Solize Partners India Pvt Ltd Vs ITO (Karnataka High Court)
Software Bought, Copyright Not Caught: Karnataka HC Rules Standard Licences Aren’t Royalty u/s 9(1)(vi), No TDS Burden u/s 195
Summary:
In Solize Partners India Pvt. Ltd. v. Income Tax Officer, International Taxation, the Karnataka High Court considered the assessee’s appeal u/s 260A concerning AY 2010-11. The company was engaged in resale of computer-software licences, installation, training, services & technical consultation.
The assessee filed its original return declaring nil income & subsequently filed a revised return on 19.07.2011, again declaring nil income. During assessment, the AO treated payments made to non-resident software owners for purchase of standardised software as “royalty” both u/s 9(1)(vi) & Article 12 of the applicable DTAAs. The consequence was an obligation to withhold tax in India.
The AO later invoked section 154, purportedly rectified a mistake & recomputed the tax payable. The CIT(A), by order dated 29.05.2012, upheld the AO’s view. The Bangalore ITAT also sustained the assessment. The appeal papers describe the Tribunal’s order as dated 05.12.2013, while one paragraph of the High Court order mentions 05.12.2023, evidently an internal date inconsistency given that the High Court appeal itself was instituted in 2014.
Issues Before the Court
The principal issue was whether payments to non-resident suppliers for shrink-wrapped, off-the-shelf or standardised software represented royalty or merely consideration for purchase of copyrighted products.
The Court also had to consider whether obtaining a software licence transferred any right in the underlying copyright, whether the non-resident’s receipts constituted business profits not taxable without a Permanent Establishment in India, & whether the retrospective amendment to section 9(1)(vi) by Finance Act, 2012 could create a withholding obligation for past transactions or override treaty protection.
Assessee’s Contentions
The assessee contended that it obtained only copyrighted material, not the copyright itself or a right to use copyright. It could use or resell the standard software subject to licence restrictions but possessed no right to reproduce, adapt, commercially exploit or otherwise exercise the exclusive rights belonging to the copyright owner.
Accordingly, the payments were consideration for goods or copyrighted articles. They constituted business income in the hands of non-resident suppliers & were not taxable in India in the absence of a PE. If the income was not chargeable in India, no withholding obligation arose.
The assessee also challenged reliance upon the retrospective Explanations inserted into section 9(1)(vi). A later domestic-law amendment could neither retrospectively create an impossible TDS obligation at the date of payment nor expand the narrower royalty definition in a DTAA.
Revenue’s Position
The AO, CIT(A) & Tribunal had proceeded on the basis that acquisition of software licences involved use of intellectual property & therefore generated royalty. This approach reflected the earlier Karnataka High Court understanding associated with Samsung Electronics Co. Ltd.
However, during hearing of the present appeal, both parties brought to the Court’s notice that the questions were identical to those considered in ITA No.698/2023, which a co-ordinate Bench had rejected on 12.08.2025. The High Court also found the controversy conclusively governed by the Supreme Court’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, (2022) 3 SCC 321. The order records no surviving independent Revenue contention capable of distinguishing that binding authority.
Court’s Findings & Legal Reasoning
The High Court held that all substantial questions stood answered by Engineering Analysis. The Supreme Court had drawn a decisive distinction between acquiring a copyright & purchasing a copyrighted article. A standard software licence permitting use of a copy, without granting rights of reproduction, adaptation, public distribution or commercial exploitation contemplated by copyright law, does not transfer copyright rights.
Therefore, consideration paid under such arrangements does not fall within “royalty” under the applicable DTAAs. The non-resident supplier’s receipt is ordinarily business income; absent a PE in India, it is not taxable here. Consequently, section 195 does not require tax deduction because that provision applies only to a sum chargeable to tax in India.
The treaty analysis remains decisive notwithstanding an expanded domestic definition. A retrospective amendment to section 9(1)(vi) cannot automatically amend the DTAA. Further, a payer cannot be treated as having defaulted for failing to anticipate a later retrospective amendment when making earlier remittances.
Applying this binding law, the Court answered the substantial questions in favour of the assessee & against Revenue, allowed the appeal & granted all consequential benefits.
Practical Implications
The ruling confirms that software payments must be classified by examining the actual rights conveyed, not merely by the presence of the words “licence” or “software”. Agreements restricting the customer to use of a copy, without exploitation rights in copyright, support treatment as purchase of a copyrighted article rather than royalty.
