Income Tax Act, 1961: s.195 – Amount paid by resident in India to non-resident foreign software suppliers – Liability to deduct tax at source – Held: In view of the definition of royalties contained in Article 12 of the DTAAs, there is no obligation on the persons mentioned in s. 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 amounts paid by resident Indian end-users/distributors to nonresident 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 same does not give rise to any income taxable in India, as a result of which the persons referred to in s.195 of the Income Tax Act are not liable to deduct any TDS under s.195 of the Income Tax Act. Income Tax Act, 1961: s.194E and s.195 – Distinction between – Held: s.194E of the Income Tax Act belongs to a set of various provisions which deal with TDS, without any reference to chargeability of tax under the Income Tax Act by the concerned non-resident assessee – This section is similar to s.193 and s.194 of the Income Tax Act by which deductions have to be made without any reference to the chargeability of a sum received by a non-resident assessee under the Income Tax Act – On the other hand, at the heart of s.195 of the Income Tax Act is the fact that deductions can only be made if the non resident assessee is liable to pay tax under the provisions of the Income Tax Act in the first place. Income Tax Act, 1961: Applicability of Income Tax Act, 1961 when DTAA applies – Held: Once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the assessee and not otherwise – Further, by explanation
4 to s.90 of the Income Tax Act, it has been clarified by the Parliament that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at – It is only where there is no such definition that the definition in the Income Tax Act can then be applied.
Income Tax Act, 1961: s.90 – Royalty – Meaning of – Held: As is now reflected by explanation 4 to s.90 of the Income Tax Act and under Article 3(2) of the DTAA, the definition of the term “royalties” shall have the meaning assigned to it by the DTAA, meaning thereby that the expression “royalty”, when occurring in s.9 of the Income Tax Act, has to be construed with reference to Article 12 of the DTAA – This position is also clarified by CBDT Circular No. 333 dated 02.04.1982 – Thus, by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as consideration for “the use of, or the right to use, any copyright” of a literary work, which includes a computer programme or software. Income Tax Act, 1961: s.9(1)(vi) explanation 4; s.195 – The question whether persons liable to deduct TDS under s.195 can be held liable to deduct such sums at a time when explanation 4 was factually not on the statute book, all deductions liable to be made and the assessment years in question being prior to the year 2012 – This question is answered by two latin maxims, lex non cogit ad impossibilia, i.e., the law does not demand the impossible and impotentia excusat legem, i.e., when there is a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused – The “person” mentioned in s.195 cannot be expected to do the impossible, namely, to apply the expanded definition of “royalty” inserted by explanation 4 to s.9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute. Copyright Act, 1957: Copyright – Meaning of – Though the expression “copyright” has not been defined separately in the “definitions” section of the Copyright Act, yet, s.14 makes it clear that “copyright” means the “exclusive right”, subject to the provisions of the Act, to do or authorise the doing of certain acts “in respect of a work” – When an “author” in relation to a “literary work” which includes a “computer programme”, creates such work, such author has the exclusive right, subject to the provisions of the Copyright Act, to do or authorise the doing of several acts in respect of such work or any substantial part thereof.
Copyright Act, 1957: s.14(b) – Right to use computer software – When, under a non-exclusive licence, an end-user gets the right to use computer software in the form of a CD, the end-user only receives a right to use the software and nothing more – The enduser does not get any of the rights that the owner continues to retain under s.14(b) of the Copyright Act read with sub-section (a)(i)-(vii) thereof – Thus, the conclusion that when computer software is licensed for use under an EULA, what is also licensed is the right to use the copyright embedded therein, is wholly incorrect – The licence for the use of a product under an EULA cannot be construed as the licence spoken of in s.30 of the Copyright Act, as such EULA only imposes restrictive conditions upon the end-user and does not part with any interest relatable to any rights mentioned in ss.14(a) and 14(b) of the Copyright Act.
