Supreme Court Order Settled the Dust on the Legal Controversy on Taxability of International Software Supply Transactions?
1. Backdrop:
India witnessed a long-drawn controversy as regards taxability of payments for ‘Off-the-self software’ to non-residents, either for own use or for resell by distributors. A question that bothered various stakeholders for decades was whether the supply of packaged or off-the-shelf software under an End-User Licence Agreements (EULAs) or distribution agreements constitute ‘royalty’ for use of copyright in software or it constituted a ‘transfer of all or any rights’ in a ‘copyright’ or merely a sale of a copyrighted article, the so-called ‘copyright vs. copyrighted article’ distinction. The controversy got aggravated given the conflicting rulings of various Income Tax Appellate Tribunal, High Courts, the Authority for Advance Rulings (‘AAR’), and the Supreme Court.
2. Supreme Court Settles the Dust:
In May 2026, in a significant development in the field of international taxation, particularly on the two decade burning issue of taxability of software payments in respect of supply of software, the Supreme Court of India (SC), in the case of Commissioner of Income-tax v. Engineering Analysis Centre of Excellence (P.) Ltd. [2026], dismissed the Tax Authorities review petitions by endorsing its own landmark judgment delivered in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT [2021] (‘the 2021 SC Order’)
The SC reiterated and relied upon its earlier verdict given by a three-Judge Bench in CIT v. GE India Technology Centre (P.) Ltd. [2024], and gave a judgment in favour of the tax payers that payment for software supply does not tantamount to “royalty” as defined under the Income-tax Act, 1961 (IT Act) nor under the applicable Double Taxation Avoidance Agreements (DTAAs). (‘the 2024 SC Order’)
The SC Court delivered an authoritative resolution and settled the dust on the two decades lethal controversy, and reaffirmed that payments made by Indian end-users or distributors to non-resident software suppliers for the purchase or use of computer software do not constitute “royalty” under the IT Act or the DTAAs. Consequently, such payments are not taxable in India and are not subject to tax withholding under section 195.
3. Supreme Court’s 2021 Landmark Judgment in the Case of Engineering Analysis:
The controversy revolved around whether payments made by Indian customers or distributors to foreign software companies for the use or resale of software should be characterized as “royalty.”
The Revenue’s position was that software payments involved the use of copyright and therefore, fell within the definition of royalty both under the IT Act and the DTAA and consequently, attracted withholding tax obligations under section 195.
- Section 9(1)(vi) of the Income-tax Act, 1961;
- Relevant provisions of various DTAAs; and
The taxpayer argued that they merely acquired a copyrighted article (software) and not any rights in the underlying copyright. The software so purchased by the tax payer for its own use or for redistribution and that the foreign software supplier did not provide any copyright rights in the software as defined in the Copyright Act laws to the tax payers and the tax payers had very limited and restrictive rights of merely using the software for the intended purpose.
The SC considered the provisions of the IT Act, applicable DTAAs, commentary on different models of DTAAs, international commentaries and papers on the subject of software taxation, copy right laws and Indian judicial precedence on this subject. After considering multiple categories of software transactions and the jurisprudence, the SC held that such payments did not amount to royalty neither under the IT Act nor under the applicable DTAAs and consequently, not subject to Indian withholding tax regime. (‘the 2021 SC Order’).
Key Findings of the Supreme Court in Engineering Analysis (2021)
The Supreme Court observed that:
(1) EULA does not Transfer Copyright
An End User Licence Agreement (EULA) entered into between the foreign software supplier and the Indian customer or distributor for a specified purpose merely grants a limited right to use software subject to restrictions.
The user is not granted any rights that constitute ownership or exploitation of copyright right under the Indian Copyright Act, 1957.
(2) Distinction Between Copyright and Copyrighted Article
The Court emphasized the distinction between:
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- Transfer of copyright rights; and
- Sale or licensing of a copyrighted product.
Purchase of software for specified purpose of own use or resell only gives access to the copyrighted article and not to the copyright itself. There was no transfer of copyright rights by the foreign software supplier in favour of the Indian users or distributors that enabled it to them to alter, amend, modify, copy, transfer, create a derivative product, access to source code, and many more rights that the foreign software supplier has.
4. Revenue Authorities Challenging the 2021 SC Order by Filing Review Petition:
The Revenue Authorities challenged the position taken by the SC in its 2021 verdict by filing review petitions before the larger bench of the SC requesting the SC to reconsider its 2021 judgment. The principal objective was to revisit the Court’s interpretation regarding software payments and their characterization as royalty.
