Engineering Analysis Centre of Excellence Pvt Ltd v. Commissioner of Income Tax & Anr

Issues

• Are sums paid by Indian enterprises to use foreign software taxable as royalty under the Act and DTAA?
• Did Section 195 require the payer to deduct tax at source on such payments?

Rules

• Payment for off-the-shelf software or for a limited, non-exclusive use does not transfer copyright.
• Where income is not chargeable in India under Section 9 read with Section 4 and the DTAA, Section 195 TDS does not apply.
• Character depends on the agreement: copyright right vs. copyrighted article.

Income-tax Act, 1961 • DTAA interpretation

Arguments

Judgment

The Supreme Court allowed the appeals. It grouped the transactions into four categories and held for the assessees in each:

1. Non-resident sells software directly to Indian end-user.
2. Non-resident sells to Indian distributor (this appellant’s category).
3. Non-resident sells to foreign distributor for resale to Indian end-users.
4. Software bundled with hardware sold to Indian distributors/end-users.

In all, the payments were not royalty. Without taxable income in India, Section 195 TDS does not apply.

Ratio (Core Principle)

A copyrighted article sale or a limited user licence does not transfer copyright. Such payments are not “royalty” under the Act/DTAA; no TDS u/s 195 when income is not chargeable in India.

Why It Matters

• Clarity for cross-border software deals and compliance.
• Aligns Indian practice with DTAA language on royalty.
• Reduces disputes on shrink-wrapped/OEM/licence software payments.

Key Takeaways

• Not royalty if no copyright rights are transferred.
• DTAA prevails where more beneficial to the assessee.
• No TDS u/s 195 if the sum isn’t chargeable in India.

Mnemonic + 3-Step Hook

Mnemonic: “SOFT—NO ROYALTY”

1. SOFTware is a copyrighted article, not the copyright itself.
2. NO income chargeable in India ⇒ no TDS.
3. ROYALTY? Only if copyright rights are actually transferred.

IRAC Outline

Issue: Are software payments to non-residents royalty? Is TDS u/s 195 required?

Rule: No royalty without transfer of copyright; DTAA governs chargeability.

Application: Agreements gave only limited, non-exclusive use; no copyright parted; hence no taxable income in India.

Conclusion: Payments not royalty; no TDS u/s 195; appeals allowed.

Glossary

Royalty

Payment for use of or right to use a copyright, patent, etc.

DTAA

Treaty to avoid double taxation and define taxing rights.

Section 195

Provision requiring TDS on sums chargeable to tax in India paid to non-residents.

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