Copyright Act, 1957: ss.14, 16, 30, 52(1)(aa), 52(1)(b), 52(1)(ad) – Infringement of copyright – Held: No copyright exists in India outside the provisions of the Copyright Act or any other special law for the time being in force, vide s.16 of the Copyright Act – When the owner of copyright in a literary work assigns wholly or in part, all or any of the rights contained in s.14(a) and (b) of the Copyright Act, in the said work for a consideration, the assignee of such right becomes entitled to all such rights comprised in the copyright that is assigned, and shall be treated as the owner of the copyright of what is assigned to him – Also, under s.30 of the Copyright Act, the owner of the copyright in any literary work may grant any interest in any right mentioned in s.14(a) of the Copyright Act by licence in writing by him to the licensee, under which, for parting with such interest, royalty may become payable – When such licence is granted, copyright is infringed when any use, relatable to the said interest/right that is licensed, is contrary to the conditions of the licence so granted – Infringement of copyright takes place when a person “makes for sale or hire or sells or lets for hire” or “offers for sale or hire” or “distributes…so as to affect prejudicially the owner of the copyright”, vide s.51(b) of the Copyright Act – 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 s.52(1)(aa) of the Copyright Act – In short, what is referred to in s.52(1)(aa) of the Copyright Act would not amount to reproduction so as to amount to an infringement of copyright – s.52(1)(ad) is independent of s.52(1)(aa) of the Copyright Act, and states that the making of copies of a computer programme from a personally legally obtained copy for non-commercial personal use would not amount to an infringement of copyright – s.52(1)(ad) of the Copyright Act cannot be read to negate the effect of s.52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in s.52(1)(aa) of the Copyright Act. Copyright Act, 1957: Copyright owner’s distribution right and the right of the purchaser to further resale – Doctrine of first sale/principle of exhaustion – Applicability of – Held: s.14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000 – After the 1999 Amendment, what is conspicuous by its absence is the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions” – This is a statutory recognition of the doctrine of first sale/principle of exhaustion.
Words and Phrases: Expression ‘in respect of ’ – Meaning of – Also in context of explanation 2(v) to s.9(1)(vi) of the Income Tax Act – Held: The expression “in respect of”, when used in a taxation statute, is only synonymous with the words “on” or “attributable to” – Such meaning accords with the meaning to be given to the expression “in respect of” contained in explanation 2(v) to s.9(1)(vi) of the Income Tax Act, and would not in any manner make the expression otiose.
Disposing of the appeals, the Court
HELD: 1. Under section 5(2) of the Income Tax Act, the total income of a person who is a non-resident, includes all income from whatever source derived, which accrues or arises or is deemed to accrue or arise to such person in India during such year. This, however, is subject to the provisions of the Income Tax Act. Certain income is deemed to arise or accrue in India, under section 9 of the Income Tax Act, notwithstanding the fact that such income may accrue or arise to a non-resident outside India. One such income is income by way of royalty, which, under section 9(1)(vi) of the Income Tax Act, means the transfer of all or any rights, including the granting of a licence, in respect of any copyright in a literary work. That such transaction may be governed by a DTAA is then recognized by section 5(2) read with section 90 of the Income Tax Act, making it clear that the Central Government may enter into any such agreement with the government of another country so as to grant relief in respect of income tax chargeable under the Income Tax Act or under any corresponding law in force in that foreign country, or for the avoidance of double taxation of income under the Income Tax Act and under the corresponding law in force in that country. What is of importance is that once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the assessee and not otherwise. Further, by explanation 4 to section 90 of the Income Tax Act, it has been clarified by the Parliament that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied. [Paras 25, 26][361-C-G]
2. The machinery provision contained in section 195 of the Income Tax Act is inextricably linked with the charging provision contained in section 9 read with section 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, “chargeable under the provisions of [the] Act”, to a non-resident, shall at the time of credit of such amount to the account of the payee in any mode, deduct tax at source at the rate in force which, under section 2(37A)(iii) of the Income Tax Act, is the rate in force prescribed by the DTAA. Such deduction is only to be made if the non resident is liable to pay tax under the charging provision contained in section 9 read with section 4 of the Income Tax Act, read with the DTAA. Thus, it is only when the non-resident is liable to pay income tax in India on income deemed to arise in India and no deduction of TDS is made under section 195(1) of the Income Tax Act, or such person has, after applying section 195(2) of the Income Tax Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in section 201 of the Income Tax Act, follow, by virtue of which the resident-payee is deemed an “assessee in default”, and thus, is made liable to pay tax, interest and penalty thereon. [Para 27][362-E-H; 363-A-B] GE India Technology Centre (P) Ltd. v. CIT (2010) 10 SCC 29:[2010] 10 SCR 1142 – relied on.
