Engineering Analysis Centre of Excellence (P.) Ltd . v. CIT – [2021] 125 taxmann.com 42 (SC)

Short Overview :

Assessee-Engineering Analysis Centre of Excellence Pvt. Ltd. was a resident Indian end-user of shrink-wrapped computer software, directly imported from the United States of America (USA).

Assessing Officer (AO) held that what was transferred between parties was copyright which attracted the payment of royalty.

 Thus, tax was required to be deducted at source by the Indian importer and end-user while making payment.

AO treated assessee as assessee-in-default for non deducting TDS on royalty payments.

The Supreme Court of India held that as per 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 to deduct tax at source.

This is because the distribution agreements or EULAs 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 of section 9(1)(vi), along with Explanations 2 and 4 thereof, which deal with royalty, couldn’t be applied also as same not being more beneficial to the assessees in comparison to provision contained in DTAAs.

Accordingly, 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, was not the payment of royalty for the use of copyright in the computer software.