Payment to UK company for providing access to software to member firms is not taxable: Delhi HC

Ey Global Services Limited vs Assistant Commissioner Of Income (W.P.(C) 11957/2016 & CM 27602/2021)

Short Overview of the case:

Facts:

1. The EYGBS (India) Private Limited is an Indian company engaged in providing back-office support and data processing services.

2. In terms of the Service Agreement and the MOU, EYGBS merely receives the right to use the software/technology/licenses and other support services procured by the EYGSL (UK) from third-party vendors. These services were further provided by EYGBS to all member firms of the EY network.

3. The question was whether the above services are in the nature of Royalty and fees for technical services chargeable to tax.

4. The AAR held that the consideration received from giving right to benefit from the computer software procured from several third party vendors (deliverables) is in the nature of royalty under Article 13 of India -UK DTAA as well as Sec 9(1)(vi) of the Act whereas consideration received for giving right to benefit from services is not in the nature of royalty under Article 13 of the India-UK DTAA.

The Hon Delhi HC held as below:

1. EYGBS merely receives the right to use the software procured by the EYGSL (UK) from third-party vendors. In determining whether the right to use software falls under royalty definition, the rights acquired by the EYGSL (UK) from the third-party software vendors are not relevant. What is relevant is the Agreement between the EYGSL (UK) and the EYGBS (India).

2. As the above agreement does not create any right to transfer the copyright in the software, the same would not fall within the ambit of the term royalty as held by the Supreme Court in Engineering Analysis Centre (2021 SCC OnLine SC 159)

Notes: 

 1. Sec 14 of the Copyright Act defines copyright to include exclusive right and license to reproduce, make copies, adapt work, etc.

 2. A non-exclusive, non-transferable licence that merely permits the use of a copyrighted property cannot be read as a licence to exercise all or any of the enumerated rights outlined in Sec 14 of the Copyright Act as held in the case of the SBI vs Collector of Customs (1999).

 3. The SC in a recent and a very famous case of Engineering Analysis Centre has held that if the licence offered to distributors and end-users creates no interest or right in the software, it does not constitute the “use of or right to use” of copyright and thus does not qualify as royalty under the double Tax avoidance Treaty.