3. It will be seen that section 194E of the Income Tax Act belongs to a set of various provisions which deal with TDS, without any reference to chargeability of tax under the Income Tax Act by the concerned nonresident assessee. This section is similar to sections 193 and 194 of the Income Tax Act by which deductions have to be made without any reference to the chargeability of a sum received by a non-resident assessee under the Income Tax Act. On the other hand, at the heart of section
195 of the Income Tax Act is the fact that deductions can only be made if the nonresident assessee is liable to pay tax under the provisions of the Income Tax Act in the first place. [Para 31][364E-F] PILCOM v. CIT, West Bengal VII, 2020 SCC Online SC 426 – held inapplicable.
4.1 Under section 2(o) of the Copyright Act, a literary work includes a computer programme and a computer programme has been defined under section 2(ffc) of the Copyright Act to mean a set of instructions expressed in words, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result. Though the expression “copyright” has not been defined separately in the “definitions” section of the Copyright Act, yet, section 14 makes it clear that “copyright” means the “exclusive right”, subject to the provisions of the Act, to do or authorise the doing of certain acts “in respect of a work”. When an “author” in relation to a “literary work” which includes a “computer programme”, creates such work, such author has the exclusive right, subject to the provisions of the Copyright Act, to do or authorise the doing of several acts in respect of such work or any substantial part thereof. In the case of a computer programme, section 14(b) specifically speaks of two sets of acts – the seven acts enumerated in subclause (a) and the eighth act of selling or giving on commercial rental or offering for sale or for commercial rental any copy of the computer programme. Insofar as the seven acts that are set out in sub-clause (a) are concerned, they all delineate how the exclusive right that is with the owner of the copyright may be parted with, i.e., if there is any parting with the right to reproduce the work in any material form; the right to issue copies of the work to the public, not being copies already in circulation; the right to perform the work in public or communicate it to the public; the right to make any cinematograph film or sound recording in respect of the work; the right to make any translation of the work; the right to make any adaptation of the work; or the right to do any of the specified acts in relation to a translation or an adaptation. [Paras 34 and 35][370-F-H; 371-A-D]
4.2 In essence, such right is referred to as copyright, and includes the right to reproduce the work in any material form, issue copies of the work to the public, perform the work in public, or make translations or adaptations of the work. This is made even clearer by the definition of an “infringing copy” contained in section 2(m) of the Copyright Act, which in relation to a computer programme, i.e., a literary work, means reproduction of the said work. Thus, the right to reproduce a computer programme and exploit the reproduction by way of sale, transfer, license etc. is at the heart of the said exclusive right. [Para 36][371-D-F]
5. Importantly, no copyright exists in India outside the provisions of the Copyright Act or any other special law for the time being in force, vide section 16 of the Copyright Act. When the owner of copyright in a literary work assigns wholly or in part, all or any of the rights contained in section 14(a) and (b) of the Copyright Act, in the said work for a consideration, the assignee of such right becomes entitled to all such rights comprised in the copyright that is assigned, and shall be treated as the owner of the copyright of what is assigned to him. Also, under section 30 of the Copyright Act, the owner of the copyright in any literary work may grant any interest in any right mentioned in section 14(a) of the Copyright Act by licence in writing by him to the licensee, under which, for parting with such interest, royalty may become payable. When such licence is granted, copyright is infringed when any use, relatable to the said interest/right that is licensed, is contrary to the conditions of the licence so granted. Infringement of copyright takes place when a person “makes for sale or hire or sells or lets for hire” or “offers for sale or hire” or “distributes…so as to affect prejudicially the owner of the copyright”, vide section 51(b) of the Copyright Act. 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. [Para 38][372-A-F]
6. Section 52(1)(ad) is independent of section 52(1)(aa) of the Copyright Act, and states that the making of copies of a computer programme from a personally legally obtained copy for non-commercial personal use would not amount to an infringement of copyright. Section 52(1)(ad) of the Copyright Act cannot be read to negate the effect of section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in section 52(1)(aa) of the Copyright Act. [Para 39] [372-F-H]
