This article is written by Vanya Verma from O.P. Jindal Global University. This article deals in depth with the case analysis of Engineering Analysis Centre of Excellence Pvt Ltd v. the Commissioner of Income Tax & Another.

CaseEngineering Analysis Centre of Excellence Pvt Ltd v the Commissioner of Income Tax & Another
CitationLL 2021 SC 124
CourtSupreme Court of India
Date of Judgement2nd March 2021
PartiesAppellant- Engineering Analysis Centre of Excellence Private LimitedRespondent- Commissioner of Income Tax
JudgesR.F Nariman, Hemant Gupta and BR Gavai


The case is about the amount paid by Indian corporations to utilise foreign software and whether or not it is taxable as royalty. The case also addresses the question of whether TDS can be deducted for software purchased from overseas software suppliers.

Important provisions 

Facts of the case 

  • Two sets of appeals were heard by the Supreme Court, one from the High Court of Karnataka and the other from the judgments of the High Court of Delhi. The contradictory rulings on the issue by the Authority for Advance Rulings (AAR) were also set to rest by the Supreme Court.
  • The appellant, in this case, was an Indian resident who sells shrink-wrapped computer software that was imported straight from a non-resident corporation. As the transactions comprised a sale of goods, the appellant did not deduct tax on the payments made to the non-resident entity. But on the other hand, the claim of the Department of Revenue, Ministry of Finance (Revenue) was that the transaction between the parties was a copyright for the right to use the software, which resulted in royalty payments, and consequently assessed that tax should be deducted at source under Section 195 of the Act.
  • When the matter was brought before the High Court of Karnataka by various assessees, the High Court upheld the appeal, citing its decision in CIT v. Samsung Electronics Co. Ltd. & Others (2012) which held that what was sold as computer software included a right or interest in copyright, resulting in the payment of royalty and being deemed to be an income of the resident in India under Section 9(1)(vi) of the Act, requiring the deduction of tax at source. 
  • The appellant, along with other assessees, filed civil appeals with the Supreme Court after being aggrieved by the decision of the court. 
  • The Supreme Court divided the appeals into the four kinds of software payments listed below:
    • Category 1: A non-resident selling software straight to an end-user.
    • Category 2: Non-residents selling software to Indian distributors for resale to Indian end-users.
    • Category 3: Sale of software to a foreign distributor for resale to end customers in India by a non-resident.
    • Category 4: Software that is bundled with hardware and distributed to Indian distributors or end-users by foreign providers.

The Appellant fell under the second category. 

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Important questions before the Court

Whether the payment is for the transfer or use of copyright

A copyright refers to the exclusive right to do or authorise specific acts concerning a “work,” such as the exclusive right to reproduce the copyright in the work in any material form and exploit it through sales, transfers, or licences, among other things. Making copies or adapting a computer programme to use or make backup copies as a temporary safeguard against loss, destruction, or damage to use it does not constitute a copyright violation.

For the purposes of the Indian Copyright Act, 1957, a computer programme (software) qualifies as a “literary work” (ICA). According to Section 30 of the ICA, the owner of copyright in a “literary work” has the right to grant any interest in his rights in exchange for a royalty payment by way of a licence. When a licence is issued, an infringement of copyright under the ICA occurs only when the rights are used in a way that is adverse to the licence.

The Supreme Court examined the Act’s definition of royalty, as well as relevant tax treaties and court decisions, and came to the following conclusions:

  • Copyright is a negative exclusive right that allows you to prevent others from performing specific acts.
  • Copyright is a privilege in the form of an intangible, incorporeal right. Copyright ownership in a work differs from copyright ownership in the physical medium in which the copyrighted work may be incorporated.
  • The transfer of ownership of the physical substance in which copyright exists gives the purchaser the right to do whatever he wants with it, except the right to reproduce it and distribute it to the public unless such copies are already in circulation and the other acts listed in Section 14 of the Copyright Act.
  • No copyright is parted with and, as a result, no infringement occurs when the core of a transaction is to authorise the end-user to have access to and make use of the “licenced” computer software product over which the licensee has no exclusive rights, as recognised by Section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user has access to computer software that is tailored to their needs or not.
  • A non-exclusive, non-transferable licence that merely permits the use of a copyrighted property cannot be read as a licence to exercise all or any of the enumerated rights outlined in Section 14 of the Copyright Act as held in the case of the State Bank of India (SBI) v. Collector of Custom, Bombay (1999).

Producing a copy or adaptation of a computer programme for the purpose of which it was delivered, as well as making backup copies to protect against the loss, does not constitute a copyright infringement under the Copyright Act. Infringement would not occur simply by storing a computer programme. The agreement’s nomenclature is irrelevant; what matters is the true nature of the transaction in light of the agreement’s general provisions and surrounding circumstances.

The Court determined that what the non-resident supplier “licences” to the distributor and resells to the resident end-user or directly supplies to the resident end user is the sale of a physical object with an embedded computer programme. The transfer of copyright in software is not included in such a sale of goods.

Royalty as defined by the Act or the tax treaty

Under the Tax Treaties, the term ‘royalty is defined as a payment received for the use or right to use any copyright in a literary work. Insofar as transfer of all or some rights includes granting of a licence in respect of any copyright of any literary work, the meaning of the word under the Act is distinct and broader than the Tax Treaty.

