2022 (7) TMI 1496 - HC - Income Tax

Income taxable in India - Payments received were taxable as royalty as per Section 9(1)(vi) or Article 12 of DTAA and USA - HELD THAT - In the opinion of this Court, the aforesaid issue is no longer res integra in Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT as held that 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, 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, thus not liable to deduct any TDS u/s 195 - Decided in favour of assessee.

Summary

Issues:
1. Whether payments received were taxable as royalty under Section 9(1)(vi) or Article 12 of the Double Taxation between India and the United States of America?

Analysis:
The appeal was filed against the order passed by the Income Tax Appellate Tribunal concerning the taxability of payments received as royalty. The substantial question of law revolved around the interpretation of Section 9(1)(vi) or Article 12 of the Double Taxation Agreement between India and the USA. The Supreme Court's judgment in a related case provided clarity on the issue, categorizing cases involving the purchase and resale of computer software by various entities.

The Supreme Court categorized cases into four groups based on the nature of transactions involving computer software. The judgment highlighted scenarios where software was purchased by end-users, Indian companies acting as distributors, foreign vendors reselling to Indian distributors, and software sold as integrated units. The Court emphasized the distinction between a copyright and copyrighted articles, ruling that licensing software for use does not transfer copyright ownership. It rejected the notion that licensing software under End User License Agreements (EULAs) includes the right to use embedded copyright.

Furthermore, the judgment emphasized the importance of interpreting tax laws in alignment with Double Taxation Avoidance Agreements (DTAA). It clarified that any interpretation broader than the DTAA's definition should be disregarded if less favorable to the assessee. The Court held that payments made by Indian entities to non-resident software manufacturers/suppliers did not constitute royalty for copyright use, absolving them from Indian tax liability and the obligation to deduct Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act.

In conclusion, the Court allowed the appeal, deciding in favor of the appellant based on the principles established in the Engineering Analysis Centre of Excellence Private Limited case. The judgment set aside previous rulings and provided a comprehensive analysis of the tax implications related to the purchase and use of computer software, offering clarity on the treatment of such transactions under Indian tax laws and international agreements.