright Act of 1957.

The object of this article in the context of a computer program is to prohibit the reproduction of said computer program and the consequent transfer of the reproduced computer.

The Supreme Court ruled that this section (of the Copyright Act) would only apply to the making of copies of the computer program and their sale, that is, the reproduction of it. ci for sale or commercial lease.

In other words, Section 14 (b) (ii) of the Copyright Act makes it clear that it is the owner’s exclusive right to sell or lease commercially or to offer to the sale or commercial lease “any copy of the computer program”.

A distributor who purchases computer software in physical form and resells it to an end user cannot be considered to have any rights falling within the scope of Article 14 (b) (ii) of the Law on the Right author. Therefore, the distribution of copyrighted computer software will not constitute a grant of a copyright interest under Section 14 (b) (ii) of the Copyright Act. ‘author.

The Supreme Court concluded that there were no justifying circumstances created to treat it as business income, resulting in withholding tax under section 195 of the Tax Act on income.


The contentious issue arose from the fact that the income tax service deals with these
payments made to non-residents for the purchase of software royalties.

The Apex Court ruling ended a long debate defending the no-tax position on software payments. The Supreme Court upheld the taxpayers’ claim that these transactions are mere sales and do not involve any license of a copyright which would have attracted the payment of royalties under the Income Tax Act .

The judgment will impact hundreds of transactions involving foreign software companies dealing with Indian entities that import software for sale in India.

Ranjan Narula

Managing Partner, RNA, Technology and Intellectual Property Consulting

Rajiv suri

Partner, RNA, Technology and Intellectual Property Lawyers

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