7. As is now reflected by explanation 4 to section 90 of the Income Tax Act and under Article 3(2) of the DTAA, the definition of the term “royalties” shall have the meaning assigned to it by the DTAA, meaning thereby that the expression “royalty”, when occurring in section 9 of the Income Tax Act, has to be construed with reference to Article 12 of the DTAA. This position is also clarified by CBDT Circular No. 333 dated 02.04.1982. Thus, by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as consideration for “the use of, or the right to use, any copyright” of a literary work, which includes a computer programme or software. [Paras 42, 43] [376-A-C, G-H]
8. A reading of the distribution agreement would show that what is granted to the distributor is only a non-exclusive, nontransferable licence to resell computer software, it being expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate enduser. This is further amplified by stating that apart from a right to use the computer programme by the end-user himself, there is no further right to sub-license or transfer, nor is there any right to reverse-engineer, modify, reproduce in any manner otherwise than permitted by the licence to the end-user. What is paid by way of consideration, therefore, by the distributor in India to the foreign, non-resident manufacturer or supplier, is the price of the computer programme as goods, either in a medium which stores the software or in a medium by which software is embedded in hardware, which may be then further resold by the distributor to the end-user in India, the distributor making a profit on such resale. Importantly, the distributor does not get the right to use the product at all. When it comes to an end-user who is directly sold the computer programme, such end-user can only use it by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce the same for sale or transfer, contrary to the terms imposed by the EULA. In all these cases, the “licence” that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a “licence” which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs in these cases are referable to section 30 of the Copyright Act, inasmuch as section
30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. Such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end-user. Thus, what is “licensed” by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user in these cases is in fact the sale of a physical object which contains an embedded computer programme. [Paras 45, 46, 47 and 52][386-C-H; 387-A-B; 392-G-H]
State Bank of India v. Collector of Customs, (2000) 1 SCC 727: [2000] 1 SCR 137 – relied on.
Sundaram Finance Ltd. v. State of Kerala, [1966] 2 SCR
828 – referred to
9. There is no doubt that section 9 of the Income Tax Act refers to persons who are non-residents and taxes their income as income which is deemed to accrue or arise in India, thus, making such persons assessees under the Income Tax Act, who are liable to pay tax. There is also no doubt that the “person responsible for paying” spoken of in section 195 of Income Tax Act is not a non-resident assessee, but a person resident in India, who is liable to make deductions under section 195 when payments are made by it to the non-resident assessee. [Para 54][393-E-F] Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : [2012] 1 SCR 573 – relied on.
10. DEFINITION OF ROYALTY IN THE DTAAs VIS-ÀVIS THE INCOME TAX ACT
10.1 When Article 12 of the India-Singapore DTAA defines the term “royalties” in sub-article (3) thereof, it does so stating that such definition is exhaustive – it uses the expression “means”. Secondly, the term “royalties” refers to payments of any kind that are received as a consideration for the use of or the right to use any copyright in a literary work. As opposed to this, the definition contained in explanation 2 to section 9(1)(vi) of the Income Tax Act, is wider in at least three respects: It speaks of “consideration”, but also includes a lump-sum consideration which would not amount to income of the recipient chargeable under the head “capital gains”; When it speaks of the transfer of “all or any rights”, it expressly includes the granting of a licence in respect thereof; and It states that such transfer must be “in respect of” any copyright of any literary work. However, even where such transfer is “in respect of” copyright, the transfer of all or any rights in relation to copyright is a sine qua non under explanation 2 to section 9(1)(vi) of the Income Tax Act. In short, there must be transfer by way of licence or otherwise, of all or any of the rights mentioned in section 14(b) read with section 14(a) of the Copyright Act. [Paras 63 and 64][404-H; 405-A-E]
State of Madras v. Swastik Tobacco Factory, [1966] 3 SCR 79 – referred to
10.2 The insertion of sub-sections (v), (vi) and (vii) in section 9(1) of the Income Tax Act, by way of an amendment through the Finance Act 1976 was to introduce source-based taxation for income in the hands of a non-resident by way of interest, royalty and fees for technical services. Consequently, section 9(1)(vi) of the Income Tax Act was brought into force. The definition of royalty contained in explanation 2(v) of section 9(1)(vi) of the Income Tax Act includes the transfer of all or any rights (including the granting of a licence) “in respect of any copyright, literary, artistic or scientific work”. The comma after the word “copyright” does not fit as copyright is obviously spoken of as existing in a literary, artistic or scientific work. As a matter of fact, this drafting error was rectified in the Draft Taxes Code 2010, under Chapter XIX in Part H thereof. [Paras 67, 69, 70][407-A-B; 408-C-E] Carborandum & Co. v. CIT, (1977) 2 SCC 862 : [1977]
