CA Garima Mittal

In this article, author attempts to outline the tax implications of imported software on the basis of judgments delivered by various authorities. For any query, author can be reached at email id: garimamittal@live.in

Introduction

In the recent years, the taxability of software payments has become hotly debated topic in the tax courts both in India and outside India.

Meaning of Software

The term software is generally understood to mean computer software though the term software is not restricted only to computer software.

As per Explanation 3 to Section 9(1)(vi) of the Income Tax Act, 1961 (‘the Act’), “computer software” means any computer programme recorded on any disc, tape perforated media or other information storage device and includes any such programme or any customized electronic data.

Tax Implications 

Generally, organizations enter into licensing agreement under which software is imported for using the same for business purpose. There are generally two ways of importing the software either by downloading it electronically or by loading it on CD. Now the issue arises whether the medium of import of software would have an impact on the transaction for taxation purpose?

There is a never-ending debate between tax payer and tax authority on whether software related payment made by resident to a foreign recipient is made towards transfer of copyright or copyright article.

Direct Tax Implications

Explanation 4 to section 9(1)(vi) of the Act clarifies that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of license) irrespective of the medium through which such rights is transferred.

Use/ right to use a copyright means that the recipient has a right to commercially exploit a copyright in the software.

As per Section 14(b) of Indian Copyright Act, 1957, copyright in the case of a computer program means the exclusive right obtained by any person to reproduce, copy, translate, or make any adoption of the computer program or to sell or give on commercial rental any copy of the computer program.

Also, the Novel Inc. case of Mumbai ITAT explicitly brings out the distinction between the terms copyright and copyright article. The extract of the same is as follows:

“The distinction between the transfer of a copyright and the transfer of a copyright product is prominent. Where the creator of an intellectual property allows another to exploit it commercially by taking the copies and selling it, but retaining the domain over such property with himself, the same is a case of transfer of copyright. If however, the creator himself exploits his work by converting it into end products ready for use and transfers the right to use such end products to another but not the further right to copy the same, it would be a case of transfer of a copyrighted product. The consideration in the former case would be royalty but that in the latter would be business profit.”

Various courts eg DIT vs Ericsson AB (343 ITR 470)(Delhi High Court), DIT vs Nokia Networks Oy (ITA 512/2007) confirmed the above mentioned distinction between copyright and copyright article.

Some of the recent cases of software payments are enumerated below:

In the case of Reliance Infocom Limited, assessee has acquired the software independent of the equipment. It has received a license to use the copyright in the software belonging to non-resident. The non-resident supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, Mumbai Tribunal held that the payment made was “for the use of or right to use copyright” and constituted royalty under section 9(1)(vi) of the Act and Article 12(3) of India-USA DTAA.

In the case of Convergys Customer Management Group Inc (2013) 58 SOT 69 (URO)Delhi Tribunal held that payment for Peoplesoft licence and maintenance charges fell within the category of copyrighted article and not towards acquisition of any copyright in the software. Reliance has been placed on B4U International Holding (ITA No 3326/Mum/2006) & Nokia Networks Oy (ITA No 512 of 2007). It further explained that even though Finance Act, 2012 has widened the scope of royalty by way of an amendment in section 9(1)(vi) of the Act, the same do not have an impact on the definition of royalty under India-USA tax treaty.

In the case of CIT vs Synopsis International Old Ltd.(2013) 212 Taxmann 454(Karn.)(HC), High Court held that it is not necessary that there should be a transfer of exclusive right in copyright and where consideration paid was for rights in respect of copyright and for user of confidential information embedded in software/ computer programme, it would fall within the mischief of Explanation 2 to section 9(1)(vi) of the Act and there would be a liability to pay tax.

In the case of Sonic Biochem Extractions P. Ltd. v ITO (2013) 23 ITR 447 (Mum.) (Trib.), though the decision was with regard to the claim of depreciation but Mumbai Tribunal at the time of giving ruling discussed that the mere purchase of software, a copyrighted article, for utilization of computers cannot be considered as purchase of copyright to called it royalty. Since the assessee did not acquire any rights for making copies, selling or acquiring software, explanation 2 to section 9(1)(vi) cannot be applied to purchase of copyrighted article which does not involve any commercial exploitation thereof.

In DIT vs Ericsson 343 ITR 470, Delhi High Court held that any software embedded in hardware and such software has no existence without such hardware, then the software so supplied will not be taxable as royalty. Since the facts of the case in Nokia were similar to Ericsson case, this aforesaid decision further followed by High Court in case of DIT vs Nokia Networks Oy (ITA No 512 of 2007).

