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Tax Implications on Import of Software

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.
Inland Revenue Authority of Singapore issued an e-Tax Guide on 8 February, 2013 to explain the
right based approach to characterize payments for software and the use of or right to use
information and digitalized goods for taxation purposes. This approach explained that distinction
need to be made to establish whether software payment is for the transfer of copyright right or
for a copyright article as tax treatment and implications of both are different.
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.
However, according to Article 12 of OECD Model Convention, Software is a programme or
series of programmes containing instructions for a computer required either for an operational
processes of the computer itself (operational software) or for the accomplishment of other tasks
(application software).
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?
According to Para 14.1 of OECD Commentary, method of transferring the computer program
to the transferee is not relevant. Therefore, direct tax implications would be the same in both the
above mentioned ways of importing the software. However, indirect tax implications differ in
both the said ways of import of software.
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 defines the term royalty as transfer of all or any
right for use of or right to use a computer software (including granting of a 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 nonresident. 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
The various indirect tax implications will arise in case of import of software some of which are
enumerated below:
Custom Duty: IT Software is classified under the tariff heading 8523 80 20 of the First Schedule
to Customs Tariff Act. The entry 8523 covers only that software which is stored on a tangible
media and not otherwise. Therefore, no custom duty will be levied in case of electronic
download of software. However, if software is imported by loading on CD, custom duty will be
levied @ 12%. Credit will also be available to importer for custom duty paid.
VAT: VAT is an indirect tax that varies from state to state. VAT of almost all the states provides
that sale of goods includes transfer of right to use goods. Here, discussing regarding the import
of software, so VAT will not be attracted. However, it is always a matter of litigation to impose
VAT on the same by tax authorities by making an effort to cover the said transaction within the
ambit of deemed sales.

Service Tax: Section 65B(44) of the Service Tax Act, 1994 defines the term service to mean any
activity carried out by a person for another for consideration and includes a declared service.
Import and export of services is governed by the Place of provision of Service Rules, 2012.
According to section 65(105)(zzzze)(v) and (vi) of Service Tax Law, taxable service means any
service provided or to be provided to any person, by any other person in relation to information
technology software, including(v) providing the right to use information technology software
for commercial exploitation including the right to reproduce, distribute and sell information
technology software and right to use software components for the creation of and inclusion in
other information technology software products.(vi)Providing the right to use information
technology software supplied electronically. Service tax is leviable @12.36%.
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.
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.
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