Hon’ble Supreme Court of India in the matter of Engineering Analysis Centre Private Limited vs. The Commissioner of Income Tax LL 2021 SC 124 has settled an important issue in income tax wherein it has been decided that the amount paid for software developed by the foreign companies and used by Indian Companies do not amount to “Royalty”, hence no tax to be deducted at source by the Indian companies.
BACKGROUND
That in the present case Engineering Analysis Centre Private Limited (“the company”) is an end user for shrink wrapped computer software which is imported directly from The United States of America (“USA”). As the company is resident Indian the assessing officer by an order dated 15.05.2002 and after applying Article 12(3) of Double Taxation Avoidance Agreement (“DTAA”) and Section 9(1)(vi) of the Income Tax Act, held that a transfer of copyright has taken place between the two parties therefore, it attracted the payment of royalty resulting in deduction of tax at source in the hands of the company.
That it was observed that for the relevant assessment year the deduction of tax at source was not done which subsequently resulted in attracting section 201(1A) of the Income Tax Act. The matter was contested in front of Commissioner of Income tax (“CIT”) where it got dismissed, whereas as and when it reached Income Tax Appellate Tribunal (“ITAT”) the same was succeeded, in which ITAT relied upon its own order passed in Samsung Electronics Co. Ltd. V Income Tax Officer, ITA Nos. 264-266/Bang/2002, wherein it was held that such transaction will not attract deduction of tax at source in the hands of the resident Indian.
Being aggrieved by the order of ITAT an appeal was filed by the revenue against the order of the ITAT to the High Court of Karnataka wherein it relied upon various judgements and held that since no application has been made under section 195(2) of the Income Tax Act, hence resident Indian importer became liable to deduct tax at source. Later, this view of the High Court of Karnataka was set aside by the Hon’ble Supreme Court of India in the matter of GE India Technology Centre (P) Ltd. V. CIT, (2010) 10 SC 29 wherein it was held that the High Court of Karnataka has misread the order relied upon. Resultantly, the matter was remanded back to the High Court to decide the same on merits.
ISSUE INVOLVED
Whether TDS liability will arise on the amount paid by the Indian companies for using foreign software in India.
APEX COURT VIEW
In the instant case, the Apex Court grouped the matter into four categories which has been explained below:
1.That computer software is directly purchased by the end-user who is resident Indian, from a foreign non-resident supplier or manufacturer.
- That resident Indian companies who act as distributors or resellers, by purchasing software from foreign non-resident supplier or manufacturer and then reselling the same to resident Indian end-user.
- That 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.
- Last category includes the cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign non-resident supplier to Indian resident distributor or end-user.
Before arriving on any of the conclusion, the apex court referred the definition of “royalties” contained in Article 12 of the DTAA, after analysing the definition the Hon’ble Apex Court construed that there is no obligation on the person mentioned in section195 of the Income Tax Act to deduct tax at source, as the distribution agreement / EULAs in the instant case do not create any interest or right in distributors or end-users, which would amount the use of or right to use any copyright.
That the Hon’ble Apex Court also concluded that provisions contained in the Income Tax Act under section 9(1)(vi) read with explanation 2 and 4 (which talks about royalty), not being more beneficial to the assesses and hence have no application in the instant case.
After analysing all the facts of the instant case, it was held by the apex court that the amounts paid by resident Indian distributor or end-user to foreign non-resident computer software manufacturers or suppliers, as consideration for the resale/use of the computer software through distribution agreements /EULAs, 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. Therefore,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.