The expression ‘copyright’ has to be understood only as is stated in Section 14 and not otherwise. It is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. The ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. The transfer of the ownership of the physical substance, in which copyright subsists, gives the purchaser the right to do with it whatever he pleases, except the right to reproduce the same and issue it to the public, unless such copies are already in circulation, and the other acts mentioned in Section 14. When the owner of copyright in a literary work assigns wholly or in part, all or any of the rights contained in Section 14(a) and (b), in the said work for a consideration, the assignee of such right becomes entitled to all such rights comprised in the copyright that is assigned, and shall be treated as the owner of the copyright of what is assigned to him [See, Section 18(2) read with Section 19(3)]. A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under Section 30, which is a licence which grants the licensee an interest in the rights mentioned in Section 14(a) and 14(b). Where the core of a transaction is to authorize the end-user to have access to and make use of the ‘licensed’ computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by Section 52(1)(aa). It makes no difference whether the end-user is enabled to use computer software that is customized to its specifications or otherwise. Section 52(1)(ad) is independent of Section 52(1)(aa). Section 52(1)(ad) cannot be read to negate the effect of Section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in Section 52(1)(aa). A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in Section 14, or create any interest in any such rights so as to attract Section 30. The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in SBI v. Collector of Customs, 2000 (1) SCC 727 [Paragraph 21], the former amounting to parting with copyright and the latter, in the context of non-exclusive End-User Licence Agreements, not being so.

Section 14(b)(ii) was amended twice, first in 1994 and then again in 1999, with effect from 15.01.2000. What is conspicuous by its absence is the phrase “regardless of whether such copy has been sold or given on hire on earlier occasions”. This is a statutory recognition of Doctrine of First Sale/Principle of Exhaustion, explained by Copinger and Skone James on Copyright, 14th Edition. Doctrine of First Sale/Principle of Exhaustion is dependent, in the first place, upon legislation which either recognizes or refuses to recognize the Doctrine – thereby, continuing to vest distribution rights in the copyright owner, even beyond the first sale of the copyrighted work. Thus, for example, prior to the amendment of Section 14(d)(ii) in 2012, dealing with a cinematograph film, the distribution right to sell or give on hire or offer for sale or hire, any copy of the film, would continue to vest in the copyright owner, “regardless of whether such copy ha[d] been sold or given on hire on earlier occasion”, which manifested the legislative intent against the application of Doctrine of First Sale/Principle of Exhaustion. Post 2012, however, the balance between the copyright owner’s distribution right and the right of the purchaser to further resale, was tilted in favour of the latter, the words “regardless of whether such copy has been sold or given on hire on earlier occasion” being deleted by the amendment. Likewise, when it comes to Section 14(a)(ii), the distribution right subsists with the owner of copyright to issue copies of the work to the public, to the extent such copies are not copies already in circulation, thereby manifesting a legislative intent to apply Doctrine of First Sale/Principle of Exhaustion, as has been found in Warner Bros. Entertainment Inc. v. Santosh V.G., 2009 SCC OnLine Del 835. Like Section 14(d)(ii), Section 14(b)(ii), has, with effect from 15.01.2000, also deleted the words “regardless of whether such copy has been sold or given on hire on earlier occasions”, thereby making it clear the same tilt that had been made in Section 14(d)(ii) vide the amendment in 2012 in favour of the purchaser, is also to be found post the amendment in 1999 in Section 14(b)(ii).

The language of Section 14(b)(ii) makes it clear it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental “any copy of the computer programme”. Thus, a distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within the scope of the aforesaid provision. The sale or commercial rental spoken of in Section 14(b)(ii) is of “any copy of a computer programme”, making it clear that the Section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction of the same for sale or commercial rental. The object of Section 14(b)(ii), in the context of a computer program, is to interdict reproduction of the said computer programme and consequent transfer of the reproduced computer programme to subsequent acquirers/end-users. By way of contrast, once a book is sold, on further resale of the same book, the purchaser loses the material book altogether, as such purchaser has, for consideration, parted with the book once and for all. This may not be so in the case of a computer programme, which is why the ECJ in UsedSoft v. Oracle, Case C-128/11 held, unless a further resale of a computer software stored on a floppy disc/CD is accompanied by the destruction of the said software on the computer of the reseller/first acquirer, the copyright owner’s rights would be easily infringed by mere reproduction thereof. This is also recognized in Section 65A which punishes the circumvention of technological protection measures, such as encryption codes, product keys etc. designed to ensure that the first acquirer’s copy is made unusable. Thus, once it is understood the object of Section 14(b)(ii) is not to interdict the sale of computer software that is ‘licensed’ to be sold by a distributor, but that it is to prevent copies of computer software once sold being reproduced and then transferred by way of sale or otherwise, it becomes clear any sale by the author of a computer software to a distributor for onward sale to an end-user, cannot possibly be hit by the said provision. Further, the distributor cannot use the computer software at all and has to pass on the said software, as shrink-wrapped by the owner, to the end-user for a consideration, the distributor’s profit margin being that of an intermediary who merely resells the same product to the end-user.

We cannot accede to the argument made by Learned Additional Solicitor General. The distribution of copyrighted computer software, on the facts before us, would constitute the grant of an interest in copyright under section 14(b)(ii) thus necessitating the deduction of tax at source under Section 195 of The Income Tax Act, 1961.

– Hon’ble Justice R.F. Nariman, Engineering Analysis Centre of Engineering Private Limited v. CIT, [Civil Appeal Nos. 8733-8734 of 2018].