Recognition of Doctrine of Copyright Exhaustion in Software in India

31st March, 2021 - 6:33 am Categories: Legal Issues 0 Comments

The Doctrine of Exhaustion, which is an internationally recognized legal principle, in layman’s terms, can be explained as a principle per which a copyright owner’s right over their creation, i.e., their right to control reproductions or copies of their work, exhausts whenever the ‘first sale’ is made by the owner or by taking their consent.

Such an owner’s right of distribution of their creation is restricted to selling the copy of the work copyrighted, once, and any subsequent sale of that copy performed whether with or without their consent would not be an infringement of the copyright that is subsistent in their work.

Such limitation proves to be vital in order to reconcile the exclusive right granted under the intellectual property laws as well as the demand for doing business in modern times, by exhaustion of the owner’s distribution rights after the first sale. Thus, the copyright holder’s right to control any subsequent change in the ownership of a particular copy of their work/creation ceases, once that copy is sold, provided no additional copies of the same are reproduced.

Recently, the Supreme Court of India in a case titled Engineering Analysis Centre for Excellence Pvt. Ltd. V. CIT has held that the amount paid by Indian companies for the usage of computer software that is developed by foreign companies, would not be considered as “royalty”, which is a taxable income in India. The case decided on March 2^nd, 2021, by the bench comprising of Justices R F Nariman, Hemant Gupta, and BR Gavai recognized the Doctrine of Exhaustion of Copyright in software and remarked upon the issues in copyright pertaining to End User License Agreements (EULA).

The 3 judges bench while hearing over 86 appeals clubbed together held that Indian companies or persons mentioned in Section 195 of the Income Tax Act, 1961, do not have any liability or obligation to deduct tax at source with respect to purchasing of software from foreign companies, as the EULAs as per the understanding of the facts of this particular matter will not be considered as licenses in terms of Section 30 of the Copyright Act, 1957 (“Act”) for they fail to transfer any rights as provided under Section 14 clauses (a) or (b) of the Act, to the Indian distributors.

There existed, previously, inconsistent decisions regarding the same passed by various High Courts including the Delhi High court’s decision in M/s Cast Software Inc., Delhi v. DCIT (International Taxation), New Delhi, also adopted by Madras High Court in the case of Commissioner Of Income Tax v. M/S Vinzas Solutions India, where the Delhi court was of the view that payment made for purchasing software from foreign companies would not amount to royalty and wouldn’t be taxable as income arising out of India, which was contrary to Karnataka High Court’s decision in Commissioner of Income Tax and another v. Samsung Electronics Co Ltd, where the division bench comprising of  Justices V.G.Sabhahit and Ravi Malimath while reversing a judgment passed by the Income Tax Appellate Tribunal held that considerations made to foreigner suppliers of computer software would be considered as royalty and would amount to income taxable in India.

The rationale given by the  Apex Court in the aforementioned Engineering Analysis Centre for Excellence Pvt. Ltd. case, was that what was granted to the distributor through the selling of the particular software was a non-transferable right/license to further sell the software and not the copyright in the software to the End-User or the distributor, thereby basically implying that the consideration that was provided to the assessee under the agreement that allowed the use of the software was not royalty as what was transferred was neither the copyright nor the use of it in the computer program/software but rather the right to use the article or the material that was copyrighted.

The court has recognized copyright exhaustion in computer software by observing mainly two amendments made in the Copyright Act, 1957 in the year 1994 and 1999, where it opined that the latter amendment re-established the doctrine of copyright exhaustion in software in Section 14(b)(ii) as the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions” was absent in it, thus giving statutory recognition to the doctrine of exhaustion.

Lastly, the Court also discussed the overriding effects of EULAs over the doctrine of copyright exhaustion by observing that even where the software is purchased directly by an End-User from a foreign supplier, the amount paid for using such software would not be considered as royalty as the right to re-sell the same would be restricted by the End-User License Agreement in such a circumstance.

Author: Hiba Nasir, a 5th Year student of B.A. LL.B. (Hons.) of Faculty of Law, Jamia Millia Islamia, intern at Khurana & Khurana, Advocates and IP Attorneys.  In case of any queries please contact/write back to us at aishani@khuranaandkhurana.com.