After going through the provisions of the Act and Treaty and after analyzing the decisions of various tax courts, if assessee case falls within the ambit of term royalty, then withholding tax implications will also apply under section 195 of the Act. However, since section 90(2) of the Act states that non-resident is entitled to apply the provisions of the Act or the relevant treaty whichever is more beneficial, therefore comparison need to be made between the Act and Treaty so that assessee could withhold tax at lower rate.

Indirect Tax Implications

Goods and Service Tax Act, 2017 has been implemented nation-wide with effect from 1st July, 2017. Definition of import of services is contained under section 2(11) of the IGST Act and the same means –

Import of services means the supply of any service where –

1. The supplier of service is located outside India;

2. The recipient of service is located in India; and

3. The place of supply of service is in India.

Further, as per section 7(4) of the Central Goods and Service Tax Act, 2017, supply of services imported into the territory of India shall be treated to be supply of service in the course of inter-state trade or commerce.

If the services are covered within the scope of ‘import of service’ then tax would be payable by the recipient of service under GST.

Research & Development Cess Act, 1986: As per section 3 of Research & Development Cess Act, 1986, a cess is leviable by Central Government at a rate not exceeding 5% on all payments made towards import of technology.

According to section 2(h) of Research & Development Cess Act, 1986, “technology”means any special or technical knowledge or any special service required for any purpose whatsoever by an industrial concern under any foreign collaboration and include designs, drawings, publications and technical personnel.

One has to examine the said mentioned technology definition in order to attract Research and Development Cess Act, 1986 on import of software.

Conclusion

There are both direct and indirect tax implications on import of software. One has to carefully analyze its tax implications in light of various provisions under various Acts, the relevant tax treaty clauses, circular and notifications issued from time to time by various authorities and most importantly going through the relevant and recent case laws in order to reach at sound decision from tax perspective.

(Republished With Amendments)

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13 responses to “Tax Implications on Import of Software”

  1. Ram says:

    R & D cess was abolished as per knowledge.

  2. robert Banzouzi says:

    Good day,
    Just to know download software on digital content or only download software is dutiable in terms of Customs Act.

  3. Arun Kumar says:

    Please clarify the Taxes, Duties and withholding Tax applicable for non physical import of software from outside India

  4. Arun Kumar says:

    Please clarify the Taxes, Duties and withholding Tax applicable for non physical import of software from outside India

  5. Nitai Barik says:

    We are intend to download electronically software license from overseas. We need to inform to Customs??
    Any Customs duty pay to Customs. Please confirm.

  6. xyz says:

    can anyone confirm if there is any tax liability if software codes are imported digitally after GST rollout ?

    Incase there is any tax liability,what kind & how to avail ITC on it since digitally purchased goods dont pass customs so who assess it ?

  7. arun bhati says:

    how much tax a Canadian company like Coarl Corp should charge for their S/W in india

  8. suresh says:

    I am distributor from India buy software license by e- mail from usa and only distribute to re seller.what are the taxes applicable to my company please reply me to my mail id.

    I am not distributing re seller by emails, I do product packing in form of box include manual and CD for software installation.

  9. Abhishek says:

    Dear Madam,

    Is there any change in the treatment now i.e.any new case laws or change of law

    – Abhishek

  10. Abhishek Saxena says:

    Dear Madam,

    Is there any change in the current scenario i.e. any new case laws etc.

    Abhishek

  11. hema says:

    the information provided in the article was very useful as it was backed up with cases and conclusion on different context, i kindly request you to post articles on customs act by citing cases relevant to the act, only if time permits!!
    thanks for current and forthcoming articles!

  12. Hemanth G says:

    Excellent article.
    Please also add the case of using online access to website of ERP softwares like SAP, wherein the user resident of India and have access rights thru licenses granted against payment, without downloading any software. does it attracts sl.10 of notification 30/2012-S.T.??
    Hemanth Gulera

  13. Vijay Ajmera says:

    Please refer the para as mentioned above under service tax applicable on software “Transactions of import of software in physical media covered by clause (v), hence service tax shall be attracted if software loaded on CD. Transactions of import of software by electronic delivery covered by clause (vi), hence subject to service tax in case of electronic delivery. However, credit will be available to importer for service tax paid”.

    When import of software on CD media then custom duty is applicable hence when custom duty is paid on import of software OR excise duty has been paid on manufacuring of software on CD media then as per my understanding service tax is not applicable.There can not be dual taxation and same has been clarified under various judicial pronouncement as well as government has also clarified this.

    Please confirm on above.

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