Taxpayers should retain end-user licence agreements, distribution contracts, invoices, PE declarations & tax-residency documents to demonstrate the transaction’s character. Bespoke transfers granting reproduction or commercial exploitation rights may still produce a different result.
The judgment also closes legacy disputes based upon the overruled Samsung approach: a licence to operate software is not a licence to exploit copyright-without copyright rights, royalty taxation & consequential TDS cannot survive.
Cases Discussed
- Engineering Analysis Centre of Excellence Private Limited Vs CIT (Supreme Court)
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The above appeal by assessee under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) is directed against the order dated 05.12.2023 in ITA No.936/B/2012 (Annexure – A) and also to quash any recovery or other proceedings instituted pursuant to the directions issued thereunder raising the following substantial questions of law:
“a) Whether, the Tribunal was right in characterising the payments made by the Appellant to non-resident software owners for purchase of standardized software as royalty both under Article 12 of the applicable DTAA’s and section 9(1)(vi) of the Act and therefore subject to withholding of tax under the Act?
b) Whether the Tribunal has erred in upholding the order of the CIT(A) without appreciating that what was transferred to the Appellant was a copyrighted material which was distinct from rights in a copyright i.e. neither the copyright in the software nor the use of the copyright in the software was transferred and nor did the Appellant have the right to make copies of the software for commercial exploitation and hence cannot be categorized as royalty?
c) Whether the payments for purchase of shrink wrap software / off the shelf /standardized software is akin to purchase of goods which is treated as business profits/income of the non-resident and not royalty and hence not taxable in India in absence of the non-resident seller having a Permanent Establishment in India? Whether the decision of the Hon’ble Karnataka High Court in case of Samsung Electronics Co., Ltd (supra) is applicable to the Appellants case in view of the fact that the Appellant’s case differs from the facts in Samsung Electronics Co., Ltd. case on various grounds and therefore the ruling would not be applicable in the present case?
d) Whether the retrospective amendment to section 9(1)(vi) of the Act by the Finance Act, 2012 could impose an obligation on the Appellant to withhold taxes under the applicable DTAA’s, and without prejudice to the same, for transactions entered in the past?
d) Whether the retrospective amendment to section 9(1)(vi) of the Act by the Finance Act, 2012 could impose an obligation on the Appellant to withhold taxes under the applicable DTAA’s, and without prejudice to the same, for transactions entered in the past?”
2. Heard learned counsel Ms.Preksha R Lalwani for Sri.Kumar Ram Raghuram Cadambi and Sri.Aditya Matolli for the appellant – assessee and learned counsel Sri.M Dilip for the respondent – revenue. Perused the entire appeal papers.
3. It is stated that the appellant – company is engaged in the business of re-sale of computer software licenses, services, installation, training and technical consultation. It is stated that the appellant – company filed return for the Assessment Year 2010-11 declaring nil income and, thereafter, appellant – company filed revised return of income on 19.07.2011 again declaring nil income. While assessing the return of the appellant, the payments made by the appellant to non-resident software owners was treated as royalty under the applicable DTAA as well as the provisions of the Act by the Assessing Officer. Aggrieved by the same, the appellant filed appeal before the Commissioner of Income Tax (Appeals)-IV, Bengaluru (hereinafter referred to as ‘the CIT(Appeals)’) and it is stated that, in the meanwhile, the Assessing Officer under Section 154 of the Act after providing an opportunity to the appellant, suo moto rectified an alleged mistake and recomputed the tax payable by the appellant. The CIT(Appeals) passed order on 29.05.2012 upholding the order passed by the Assessing Officer. Against the order of the CIT(Appeals), it is stated that the appeal was filed before the Tribunal. The Tribunal under impugned order upheld the order of the CIT (Appeals) as well as the assessment order.
4. During the course of hearing, learned counsel for the parties brought to our notice that the substantial questions of law raised herein are identical to substantial questions of law raised in ITA No.698/2023 preferred by revenue, which was rejected by judgment of Co-ordinate Bench of this Court dated 12.08.2025. Further, we are of the opinion that the substantial questions of law raised herein are answered by the Hon’ble Apex Court in Engineering Analysis Centre of Excellence Private Limited Vs CIT and Another, reported in (2022) 3 SCC 321.
5. In the light of the above, the appeal deserves to be allowed. Accordingly, substantial questions of law raised are answered in favour of the assessee and against the revenue. In view of the above, the appellant – assessee would be entitled for all consequential benefits.