3 SCR 475 – referred to.
10.3 The transfer of “all or any rights (including the granting of a licence) in respect of any copyright”, in the context of computer software, is referable to sections 14(a), 14(b) and 30 of the Copyright Act. As has been held, the expression “in respect of” is equivalent to “in” or “attributable to”. Thus, explanation 2(v) to section 9(1)(vi) of the Income Tax Act, when it speaks of “all of any rights…in respect of copyright” is certainly more expansive than the DTAA provision, which speaks of the “use of, or the right to use” any copyright. However, when it comes to the expression “use of, or the right to use”, the same position would obtain under explanation 2(v) of section 9(1)(vi) of the Income Tax Act, inasmuch as, there must, under the licence granted or sale made, be a transfer of any of the rights contained in sections 14(a) or 14(b) of the Copyright Act, for explanation 2(v) to apply. To this extent, there will be no difference in the position between the definition of “royalties” in the DTAAs and the definition of “royalty” in explanation 2(v) of section 9(1)(vi) of the Income Tax Act. [Paras 71, 72][409-A-B; G-H; 410-A-B] CIT v. DCM Limited, ITA Nos. 87-89/1992 – referred to.
11. The question whether persons liable to deduct TDS under section 195 of the Income Tax Act can be held liable to deduct such sums at a time when explanation 4 was factually not on the statute book, all deductions liable to be made and the assessment years in question being prior to the year 2012. This question is answered by two latin maxims, lex non cogit ad impossibilia, i.e., the law does not demand the impossible and impotentia excusat legem, i.e., when there is a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused. The “person” mentioned in section 195 of the Income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of “royalty” inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute. [Paras 80, 81 and 85][413-D-F; 420-H; 421-A-B]
Arjun Panditrao Khotkar v. Kailash Kushanrao
Gorantyal,(2020) 7 SCC 1; Citrix Systems Asia Pacific Ptyl. Ltd., In Re., (2012) 343 ITR 1 (AAR) – referred to.
Dassault Systems, K.K., In Re., (2010) 322 ITR 125 (AAR); Geoquest Systems B.V. Gevers Deynootweg, In Re., (2010) 327 ITR 1 (AAR); Director of Income Tax v. A.P. Moller Maersk AS, (2017) 5 SCC 651 –
approved.
12. When, under a non-exclusive licence, an end-user gets the right to use computer software in the form of a CD, the enduser only receives a right to use the software and nothing more. The end-user does not get any of the rights that the owner continues to retain under section 14(b) of the Copyright Act read with sub-section (a)(i)-(vii) thereof. Thus, the conclusion that when computer software is licensed for use under an EULA, what is also licensed is the right to use the copyright embedded therein, is wholly incorrect. The licence for the use of a product under an EULA cannot be construed as the licence spoken of in section
30 of the Copyright Act, as such EULA only imposes restrictive conditions upon the end-user and does not part with any interest relatable to any rights mentioned in sections 14(a) and 14(b) of the Copyright Act. [Para 97][431-E-G]
CIT v. Samsung Electronics Co. Ltd. (2012) 345 ITR
494 – not correct law.
