Payment to non-resident for resale/use of software through EULAs agreements not liable to TDS u/s 195  

Payment to non-resident for consideration for resale/use of computer software through EULAs/distribution agreements not liable to TDS u/s 195  

ABCAUS Case Law Citation
ABCAUS 3464 (2021) (03) SC

Important case law relied referred:
CIT vs. Samsung Electronics Co. Ltd. (2012) 345 ITR 494
Transmission Corpn. of A.P. Ltd. v. CIT (1999) 7 SCC  266
Director of Income Tax v. Ericsson A.B., (2012) 343 ITR 470
GE India Technology Centre (P) Ltd. vs. CIT (2010) 10   SCC 29
PILCOM v. CIT 2020 SCC Online SC 426

The question before the Hon’ble Supreme Court was whether the 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 payment of royalty for the use of copyright in the computer software, and that the same give rise to income taxable in India as a result of which the persons referred to in section 195 of the Act were liable to deduct  TDS  u/s 195 of the Act?  

The above question of law  had been answered in several rulings, by the AAR, High Court of Karnataka, and the High Court of Delhi.

High Court of Karnataka ruled that the amounts paid by the concerned persons resident in India to non-resident, foreign software suppliers, amounted to royalty and as this was so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 making it incumbent upon all such persons to deduct tax at source (TDS) under section 195 of the Income Tax Act.

Whereas the Delhi High Court had held that payment  received by the  assessee was towards the title and system of which software was an inseparable parts incapable of independent use and it was a  contract  for  supply of goods. Therefore, no part of the payment can be classified as payment towards royalty.

The Hon’ble Supreme Court stated that the OECD Commentary is significant, as the Contracting States to which the persons deducting tax/assessees belong, can conclude business transactions on the basis that they are to be taxed either on income by way of royalties for  parting with copyright, or income derived  from  licence  agreements which is then taxed as business profits depending on the existence of a PE in the Contracting State.

The Hon’ble Supreme Court held that given the definition of royalties contained in various DTAAs, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of the cases.

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