Taxable Income Receipts From Sale of Software not Taxable in India—SoftwareONE Case

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The Tax Publishers Income Tax--Taxable Income Receipts From Sale of Software not Taxable in India--SoftwareONE Case Akhilesh Kumar Sah The decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT 2021 TaxPub(DT) 1208 (SC) has become a landmark case in India. The issue of taxability of software of a foreign company to an Indian company has remained a controversial one. A recent case before the Delhi ITAT while analyzing the issue has while given the decision in this respect by following the decision of the above mentioned case by Supreme Court. 1. Introduction The Supreme Court in Engineering Analysis Centre ofExcellence Pvt. Ltd. v. CIT (supra) has observed that: (i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. (ii) 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. (iii) 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. (iv) 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. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Taxable Income

Receipts From Sale of Software not Taxable in India--SoftwareONE Case

Akhilesh Kumar Sah

The decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT 2021 TaxPub(DT) 1208 (SC) has become a landmark case in India. The issue of taxability of software of a foreign company to an Indian company has remained a controversial one. A recent case before the Delhi ITAT while analyzing the issue has while given the decision in this respect by following the decision of the above mentioned case by Supreme Court.

1. Introduction

The Supreme Court in Engineering Analysis Centre ofExcellence Pvt. Ltd. v. CIT (supra) has observed that:

(i) Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts.

(ii) 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.

(iii) 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.

(iv) 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.