Reselling foreign software in India: payments for resale are not royalty, but goods and services tax and exclusivity terms still bind

In Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax, decided on 2 March 2021, the Supreme Court held that a payment by an Indian distributor or end user to a foreign supplier for the resale or use of software under a distribution agreement or an end-user licence agreement is not royalty and gives rise to no income taxable in India, so no duty to deduct tax arose under section 195 of the Income-tax Act, 1961. The successor withholding rule for payments to non-residents is section 393(2) of the Income-tax Act, 2025. The ruling does not decide goods and services tax (GST) on imported software or software as a service (SaaS), and it does not touch the limits that section 3(4) of the Competition Act, 2002 places on exclusive distribution.

What is the licence chain when foreign software is resold?

Three documents usually sit in a line. The vendor and the Indian distributor sign a distribution agreement. The vendor and each Indian customer are bound by an end-user licence agreement (EULA). Between them, the distributor passes on a key, copy or login. In a SaaS arrangement the third document is a subscription contract, and there is no copy to pass on.

Which document grants what decides the tax and the termination position. If the distributor may only sell copies the vendor has produced, it holds no interest in the copyright and the customer's right to use comes from the EULA. If it may reproduce, host or sub-licence the software, it is a licensee of the copyright, and the payment looks different in law.

What did the Supreme Court hold in 2021?

The judgment is Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax, Civil Appeal Nos. 8733-8734 of 2018 and connected appeals, decided on 2 March 2021 by Nariman, Gupta and Gavai JJ. The appeals fell in four groups, including an Indian distributor buying from a foreign supplier and reselling in India, and a foreign distributor reselling to Indian distributors or users.

Its answer, in paragraph 169, covers all four groups. Amounts paid by resident Indian end users or distributors to non-resident software suppliers, as consideration for the resale or use of the software through EULAs or distribution agreements, are not royalty for the use of copyright and give rise to no income taxable in India. The payers named in section 195 were therefore not liable to deduct tax. The Court allowed the appeals from the Karnataka High Court and dismissed those from the Delhi High Court.

The reasoning has two limbs. Section 14(b)(ii) of the Copyright Act, 1957 reserves to the owner the right to sell copies of a computer programme, and the Court read it as aimed at reproducing the programme and selling the reproductions. A distributor who buys a copy and passes it on reproduces nothing and acquires no interest in the copyright. And the royalty definition in the double taxation avoidance agreements before the Court did not reach such payments; under section 90(2) of the 1961 Act the treaty prevails where it is more beneficial, and the domestic definition was not.

Does the holding carry into the Income-tax Act, 2025?

Since 1 April 2026, withholding on payments to non-residents sits in section 393(2) of the Income-tax Act, 2025. Serial number 17 of its Table is the residual entry: any other sum chargeable under the Act, other than salary, paid to a non-resident who is not a company or to a foreign company, with tax deducted at rates in force. Note 3(b) extends the duty to every payer, resident or non-resident, whether or not a non-resident payer has any residence, business connection or other presence in India. On its words that entry reads as the successor to section 195.

Two provisions carry the law on which the 2021 holding rested. Section 9(6)(c)(i) says that the transfer of rights in respect of property includes the transfer of a right to use computer software, including by licence, whatever the medium; that is Explanation 4 to old section 9(1)(vi), which the Court held did not displace the treaty. Section 159(4) provides that where an agreement with another country applies to an assessee, the Act applies only to the extent it is more beneficial. Our position is that the 2021 reasoning applies to the same facts under the new text, though no court has yet applied it to section 393(2).

How is goods and services tax charged on software and SaaS from abroad?

The 2021 judgment does not bear on goods and services tax (GST). Section 2(17) of the Integrated Goods and Services Tax Act, 2017 defines online information and database access or retrieval (OIDAR) services as services whose delivery is mediated by information technology over the internet or an electronic network and whose supply is impossible to ensure without information technology. Its list includes cloud services and the supply of software over a network.

Section 13(12) makes the place of supply of OIDAR services the location of the recipient, who is deemed to be in India if two non-contradictory conditions are met, such as an Indian billing address or bank account. Under section 14, where a supplier outside India sells to a non-taxable online recipient, defined in section 2(16) as an unregistered person, including a person registered only as a tax deductor under section 24(vi) of the Central Goods and Services Tax Act, 2017, the foreign supplier pays the integrated tax after a single registration under the simplified scheme.

A reseller is registered and is not such a recipient. Serial number 1 of Notification No. 10/2017-Integrated Tax (Rate), made on 28 June 2017 under section 5(3), puts the whole integrated tax on reverse charge for any service supplied from a non-taxable territory to a person in India other than a non-taxable online recipient, so the Indian buyer accounts for the tax. Item (ii) under heading 9973 of Notification No. 8/2017-Integrated Tax (Rate), as it stands on 3 November 2026, lists the temporary or permanent transfer, or permitting the use or enjoyment, of intellectual property rights in information technology software at 18 per cent.

