The Hon’ble Supreme Court on 2nd March 2021 in the case of Engineering Analysis Centre of Excellence Private Limited Vs CIT, put a rest to the contentious issue of tax on Payment by end users or tech companies in India to suppliers abroad on import of software as ‘Royalty’.

Let’s understand what was the issue and conclusion given by Hon’ble court.

Facts of the case

  • Engineering Analysis Centre of Excellence Pvt. Ltd. [“EAC”], is a resident Indian end-user of shrink-wrapped computer software, directly imported from the United States of America [“USA”].
  • The Assessing Officer by an order, found that what was in fact transferred in the transaction between the parties was copyright which attracted the payment of royalty and thus, it was required that tax be deducted at source by the EAC and EAC was held liable to pay the amount of Rs. 1,03,54,784. The appeal before the Commissioner of Income Tax [“CIT”] was dismissed. However, the appeal before the Income Tax Appellate Tribunal [“ITAT”] succeeded.
  • An appeal was made from the order of the ITAT to the High Court of Karnataka by the Revenue and court held that since no application under section 195(2) of the Income Tax Act had been made, the resident Indian importers became liable to deduct tax at source, without more, under section 195(1) of the Income Tax Act.
  • However, the view of the High court was set aside and the court remanded the matter to HC to decide –“whether, on facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not “royalty” and that the same did not give rise to any “income” taxable in India and, therefore, the appellant(s) was not liable to deduct any tax at source?”
  • After examination of the End User License Agreement [“EULA”] involved in the transaction, it was held by High Court that what was sold by way of computer software included a right or interest in copyright, which thus gave rise to the payment of royalty and would be an income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, requiring the deduction of tax at source.

Hon’ble Supreme Court grouped the issue into four categories-

1. The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer.

2. The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.

3. The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users.

4. The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.

Observation of the Hon’ble SC

  • Definition of Royalty in the DTAA VIS-À-VIS THE INCOME TAX ACT- Article 12 of the DTAA defines the term “Royalty” in sub article (3) thereof means payments of any kind that are received as a consideration for the use of or the right to use any copyright in a literary work.
  • As opposed to this, the definition contained in explanation 2 to section 9(1)(vi) of the Income Tax Act, is wider in at least three respects:

1. It speaks of “consideration”, but also includes a lump-sum consideration  which would not amount to income of the recipient chargeable under the  head “capital gains”;

2. When it speaks of the transfer of “all or any rights”, it expressly includes the      granting of a licence in respect thereof; and

3. It states that such transfer must be “in respect of” any copyright of any  literary work.

  • However, even where such transfer is “in respect of” copyright, the transfer of all or any rights in relation to copyright is a sine qua non under explanation 2 to section 9(1)(vi) of the Income Tax Act.
  • Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 it was held that by virtue of section 90(2) of the Income Tax Act, the DTAA would prevail over domestic law to the extent it is more beneficial to the deductor of tax under section 195 of the Income Tax Act.
  • Further, the Court noted that by perusal of End User License Agreement (EULA) what is granted to the distributor is only a non-exclusive, non-transferable licence to resell computer software, it is expressly stipulated that no copyright in the computer programme is transferred either to the distributor or to the ultimate end-user.
  • In all these cases, the “licence” that is granted vide the EULA, is not a licence in terms of section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the Copyright Act, but is a “licence” which imposes restrictions or conditions for the use of computer software.
  • Thus, it cannot be said that any of the EULAs that we are concerned with are referable to section 30 of the Copyright Act, inasmuch as section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of the Copyright Act.
  • Further, Hon’ble SC referred the State Bank of India v. Collector of Customs, (2000) 1 SCC 727 and found that though this judgment has been delivered under the Customs Act 1962, yet the important differentiation made between the right to reproduce and the right to use computer software has been recognized by the judgment. Whereas the former would amount to a parting of copyright by the owner thereof, the latter would not.
  • Moreover, It is noted that there can be no doubt as to the real nature of the transactions in the appeals. What is “licensed” by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by Court in the context of a sales tax statute in Tata Consultancy Services v. State of A.P., 2005 (1) SCC 308.


  • Given the definition of royalties contained in Article 12 of the DTAAs, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.
  • Amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases.

Author Bio

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

April 2021