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Amount Paid By Indian end-users To Use Foreign Software Not 'Royalty'; No TDS Liability: SC

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 enumerated by us in paragraph 4 of this judgment.” (Para 169)



Engineering Analysis Centre of Excellence Private Limited V/s The Commissioner of Income Tax & Anr.

CIVIL APPEAL NOS. 8733-8734 OF 2018 With 86 Ors.

Decided on 02nd March 2021

A Three-Judge Bench of the Hon’ble Supreme Court comprising of Justice R. F. Nariman, Justice Hemant Gupta, and Justice B.R. Gavai presided over the present case where similar cases have been clubbed together to provide speedy justice.

The appeals in these cases are by both the assessees as well as the Department of Revenue, Ministry of Finance [Revenue]. Whereas the assessees have succeeded in the question that was posed before the High Court of Delhi, the Revenue has succeeded insofar as the same question was posed before the High Court of Karnataka, and in the ruling by the Authority for Advance Rulings [AAR], impugned in C.A. No. 8990/2018.

The question which was posed before the High Court of Karnataka was answered stating that the amounts paid by the concerned persons resident in India to a non-resident, foreign software suppliers, amounted to royalty and as this was so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 [Income Tax Act], thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source [TDS] under section 195 of the Income Tax Act.

The contentions on behalf of the Appellants were as follows: (i) that the definition of “royalties” did not extend to derivative products of the copyright, for example, a book or a music CD or software products. Thus, no tax had to be deducted by the Indian importer under section 195(1) of the Income Tax Act. (ii) that there was a difference between copyright in original work and a copyrighted article, and that this was recognized in section 14(b) of the Copyright Act, which refers to a “computer program” per se and a “copy of a computer program” as two distinct subject matters. (iii) that the importer, being only a distributor, had no right to use the computer software, and merely purchased a sealed, shrink-wrapped product and resold it in the same, sealed condition, and thereby did not pay any consideration for any transfer of or interest in copyright.

Contentions on behalf of the Revenue Department were as follows: (i) that explanation 2(v) to section 9(1)(vi) of the Income Tax Act applied to payments to a non-resident by way of royalty for the use of or the right to use any copyright. For this, he relied upon the language of explanation 2(v) and stressed that the words “in respect of” have to be given a wide meaning. (ii) that the provisions for TDS are distinct from and exist apart from provisions for assessment under the Income Tax Act. This being so, it is clear that the India-USA Double Taxation Avoidance Agreement [ DTAA] and other such DTAAs would not apply to the persons spoken of in section 195 of the Income Tax Act who are not assessees, since the provisions of the DTAAs when read with section 90 of the Income Tax Act, applied only to persons who could be described as assessees. (iii) that section 51(b) of the Copyright Act makes it clear that when any person makes for sale or hire, or sells or lets for hire, or distributes, either for trade or to such an extent as to affect prejudicially the owner of the copyright, or imports into India, any infringing copies of the work, such importation into India without a license would amount to infringement of copyright.

In essence, a right is referred to as copyright when it includes the right to reproduce the work in any material form, issue copies of the work to the public, perform the work in public, or make translations or adaptations of the work. This is made even clearer by the definition of an “infringing copy” contained in section 2(m) of the Copyright Act, which in relation to a computer program, i.e., a literary work, means a reproduction of the said work. Thus, the right to reproduce a computer program and exploit the reproduction by way of sale, transfer, license, etc. is at the heart of the said exclusive right.

After hearing the arguments of from both the side, the Court was of the view that “Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, 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.” (Para 168)


Hence, this Court, in conclusion, stated that “Our answer to the question posed before us, is that the 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 enumerated by us in paragraph 4 of this judgment.” (Para 169)


The appeals from the impugned judgments of the High Court of Karnataka and of the High Court were allowed, and the aforesaid judgments are set aside. However, the appeals from the impugned order of the High Court of Delhi were dismissed. The ruling of the AAR in Citrix Systems (AAR) is set aside.



Risikesh Dhanaki

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