Deciding taxability of the software is currently a challenge, fortunately, Supreme court gave some remarks which will be helpful to decide taxability which is summarised below

Decision Engineering Analysis

• Test of charge ability is relevant for sec 195
• DTAA definition refers to “royalty means” and therefore it is exhaustive.
• Income tax definition has wider coverage on three counts
  • Lump-sum consideration
  • All and any rights
  • Respect of copyright
• Definition of all or any rights in respect of copyright is the same in both
• SC emphasis on
  • right or interest in software and
  • since the right to reproduce is prohibited it is not the copyright
  • copyright is an exclusive right – restricts others from doing a certain act
  • Ownership of copyright is different from ownership of the material in which copyright is embedded
  • A license does not confer any interest in software and therefore not the copyright
  • Even in the case of customise software the source code is not shared or shared in a very restrictive format and therefore complete exploitation of software is not permitted to the licensee
  • Right to reproduce software is different from the right to use software (SBI case 1 SCC 727)
  • The Doctrine of the first sale – exhaustive right to copy
  • In the case of distribution of shrink-wrap software, the distributor does not have the right to copy the software
• Therefore unless a license is u/s 30 of copyright act which grants an interest in or transfers rights – it should not construe as royalty
• In the case of software embedded in hardware what is sold is hardware and relies on Tata consultancy case
• SAAS service is where services are provided on an app base model where all the activities right from data, application till storage are provided by the service provider. Here are two possibilities
  • Apps are allowed to use for enjoying service but not to modify – not covered
  • Open source code is available with modifications rights also – might get covered under royalty
• PAAS is to use computer technologies without data and application but no right to reproduce
• IAAS provides storage and networking but not a copyright to use Equipment as modifications are not allowed
• Subscription of database – In Wipro Kart HC relied on Samsung case which is struck down by SC – it is access and not right in database – Treaty protects but Domestic law is litigative
• Shrinkwrap software – SC rules no TDS at the first place under royalty and notification 21/2012 exempting charge at the second level on a buyer should not get affected
• A Transaction where you have excess to know how or invention then can be royalty but standard facility use is not an invention and so not royalty