Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax
(2022) 3 SCC 321
In the Supreme Court of India
Civil Appeal 8733-8734/2018
Before Justice R.F. Nariman, Justice Hemant Gupta, and Justice B.R. Gavai
Decided on March 2, 2021

Relevancy of the Case: Taxation of payments made by Indian companies for software services to a foreign company

Statutes and Provisions Involved

• The Income Tax Act, 1961 (Section 195, 201, 9(1)(4))

Relevant Facts of the Case

• Engineering Analysis Centre of Excellence Pvt. Ltd. (EAC) is a resident Indian assessee. The assessee directly imported software from the USA as shrink-wrapped software.
• The Assessing Officer (AO) concluded that this resulted in the copyright transfer between the parties. As a result, this transaction would attract a payment of royalty. It was required that EAC deduct the tax at source.

Prominent Arguments by the Advocates

• The appellant’s counsel submitted that royalties do not include derivative products of copyright. Therefore, the appellant’s payment to the foreign supplier is not a royalty, leaving no question of DTS.
• The respondent’s counsel argued that the appellant was liable for not deducting tax at source under Section 9(1)(iv) of the Income Tax Act, 1961. Moreover, making copies of computer programs for commercial use only amounts to infringement when the program was obtained legally for personal use.

Opinion of the Bench

• Transferring physical material is not equal to transferring copyright contained in the material. The right to use computer software and the right to redistribute it are distinct rights. The distribution agreement did not create any rights of EAC in the copyrighted work.
• Royalties are payments for using, or having the right to use, any copyright. Since the Americans did not transfer any copyright, EAC did not pay any royalties. Since EAC did not pay royalties, they were not obligated to deduct tax at source.

Final Decision

• The bench ruled that software companies do not have to pay TDS when purchasing software from foreign suppliers. Further, no royalties are payable for using foreign software as it is not taxable income in India.

Anjali Agrawal, an undergraduate student at the NALSAR University of Law, Anjini Pandey, an undergraduate student at Dr Ram Manohar Lohiya National Law University, Linet Christina Thomas, an undergraduate student at Lords Universal College of Law, and Ojasvi Gupta, an undergraduate student at the Faculty of Law, Banaras Hindu University, prepared this case summary during their internship with The Cyber Blog India in May/June 2022.