2021 (12) TMI 1447 - HC - Income Tax

TDS u/s 195 - Income taxable in India - Royalty - amounts paid by the assessee to the foreign company for the use of copyright of 'computer software' - HELD THAT - Substantial questions of law raised herein have been decided in favour of the assessee, in the decision of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT held amounts paid by resident Indian endusers/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, 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, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS u/s 195 of the Income Tax Act. Decided against revenue.

Summary

Issues involved:
1. Interpretation of whether the payment made for the use of copyright of computer software constitutes 'royalty' and is taxable in India.
2. Examination of whether the transfer of the right to use copyrighted software amounts to royalty under the Income Tax Act and Double Taxation Avoidance Agreement (DTAA).
3. Analysis of whether the Tribunal's decision favoring the assessee is valid based on previous case law and distinguishable facts.
4. Determination of whether the right to use copyrighted material constitutes royalty under DTAA provisions and whether tax deduction at source is required.

Detailed Analysis:
1. The Tax Case Appeals were filed questioning the correctness of the Income Tax Appellate Tribunal's order related to assessment years 2010-11, 2012-13, 2013-14, and 2015-16. The primary issue was whether the amounts paid for the use of copyright of computer software constituted 'royalty' and were taxable in India. The Tribunal's decision was challenged by the Revenue, arguing that tax should have been deducted at the source. However, the Supreme Court's decision in a similar case favored the assessee, stating that such payments did not amount to royalty under the Income Tax Act, thus absolving the assessee from tax liability.

2. Another issue raised was whether the transfer of the right to use copyrighted software should be considered as royalty, especially in light of retrospective amendments to the Income Tax Act. The Tribunal's decision was questioned based on the interpretation of DTAA provisions and the definition of royalty. The Supreme Court's ruling clarified that in cases where there was no creation of interest or right amounting to the use of copyright, tax deduction at the source was not mandatory, aligning with the DTAA provisions.

3. The Tribunal's decision in favor of the assessee was also challenged on the grounds of distinguishable facts from previous case law. However, the Supreme Court's decision provided a comprehensive analysis, categorizing different scenarios involving computer software transactions and concluding that payments for the use of software did not constitute royalty, thus supporting the assessee's position.

4. Lastly, the judgment addressed the applicability of royalty under DTAA provisions and the necessity of tax deduction at the source. The Supreme Court's ruling clarified that payments made by resident Indian end-users/distributors to non-resident software manufacturers did not amount to royalty for the use of copyright, thereby eliminating the obligation to deduct tax at the source under section 195 of the Income Tax Act. As a result, the Tax Case Appeals were dismissed, and the substantial questions of law were answered against the Revenue, in line with the Supreme Court's decision.