Author: Intern - Ashay Kaushik
In the matter of Engineering Analysis Centre of Excellence Private Limited v. The a Commission of Income Tax and Anr (2021 SCC OnLine SC 159)[i] a full bench (R.F. Nariman, J., Hemant Gupta, J., B. R. Gavai, J.) of the Hon’ble Supreme Court of India vide its order dated March 2nd 2021, held that the amount paid by a resident Indian end user/distributor to a foreign software manufacturer for a License to resale/use of such Software is not ‘royalty’ and thus is not taxable.
The Appellant is a resident Indian end-user of shrink-wrapped computer software, directly imported from the United States of America. The Respondents were of the view that since the sale of the software included a license to use the same, the payment made by the appellant(s) to foreign suppliers constituted “royalty” which was deemed to accrue or arise in India and, therefore it was required that tax be deducted at source by the Indian importer and end-user (Appellant) under Section 195(1) of the Income Tax Act, 1961.
The Court considered, inter alia, the relevant provisions under the Copyright Act, 1957 and its amending acts in detail and observed that- “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 of the Copyright Act.”
The Court further observed that the license between the parties was 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 in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods. Thus, the Court held that any amount paid for such license cannot be construed as ‘Royalty’ and is not taxable under the Section 195(1) of the Income Tax Act, 1961.
The Court concluded in its Judgement 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.”
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[i] https://main.sci.gov.in/supremecourt/2011/38137/38137_2011_33_1501_26629_Judgement_02-Mar-2021.pdf