Unfortunately, before the present batch of review petitions, another set of review petitions against the same judgment had already been filed and decided by the SC in the case of CIT v. GE India Technology Centre (P.) Ltd. [2024] (‘the 2024 SC Order’).
5. Supreme Court’s Ruling of May 2026:
The Supreme Court dismissed the review petitions filed by the Revenue Authorities and declined to reopen the issue on the subject and the SC noted that earlier review petition in the case of CIT v. GE India Technology Centre (P.) Ltd. [2024] had already been dismissed. The SC categorically noted that the earlier bench of the SC in 2024 had examined the review petitions and found no justification for interfering with its 2021 verdict and that since the parties in the present petitions were similarly situated, there was no reason to revisit the issue again.
In the end, the SC followed its 2024 order and dismissed the review petitions filed by the Revenue Authorities in the case of Engineering Analysis.
6. Significance of the SC Ruling:
The dismissal of the review petitions in 2026 and reiterating its earlier verdict given in 2024 in the case of GE India further strengthens the legal position and provides certainty surrounding taxation of software payments in India.
The ruling has several important ramifications:
(1) Certainty for Indian Importers and Distributors
Indian businesses purchasing standard and “off-the-shelf” software from foreign suppliers can rely on the principle that such payments are generally not regarded as royalty and not taxable in India, provided no copyright rights are transferred by the foreign supplier in favour of the purchaser.
(2) Clarity on Withholding Tax Compliance:
The SC ruling reinforces the fundamental principles that withholding tax obligations under Section 195 of the IT Act arises only when the payment to non-residents is chargeable to tax in India. Further, where software payments merely relate to use of copyrighted products, withholding tax provisions should not be applicable and consequently, no adverse tax consequences should arise under the provisions of the IT Act for the tax payers.
(3) Alignment with International Tax Principles:
The SC judgment aligns the Indian taxation position with regard to taxation of software payments with internationally accepted principles distinguishing between:
-
- Copyright rights; and
- Copyrighted products.
This certainly enhances predictability for cross-border software transactions and boost confidence of global players.
(4) Reduction in Litigation:
The dismissal of successive review petitions by the SC vide its 2021 Order, 2024 Order and this May 2026 Order, substantially reduces the uncertainty over the issue of taxability of software transactions and strengthens the precedential value of the 2021 Engineering Analysis ruling.
Given the successive verdicts of the SC and that as per the principles of “interpretation of jurisprudence” SC ruling is treated as law of the land, being a supreme judiciary under the Indian judicial system, hopefully, the Tax Authorities may consider withdrawing their existing litigations on the subject with the same or similar fact pattern to save time, cost and efforts of all the stakeholder and thereby help in reducing litigation in respect of plethora of cases pending at various judicial forums in India.
7. Summing UP:
This Supreme Court’s verdict in the case of Engineering Analysis Centre of Excellence (P.) Ltd. [2026] marks another significant affirmation of the internationally accepted interpretation on taxation of software payments made by Indian end-users or distributors for the use or resale of standard computer software, without transfer of copyright rights, do not constitute royalty and therefore, not taxable in India nor subject to any withholding tax regime in India.
This SC verdict provides much-needed clarity and certainty for taxpayers engaged in cross-border software transactions and continues to remain one of the most significant rulings in India’s international tax jurisprudence.
In our humble submission, the CBDT should consider releasing a notification clarifying their position on taxation of software payments basis the series of orders of the SC and provide appropriate guidelines to the tax authorities or alternatively introduce retrospective amendments in the IT Act 1961 as well as amend the ITA Act 2025 with appropriate safeguards as this will go a long way in significantly reducing litigations on the subject and thereby provide a clarity, certainty and confidence to the Indian as well as global players.
The overall landscape of international taxation of cross-border transactions is transforming given the OECD/G20 Base Erosion and Profit Shifting (BEPS) framework, active participation of India on MLI and the ongoing work on Pillar One and Pillar Two seeking to reallocate taxing rights among participating countries. This would have impact of the issue of royalty characterisation also in respect of cross-border software and digital businesses. We will witness the evolving landscape of international taxation vis-a-vis cross-border transactions.
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Author: Jayesh Kariya, Partner and Leader Transaction and Business Advisory, Bhuta Shah & Co and Nishra Shah at BSC Advisors Pvt. Ltd.
