Summary
The Supreme Court held that payments under the software distribution agreements and EULAs before it were for software copies, not the use of copyright, and did not attract royalty withholding under Section 195. The applicable DTAAs’ more beneficial definitions governed. Restricted installation, use and backup permissions did not transfer copyright rights. The holding covered all four transaction categories before the Court, including software embedded in hardware. Karnataka judgments and the adverse AAR ruling were set aside; Revenue’s appeals from Delhi judgments failed.
Issues
- Whether payments for software copies under the agreements constituted copyright royalties under the applicable DTAAs.
- Whether treaty protection applied when determining withholding under Section 195.
- What effect retrospective domestic amendments, licence restrictions and resale rights had.
Provisions considered
- Sections 90(2) and 195(1); Section 9(1)(vi), Explanations 2 and 4, Income-tax Act, 1961More beneficial treaty definitions governed chargeability and consequent withholding; domestic expansion could not unilaterally expand treaty royalty. (¶¶ 24-32, 53-85, 168-169)
- Sections 14(a), (b), 30 and 52(1)(aa), Copyright Act, 1957Copyright exploitation rights were distinguished from limited use of software copies and incidental installation or backup permissions. (¶¶ 33-39, 44-52, 97-118, 119-144)
- Royalty definitions, including India-Singapore DTAA Article 12(3), Applicable Double Taxation Avoidance AgreementsPayments for the copies under the agreements did not constitute consideration for use of or right to use copyright. (¶¶ 40-43, 62-73, 168-169)
Held
- Section 195 withholding depends on chargeability of the non-resident’s income, determined with the applicable DTAA. A payer must consider treaty protection; the decision concerning Section 194E did not govern this different statutory language. (¶¶ 25-32, 53-61)
- Ownership of a copyrighted copy differs from copyright itself. The agreements restricted end-users’ use and did not confer rights to reproduce and exploit the work as copyright holders; the distributor merely resold copies. Labels such as licence were not conclusive. (¶¶ 34-39, 44-52, 117)
- The more beneficial treaty royalty definition prevailed over the wider domestic definition. Explanation 4 expanded rather than merely clarified the earlier position; payers could not be required to perform past withholding based on an expansion not then on the statute book. (¶¶ 62-85, 100, 165)
- Resale of authorised copies already in circulation under these arrangements did not confer a copyright interest. The statutory first-sale analysis was tied to the relevant provisions and transactions, rather than unrestricted reproduction rights. (¶ 119-144)
- The OECD Commentary retained persuasive interpretative value. Unilateral positions or committee recommendations could not amend the bilateral treaty definitions. (¶ 145-162)
- No copyright royalty arose under the agreements in all four categories: direct end-user purchases, resident distributors, non-resident distributors and software embedded in hardware. There was therefore no corresponding Section 195 withholding obligation on these facts. (¶¶ 4, 168-170)
Result
Assessees’ appeals from Karnataka judgments allowed and those judgments set aside; Citrix AAR ruling set aside; appeals from Delhi judgments dismissed.