In Brief
A landmark Supreme Court judgment addresses whether payments for imported computer software attract tax deduction at source (TDS) under section 195 of the Income Tax Act, 1961. The Court held that software supplied through end-user license agreements (EULAs) and distribution agreements constitutes a sale of goods, not a transfer of copyright or royalty. The critical distinction is between parting with copyright (royalty) versus granting a restricted, non-transferable license to use copyrighted material (sale of goods). Non-exclusive licenses are ancillary to the supply, not transfers of copyright interests under Indian copyright law or Double Taxation Avoidance Agreements. Applying the doctrine of first sale and the OECD Commentary on Article 12 of DTAAs, the Court concluded no TDS obligation arises as software transactions are business profits under Article 7 of DTAAs, not royalties. The judgment reversed High Court of Karnataka decisions and approved Delhi High Court judgments, setting aside an Authority for Advance Rulings determination. It also clarified that retrospective amendments to tax law cannot impose impossible compliance obligations and that DTAA provisions prevail over domestic law when more beneficial to assessees."
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