Issue/Justification
(a) Right to use a copyright vis-à-vis Right to use a copyrighted article
Internationally, as evidenced by OECD Commentary and opinion of eminent experts, the following two basic principles with regard to software payments are recognized and well settled:
(i) The proposition that “right to use a copyright” is different from “right to use a copyrighted article” is recognized and it is only the ‘right to use a copyright’ which is covered within the definition of royalty.
(ii) The distributor of computer software does not pay to exploit any rights in the software but only for acquisition of the software for further circulation. In view of these, payments made by a distributor to the copyrighter holder are in the nature of business income and not royalty income.
Also, ‘Packaged /Canned Software’ means ready-made software that could be sold off the shelf. Sale of such software products represent sale of copyrighted articles as against a copyright i.e. such transactions represent sale of goods. Packaged software has been held to be ‘Goods’ even by the Supreme Court in case of TCS vs. State of AP (271 ITR 401). The Central Board of Excise and Customs (“CBEC”) has recognized ‘Information Technology Software’ as ‘Goods’ and classified the same as Central Excise Tariff Item 8523 80 20 in Schedule I to the Central Excise Tariff Act, 1985. Further, ‘Packaged Software/Canned Software’ is recognized as ‘Goods’ for the purposes of Central Excise Law by the CBEC, which is another wing of the Ministry of Finance. These facts lead to the conclusion that ‘Packaged Software /Canned Software’ are in the nature of ‘Goods’ and the legislation also recognizes the same.
Given the above, it is recommended that a specific amendment be made to the Income-tax Act to exclude ‘Packaged/Canned Software’ from the purview of ‘royalty’ defined under Section 9(1)(vi). Further, in certain cases, these software products are downloadable from the internet and not necessarily delivered in tangible media such as a CD or a DVD. However, irrespective of the mode of delivery, the fact remains that what is sold is a ‘copyrighted article’ and not a ‘copyright’.
(b) Use of Standard facilities
The Apex Court in CIT Vs. Kotak Securities Limited has clarified that the common services which are necessary for carrying out trading in securities for which transaction charges are paid,
do not amount to technical services.
c) Exclusion of packaged software from applicability of TDS under Section 194J of the Income-tax Act
Circular No. 13/2006, dated 13.12.2006 issued by the CBDT states that TDS shall be applicable only when there is a ‘contract for work’ and not where there is a ‘contract for sale’. This proposition has also been upheld in various judicial precedents like BDA Limited vs. ITO (TDS) 281 ITR 99 (HC Bom), CIT vs. Dabur India Limited (283 ITR 197) (HC Del).
Considering the facts and arguments above, it is clear that transaction of sale of ‘Packaged / Canned Software’ is a ‘contract for sale’ as against a “contract for work’ and consequently, should not attract TDS provisions. It is relevant to note that ‘Packaged/Canned Software’ is also subject to excise duty. There are no other goods in India which are subject to both excise duty and TDS.
An amendment to the Incometax Act to exclude ‘Packaged/Canned Software’ from the purview of ‘royalty’ would automatically exclude the transactions from the purview of Section 194J of the
Income-tax Act and would help resolve the withholding tax issue faced by traders of hardware with embossed software. The distribution network and channel partners for off the shelf packaged software also deal with hardware like computers, desktop etc. The packaged software is mostly sold along with the hardware, on the same invoice. There is no obligation of TDS on any hardware items, and the traders are finding it confusing and difficult to discharge the TDS obligation arising out of the sale of the ‘Packaged Software/Canned Software’. Resolution of the definition of royalty to exclude ‘PackagedSoftware/Canned Software’ would also help traders and boost ease of business.
Separately, Software Ancillary Services such as Upgrade Fees, Subscriptions, etc. which do not involve transfer of rights, or grant of license but involve only payments of consideration for services is not ‘Royalty’ for the purposes of Section 194J read with Section 9(1)(iv) Explanation 2 of the Income-tax Act. Clarification may be issued that AMC’s, Upgrade Fees, Subscriptions, etc. which do not involve transfer of rights, or grant of license, but involve only payments of consideration for services is not “Royalty” for the purposes of Section 194J read with Section 9(1)(iv) Explanation 2 of the Income-tax Act and that such transaction are not liable for TDS under Section 194J of the Act.
Suggestion
It is suggested that payments for copyrighted article like shrink-wrapped software as also payments made by distributors of software be specifically excluded from the definition of “royalty”.
In view of decision of Apex Court in CIT Vs. Kotak Securities Limited an exception should be carved out in Explanation 6 to Section 9(1)(vi) so as to exclude payments for use of standard facilities to the general public at large like payments for telephone service, internet service, cable television services and other similar services.
To bring utmost clarity, it is also suggested that a specific amendment be made to Section 194J to exclude sale of software products from the ambit of tax withholding. In this regard, it is suggested that the following provision be included in Section 194J of the Act:
Amendment required
“194J. (1) Any person, …
Provided that no deduction shall be made under this section—
1. …
2. …
from any sums, if credited or paid for the transfer of a computer software (including the granting of a licence), along with or without a computer or computer-based equipment or for ancillary services such as up gradation or subscriptions, which does not involve transfer of all or any rights in respect of any copyright.”
