Global Tax Alert | 18 September 2013

Mumbai Tribunal characterizes payment for computer software as royalty payment

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Executive summary

This Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (Tribunal) in the case of Reliance Infocom Ltd. (Taxpayer)1 on the issue of whether consideration for software would be in the nature of a royalty payment under the Indian Tax Laws (ITL) and the applicable Double Taxation Avoidance Agreements (treaties).2 The Taxpayer, an Indian telecom company, had purchased wireless network equipment from various vendors. It had also entered into stand-alone agreements with the same vendor and other foreign companies for software specific to the equipment supplied. On the facts, the Tribunal held that the payment for a software license under a stand-alone agreement (i.e., which is not integral to the equipment purchase) is consideration for the transfer/use of a copyright and is taxable as a royalty, both under the ITL and the relevant treaties.


”Royalty” is defined in the ITL to mean consideration for the transfer of all or any rights (including the granting of a license) in respect of any copyright. The definition of “royalty” under the ITL was amended by the Finance Act, 2012 to clarify that the transfer of all or any rights in respect of any right, property or information includes right for use/to use computer software (including the granting of a license), regardless of the medium through which such right is transferred. The comparable definition under various treaties define “royalty” to mean consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work.

In order to establish a wireless telecommunications network in India, the Taxpayer, entered into a contract with an Indian company (ICo) for the supply of hardware, software and services for establishing the network. The software supply contract was thereafter assigned by ICo to its Foreign Group Company (FCo) under a tripartite agreement between the Taxpayer, FCo and ICo. FCo supplied software under this agreement.

The Taxpayer also entered into similar software supply contracts with other FCos.

The Taxpayer applied to the Tax Authority for a zero withholding tax order on the payments. The Tax Authority considered the payments as royalties and, hence, taxable for the recipient.

On appeal by the Taxpayer, the First Appellate Authority observed that the Taxpayer was prohibited to decompile, reverse engineer, disassemble, decode, modify or sub-license the software, as per the agreements. Also, the agreement provided for returning the software to FCo after the termination/cancellation of the agreement. Based on these facts, the First Appellate Authority held that the Indian Copyright Act was inapplicable and, as the Taxpayer only had a “copy of software” without any part of “copyright of the software,” the payments did not amount to royalty under the treaties. The Tax Authority appealed before the Tribunal. The Taxpayer contended that the main purpose of entering into various contracts was for setting up a mobile network and that the software did not work without the equipment. The Taxpayer argued that the equipment-specific software was nothing but a computer technology that would result in network communication when used with the equipment.

Tribunal's ruling on taxation of software as a royalty

The Tribunal noted that the distinction between a “copyrighted article” and “copyright,” as brought out by the Special Bench of the Delhi Tribunal3 (SB) and approved by the Delhi High Court (HC),4 was that the purchase of software along with hardware is purchase of a “copyrighted article” and no “copyright” was involved. But, in these decisions, the software was supplied along with hardware as part of the equipment and there was no separate sale of software. Software was an integral part of the supply of equipment for telecommunications, generally called embedded software.

Though the Tribunal agreed with the Delhi HC decisions in the cases of Nokia5 and Erickson6 on principles, it distinguished them on facts. The Tribunal held that the Delhi HC decisions were in the case of supply of software along with hardware as an embedded software, whereas, in the present case, the Taxpayer purchased the software by virtue of a stand-alone “software license agreement.” The software was neither an integral part of the purchase of equipment nor was it embedded software. The delivery was separate, in the form of CDs, mostly abroad and was installed in India separately.

The Tribunal held that FCo transferred a license to use its copyright to the Taxpayer where FCo continued to be the owner of the copyright and all other IPRs. The Tribunal further held that “copyright” is an umbrella of many rights. The license granted for making use of the “copyright” in respect of shrink-wrapped software/off-the-shelf software, authorizing the end user to make use of its own network equipment, would also amount to transfer of part of the copyright. Consequently, this would amount to transfer of “right to use the copyright” for internal business.

The Tribunal specifically dealt in detail with the Karnataka HC decisions in the cases of Samsung [345 ITR 494 (Kar)]7 and Synopsis International [212 Taxman 454 (Kar)]. The Tribunal observed that the facts in the present case were similar to the ones considered by the Karnataka HC in the case of Samsung wherein it was held that the end users of the computer program were granted a “copyright” where they were granted a license to make copies of the computer program for back-up or archival purposes. Reliance was also placed on another Karnataka HC decision in the case of FCo's group company, Lucent Technologies [348 ITR 196 (Kar)],8 wherein, under similar facts as in the present case, it was held that payment for the purchase of a copy of a computer program that was supplied as a bundled contract, along with hardware on which the computer program was to be installed, was taxable as a royalty. In light of the above decisions, that too in the case of FCo's group company itself on the same terms of agreement as that of the Taxpayer for supply of software, the Tribunal followed the decisions of the Karnataka HC.

Payment made by the Taxpayer to FCo and various other suppliers was said to be a royalty.


This Tribunal ruling adds to the many rulings that currently exist on taxation of cross-border computer software transactions. Characterization of cross-border software payments, either as a royalty or as business profits, has been a contentious issue in India. Characterization as a royalty would be subject to withholding tax, whereas characterization as business profits would not be taxable in the absence of a business presence/permanent establishment of the foreign enterprise in India. As the issue is currently pending before the Supreme Court (SC), finality may be reached once the matter is decided by the SC. However, this ruling suggests that, where facts are similar to the ones considered by the SB and the Delhi HC (i.e., software embedded in the equipment/hardware), the payments could still be protected and would not be regarded as a royalty.


1. DDIT(IT) v. Reliance Infocom Ltd. (now known as Reliance Communications Ltd.) [TS-433-ITAT-2013(Mum)]. Various group companies of Reliance and Lucent Technologies GRL LLC, USA were the other respondents.

2. India's treaties with the US, Israel, China, Sweden, Singapore, Japan, Australia, Canada, UK and Netherlands.

3. Motorola Inc. [(2005) 270 ITR (AT) 62].

4. Erickson [343 ITR 370] and Nokia Networks [25 225].

5. See EY Tax Alert dated 14 September 2012.

6. See EY Tax Alert dated 28 December 2011.

7. See EY Tax Alert dated 30 November 2011.

8. See EY Tax Alert dated 19 December 2011.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India), Mumbai
  • Sudhir Kapadia
    +91 22 6192 0900
Ernst & Young LLP (India), Hyderabad
  • Jayesh Sanghvi
    +91 40 6736 2078
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
  • Nachiket Deo
    +44 20 778 30862
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
  • Gagan Malik
    +65 6309 8524
Ernst & Young LLP, Indian Tax Desk, New York
  • Tejas Mody
    +1 212 773 4496

EYG no. CM3807