Where does the Competition Act limit exclusivity?

Section 3(4) of the Competition Act, 2002 covers agreements between enterprises at different levels of the production chain. It names tie-in arrangements, exclusive supply, exclusive distribution, refusal to deal and resale price maintenance, and treats them as contravening section 3(1) only if they cause or are likely to cause an appreciable adverse effect on competition in India. An agreement that contravenes section 3(1) is void under section 3(2).

The Competition (Amendment) Act, 2023 changed the sub-section, and its section 4 came into force on 18 May 2023 under Notification S.O. 2228(E). The sub-section now begins 'any other agreement', so the named categories are examples. The Explanation covers services as well as goods, which brings a SaaS distributor within it, and exclusive supply became 'exclusive dealing', which restrains the purchaser or the seller.

Section 3(5) leaves untouched the right to restrain infringement of, or to impose reasonable conditions to protect, rights under the Copyright Act, 1957 and the other intellectual property statutes it lists, and the 2023 Act added any other law protecting intellectual property. A territory limit or anti-copying term protecting the vendor's copyright sits inside that carve-out. A term fixing the distributor's resale price, or barring it from carrying a competing product, is judged under section 3(4) and the appreciable adverse effect test. A new proviso takes an agreement between an enterprise and an end consumer outside section 3(4), so the EULA with an end customer is not tested there.

What happens on termination?

The licence chain decides the effect. Where the customer's rights come from the vendor's EULA, ending the distribution agreement does not by itself end the customer's licence. What ends is the distributor's right to buy and resell, and with it the support and renewal work it did. A sub-licence from the distributor depends on the head licence and may fall with it unless the agreement says otherwise.

A distribution agreement therefore tends to deal with notice, a sell-off period for stock already bought, who supports existing customers afterwards and for how long, and return or deletion of data in a SaaS tenancy. A restraint on the former distributor after the relationship ends meets section 27 of the Indian Contract Act, 1872, which makes an agreement in restraint of a lawful trade void to that extent.

Which law and forum govern a dispute?

The Arbitration and Conciliation Act, 1996 treats arbitrations seated in India differently from the enforcement of foreign awards, so the seat sets which court supervises and how an award is enforced. A foreign governing law does not remove the Competition Act, 2002 or the tax statutes, which apply to the conduct and the payment in India whatever the contract says.

What do the numbers look like?

An illustration. The reseller, vendor and figures are hypothetical. The treaty rate is chosen for arithmetic only and is not any treaty's rate. GST is taken at 18 per cent, and the reseller is registered and able to claim credit on its inputs.

An Indian reseller buys 100 seat licences from a foreign vendor
  Price paid to the vendor                                 INR 10,00,000
  Price charged to Indian customers, before tax            INR 12,00,000
  Gross margin                                             INR 2,00,000

Withholding on the payment to the vendor
  Treated as resale, as in the 2021 judgment               nil
  If treated as royalty at a hypothetical 10 per cent      INR 1,00,000
  If the contract grosses up so the vendor nets
  INR 10,00,000: gross payment                             INR 11,11,111
    Tax deducted                                           INR 1,11,111
    Margin after the gross-up                              INR 88,889

GST on the same chain (the resale case, no withholding)
  Reverse charge on the import, 18 per cent of 10,00,000   INR 1,80,000
  Output tax on the sale, 18 per cent of 12,00,000         INR 2,16,000
  Net GST after credit on the import                       INR 36,000
  The net equals 18 per cent of the INR 2,00,000 margin

The gross-up shows why characterisation matters: the margin would fall from INR 2,00,000 to INR 88,889, before income tax. The reverse charge is cash out and credit in the same period, so the net GST is the tax on the margin.

What remains unsettled?

Three points.

Whether payments for SaaS or cloud access are royalty. The Court dealt with shrink-wrapped and downloaded software, and its reasoning rests on no copyright interest passing to the payer. A hosted subscription passes no copy at all, but the judgment does not decide how section 9(6) of the 2025 Act treats it.

Whether the holding stands without a treaty. The conclusion that the domestic definition was not more beneficial presupposes a treaty. For a vendor in a country with no agreement with India the domestic text of section 9(6)(c)(i) is the operative one, and the copyright reasoning would have to carry the argument alone.

How the Competition Commission of India will apply the amended section 3(4) to software distribution. The 2023 text is recent, so the line between a protected intellectual property condition and an exclusivity restraint is drawn case by case.