13. The expression “in respect of”, when used in a taxation statute, is only synonymous with the words “on” or “attributable to”. Such meaning accords with the meaning to be given to the expression “in respect of” contained in explanation 2(v) to section 9(1)(vi) of the Income Tax Act, and would not in any manner make the expression otiose. Secondly, section 16 of the Copyright Act, which states that “no person shall be entitled to copyright…otherwise than under and in accordance with the provisions of this Act or of any other law for the time being in force” has been completely missed, thus making it clear that the expression “copyright” has to be understood only as is stated in section 14 of the Copyright Act and not otherwise. Thirdly, the storage of a computer programme per se would not constitute infringement of copyright. This, again, would directly be contrary to the terms of section 52(1)(aa) of the Copyright Act. [Paras 105, 106 and 107][439-B-E]
State of Madras v. Swastik Tobacco Factory [1966] 3 SCR 79 – relied on
Director of Income Tax v. Ericsson A.B., (2012) 343 ITR 470; Director of Income Tax v. Nokia Networks OY, (2013) 358 ITR 259; Director of Income Tax v. Infrasoft Ltd., (2014) 264 CTR 329; CIT v. ZTE Corporation, (2017) 392 ITR 80 – approved.
14. Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. Copyright is an intangible, incorporeal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner. Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. The transfer of the material substance does not, of itself, serve to transfer the copyright therein. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in section
14 of the Copyright Act. A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. The right to reproduce and the right to use computer software are distinct and separate rights. The former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so. [Para 117][452-C-H; 453-A-D]
State Bank of India v. Collector of Customs, (2000) 1 SCC 727 : [2000] 1 SCR 1 – relied on
15.1 Section 14(b)(ii) of the Copyright Act was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000. After the 1999 Amendment, what is conspicuous by its absence is the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions”. This is a statutory recognition of the doctrine of first sale/principle of exhaustion. [Para 120][454-A-C]
Copinger and Skone James on Compyright (14 th
Edition) (1999); Warner Bros. Entertainment Inc. v. Santosh V.G., CS (OS) No. 1682/2006 [“Warner Bros.”] 2009 SCC OnLine Del 835; John Wiley & Sons Inc. v. Prabhat Chander Kumar Jain, IA No. 11331/2008 in CS(OS) No. 1960/2008 2010 SCC OnLine Del 2000; UseSoft GmbH v. Oracle International Corp. (Case C128/11) – referred to.
15.2 The doctrine of first sale/principle of exhaustion is dependent, in the first place, upon legislation which either recognises or refuses to recognise the doctrine (thereby continuing to vest distribution rights in the copyright owner, even beyond the first sale of the copyrighted work). Thus, for example, prior to the amendment of section 14(d)(ii) in 2012, dealing with a cinematograph film, the distribution right to sell or give on hire or offer for sale or hire, any copy of the film, would continue to vest in the copyright owner, “regardless of whether such copy ha[d] been sold or given on hire on earlier occasion”, which manifested the legislative intent against the application of the doctrine of first sale/principle of exhaustion. Post 2012, however, the balance between the copyright owner’s distribution right and the right of the purchaser to further resale, was tilted in favour of the latter, the words “regardless of whether such copy has been sold or given on hire on earlier occasion” being deleted by the amendment. Likewise, when it comes to section 14(a)(ii) of the Copyright Act, the distribution right subsists with the owner of copyright to issue copies of the work to the public, to the extent such copies are not copies already in circulation, thereby manifesting a legislative intent to apply the doctrine of first sale/principle of exhaustion. Like section 14(d)(ii) of the Copyright Act, section 14(b)(ii), has, after the 1999 Amendment, with effect from 15.01.2000, also deleted the words “regardless of whether such copy has been sold or given on hire on earlier occasions’’, thereby making it clear that the same tilt that had been made in section 14(d)(ii) of the Copyright Act vide the amendment in 2012 in favour of the purchaser, is also to be found post the 1999 Amendment, in section 14(b)(ii) of the Copyright Act. [Paras 140, 141][470-E-H; 471-A-C]
15.3 The language of section 14(b)(ii) of the Copyright Act makes it clear that it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental “any copy of the computer programme”. Thus, a distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within the scope of the aforesaid provision. The sale or commercial rental spoken of in section 14(b)(ii) of the Copyright Act is of “any copy of a computer programme”, making it clear that the section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction of the same for sale or commercial rental. [Para 142][471-C-E, H]
