Taxation of payment made for foreign software

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Question - 

Whether the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is the payment of royalty for the use of copyright in the computer software, and that the same give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act are liable to deduct any TDS under section 195 of the Income Tax Act?


Analysis: There cane be following 4 cases:

Case 1 - Computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacture. 

Case 2 - Resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. 

Case 3 - Distributor happen to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users. 

Case 4 - Computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.



Answer: 

That the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. 

The answer to this question will apply to all four cases.


Given the definition of royalties contained in Article 12 of the DTAAs, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. 

The provisions contained in the Income Tax Act (section 9 (1) (vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.

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