Case Analysis; Engineering Analysis Centre of Excellence Private Limited versus CIT
Engineering
Analysis Centre of Excellence Private Limited versus CIT and Anr.
(The
Supreme Court of India)
I.
Introduction-
·
Engineering Analysis
Centre of Excellence Private Limited (‘EAC’), a resident Indian is an end-user of
shrink-wrapped computer software which is directly imported from the United
States of America.
·
It was construed by the assessing
officer after application of Article 12(3) of the Double Taxation Avoidance
Agreement [“DTAA”], between India and USA, and upon further application of
section 9(1)(vi) of the Income Tax Act, that what was transferred between the
parties was copyright which invoked the payment of royalty and it was required that
the tax be deducted at the source by end-user, EAC.
·
A bench of Justices; Justice R
F Nariman, Justice Hemant Gupta and Justice B R Gavai rejected
the argument of Income Tax Department stating that, ‘the purchase of software
is taxable as income arising out of India.’
·
The Apex court held that,
there is no liability for Indian end-user to deduct tax at source with respect
to purchase of software from foreign companies.
II.
Issues-
·
A great deal of ambiguities
has cropped up regarding the payment made to a non-resident entity for the
grant of use of computer software by an Indian business person.
·
The Income Tax Department
is treating such payment as royalty and accordingly, bringing the same to tax
in India.
·
The purview of royalty
under section 9(1)(vi) of Income Tax Act is quite wide whereas section 12 of
Double taxation avoidance agreement (DTAA) is restrictive.
·
Under the provisions of Article
7 of DTAA Act, payments made for the access of computer software are nature of
business profits and therefore the assesses cannot be liable for tax in India.
III.
Views
of lower courts-
·
The Karnataka High Court
in the case of Commissioner of Income Tax and another v. Samsung Electronics Co.
Ltd. had held that any or all payments extended to foreign company amounted to
'royalty' which thereby made the Indian purchasers duty-bound to deduct tax at
source u/s 195 of the Income Tax Act.
·
The Supreme Court of
India set aside the judgement given by Karnataka High Court and approved the
view of Delhi High Court in this particular case.
· The Delhi High Court adopted a very firm view that the amount received by the assessed under the license agreement for allowing the use of software is not royalty, because neither copyright is transferred nor there is any use of the copyright but, what is transferred is the right to use the copyrighted material which is different from rights in a copyright.
IV.
Supreme Court View
on ‘Taxation of payment made for foreign software’-
The Supreme Court dealt with four categories
of cases:
·
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 manufacture.
·
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.
·
The third category
concerns cases wherein the distributor happen 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.
·
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.
The court held that in none of the 4 categories the payment for using foreign software did not amount to ‘royalty’ which is taxable in India.
V.
Important
illustration given by Supreme Court-
“If
an English publisher sells 2000 copies of a particular book to an Indian
distributor, who then resells the same at a profit, no copyright in the
aforesaid book is transferred to the Indian distributor, either by way of
license or otherwise, since the Indian distributor only makes a profit on the
sale of each book.
Importantly, there is no right in the
Indian distributor to reproduce the aforesaid book and then sell copies of the
same.
On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of license or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the license.”
VI.
Conclusion-
·
The Supreme Court held
that there is no obligation on the persons mentioned Section 195 of the Income
Tax Act to deduct tax at source as the distribution agreements/EULAs in the
facts of this case do not create any right or in the end-users which would
amount to the use of or right to use any copyright. Therefore, the consequences
of section 201 of Income Tax Act will not fall on the resident companies for
not deducting TDS from the foreign companies.
·
No copyright of software
was given, so payment for user-license agreement doesn’t amount to royalty.
·
The Court noted that the
end-user license agreement of the software do not transfer of assign the
copyright over the software. What is granted to thee user is only a
non-exclusive, non-transferable license to resell computer software, it is
expressly stipulated that no copyright of the software program is transferred
to the end-user or the distributor.
·
The Supreme Court held
that the transaction is similar to a ‘sale of goods' as pronounced by the Apex
Court that- 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 program, and
is, therefore, a sale of goods, which, as has been correctly pointed out by the
learned counsel for the assesses, is the law declared by this Court in the
context of a sales tax statute in “Tata Consultancy Services v. the State of
A.P., 2005 (1) SCC 308”
·
“Given the definition of
royalties contained in Article 12 of DTAAs mentioned in paragraph 41 of this
judgment it is clear there is no obligation on the person 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 assesses have no application in the facts of these
cases”, the top court said in the 266- pages judgment.
·
The court also observed
that, non-resident Indian entity is liable to TDS only if is liable to pay tax
under the charging provision contained in the section 9 read with section 4 of
the Income Tax Act, read with DTAA.
· The court noted that DTAA with foreign companies will have application in this case. The definition of ‘royalty’ will have application.
Dhwani Naikwadi
Intern Team K&T Forlex
Mumbai | Pune | New Delhi | Singapore | Shanghai
#ktforlex #SupremCourt #Tax #ForeignSoftware #Royalty
Links referred-
2.
https://taxguru.in/income-tax/supreme-court-ruling-backs-taxpayers-software-royalty-case.html?amp
3.
https://www.scconline.com/blog/?p=244894
4.
https://indiankanoon.org/doc/101234995/
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