15.4 The object of section 14(b)(ii) of the Copyright Act, in the context of a computer program, is to interdict reproduction of the said computer programme and consequent transfer of the reproduced computer programme to subsequent acquirers/endusers. By way of contrast, once a book is sold, on further resale of the same book, the purchaser loses the material book altogether, as such purchaser has, for consideration, parted with the book once and for all. This may not be so in the case of a computer programme. Once it is understood that the object of section 14(b)(ii) of the Copyright Act is not to interdict the sale of computer software that is “licensed” to be sold by a distributor, but that it is to prevent copies of computer software once sold being reproduced and then transferred by way of sale or otherwise, it becomes clear that any sale by the author of a computer software to a distributor for onward sale to an enduser, cannot possibly be hit by the said provision. Further, the distributor cannot use the computer software at all and has to pass on the said software, as shrink-wrapped by the owner, to the end-user for a consideration, the distributor’s profit margin being that of an intermediary who merely resells the same product to the end-user. Distribution of copyrighted computer software, on the facts of the present appeals would not constitute the grant of an interest in copyright under section 14(b)(ii) of the Copyright Act necessitating the deduction of tax at source under section
195 of the Income Tax Act. [Paras 143, 144][471-G-H; 472-A-D]
16.1 The DTAAs that have been entered into by India with other Contracting States have to be interpreted liberally with a view to implement the true intention of the parties. When the definition of “royalties” is seen in all the DTAAs in these appeal, it is found that “royalties” is defined in a manner either identical with or similar to the definition contained in Article 12 of the OECD Model Tax Convention. This being the case, the OECD Commentary on the provisions of the OECD Model Tax Convention then becomes relevant. [Paras 145, 150][472-E; 476-C-D]
Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 : [2003] 4 Suppl. SCR 222; Formula One World Championship Ltd. v. CIT, (2017) 15 SCC 602 : [2017]
2 SCR 152; CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294 : [2017] 10 SCR 157 – referred to
Thiel v. Federal Commissioner of Taxation, High Court of Australia, [1990] 94 ALR 647; Ram Jethmalani v. Union of India, (2011) 8 SCC 1 : [2011] 8 SCR 725; Director of Income Tax v. New Skies Satellite BV, (2016)
382 ITR 114; Ostime (Inspector of Taxes) v. Australian Mutual Provident Society [1959] AC 259 – referred to
16.2 After India took such positions qua the OECD Commentary, no bilateral amendment was made by India and the other Contracting States to change the definition of royalties contained in any of the DTAAs in these appeals, in accordance with its position. As a matter of fact, DTAAs that were amended subsequently, such as the Convention between the Republic of India and the Kingdom of Morocco for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes On Income, [“India-Morocco DTAA”], which was amended on 22.10.2019, incorporated a definition of royalties, not very different from the definition contained in the OECD Model Tax Convention. [Para 156][485-G-H; 486-A-B]
16.3 Similarly, though the India-Singapore DTAA came into force on 08.08.1994, it has been amended several times, including on 01.09.2011, and 23.03.2017. However, the definition of “royalties” has been retained without any changes. Likewise, the Convention between the Government of the Republic of India and the Government of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains and for the Encouragement of Mutual Trade and Investment, [“India-Mauritius DTAA”] was entered into on 06.12.1983, and was amended subsequently on 10.08.2016, without making any change to the definition of “royalties”. It is thus clear that the OECD Commentary on Article
12 of the OECD Model Tax Convention, incorporated in DTAAs in these cases will continue to have persuasive value as to the interpretation of the term “royalties” contained therein. [Paras 157, 158][486-D-G]
Commissioner of Customs v. G.M. Exports, (2016) 1 SCC
91 : [2015] 14 SCR 848 – referred to
17. Given the definition of royalties contained in Article 12 of the DTAAs 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. 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. [Paras 168 and 169][491-G-H; 492-A-D]
Transmission Corpn. of A.P. Ltd. v. CIT, (1999) 7 SCC 266:[1999] 1 Suppl. SCR 504; Tata Consultancy
Services v. State of A.P., 2005 (1) SCC 308 : [2004] 5 Suppl. SCR 1040 – referred to
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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