Because the licence offered to distributors and end-users creates no interest or right in the software, it does not constitute the “use of or right to use” of copyright and thus does not qualify as royalty under the Tax Treaty.

The phrase “in respect of” in the Act indicates “in” or “attributable to,” according to the Court. As a result, to qualify as royalty under the Act, there must be a transfer of all or any rights in copyright, whether by licence or otherwise. Payments made for such licences do not qualify as royalty under the Act (up to 2012) or the Tax Treaty since the licence given to distributors and end-users did not involve the grant of any interest in the rights of a copyright owner.

Explanation 4 to Section 9(1)(vi) inserted by the Finance Act, 2012, which states that a transfer of all or any rights includes a transfer of all or any rights for the use of computer software, broadens the definition of royalty and is not intended to be clarified. Furthermore, because the definition of royalties under the Tax Treaty is narrower and more advantageous, the Act’s requirements would be inapplicable, and there would be no obligation to withhold taxes under Section 195 of the Act.

Revenue had sought to rely on the Supreme Court’s decision in PILCOM v. CIT (2020), which dealt with Section 194E of the Act, for the proposition that tax must be deducted at source regardless of whether the non-resident assessee is otherwise liable for tax. The Supreme Court stated that accepting the Revenue’s argument would result in absurd consequences as taxes would have to be withheld even if the income was not taxable in India, which was not the intent of the legislature. As a result, the aforementioned judgement has no bearing on the determination of withholding tax obligations under Section 195 of the Act.

Retrospective amendment

The Finance Act of 2012 added Explanation 4 to Section 9(1)(vi), which increased the concept of “royalty” under the Act (with retroactive effect from 1 June 1976). A person who made a payment before 2012 cannot be expected to use the extended definition of royalty, which did not exist at the time the payment was made, to determine withholding requirements under Section 195 of the Act. The substantive revision to the Act does not force a person to perform the impossible, i.e., where a disability prevents a person from obeying the law, the alleged disobedience of the law is pardoned.

Relevance and India’s positions on the OECD commentary

The concept of “royalty” provided under the Tax Treaty is similar to the OECD Model Convention’s definition of royalty. As a result, the OECD Commentary might be consulted, which states that making a copy or alteration of a computer programme to enable the use of the software for which it was provided does not entail royalties. This also proves that payments made by distributors and end-users are not considered royalties.

Even though the Indian government has expressed reservations about the OECD commentary on royalties, such complaints would not alter the commentary’s applicability unless they were included in the treaties through bilateral negotiations with the respective countries. The Court noted that even though India has negotiated or altered tax treaties with several countries after expressing its reservations, the concept of royalty had not changed and remained comparable to the OECD Model Convention definition. As a result, the OECD Commentary on Article 12 of the OECD Model Convention will continue to be persuasive in interpreting the term “royalties” as used in Tax Treaties.


The issues before the Supreme Court were as follows: 

  • Whether the sum paid by Indian enterprises to use foreign software is taxable as royalty as defined in explanation 2 to Section 9(1)(vi) of the Act and the Double Taxation Avoidance Agreement (DTAA)?
  • Whether the payer was required to deduct tax at source on such payments under Section 195 of the Act.

Arguments by the appellants

  • The purchase of computer software by a resident Indian distributor for resale is a sale of goods. Even the end customer was only given a limited licence to use the goods by themselves.
  • The definition of “royalties” provided under DTAA did not include derivative products of the Copyright. It is well established that the DTAA provisions regulate the taxability of income since they are more favourable to the assessee. Furthermore, the OECD Model Tax Convention on Income and Capital (OECD Commentary), the UN Model, and the United States Internal Revenue Code, among others, do not consider the sale of copyrighted material to be royalty.
  • Amendment to Section 9(1)(vi) in 2012 could not be applied retroactively to assessment years before 2012.
  • The foreign supplier’s distribution right would not extend beyond the first sale of copies of the work to other people, according to Section 14(b)(ii) of the Copyright Act.

Arguments by the respondents

  • Explanation 2(v) to Section 9(1)(vi) of the Act merely clarifies the law in effect since 1976, when Section 9(1)(vi) of the Act was first enacted.
  • DTAAs would not apply to “persons” who are not assessees as defined in Section 195 of the Act.
  • According to the ruling in PILCOM v. CIT (2020) tax must be deducted at source under Section 194E of the Act, regardless of whether the non-resident assessee is otherwise liable for tax.
  • In some circumstances, the original owner relinquishes copyright because the software adoption could be produced, albeit for installation and usage on a specific computer.
  • Making copies or adapting a computer programme from a legally obtained copy for non-commercial, personal use would not be considered infringement under Section 52(1)(a) of the Copyright Act; nevertheless, the converse would be considered infringement.
  • Distributors will be exempt from the doctrine of first sale/principle of exhaustion.
  • Tata Consultancy Services v. State of AP (2004), in which it was held that software recorded on compact discs are products for sales tax law, cannot be applied to the Act.


In a lengthy decision, the Supreme Court found that: 

  • When the DTAA is applied, the Act’s provisions can only be applied to the degree that they are more beneficial to the assessee.
  • If a non-resident is obligated to pay tax under Section 9 read with Section 4 of the Act and the DTAA then only a tax deduction at source can be allowed under Section 195 of the Act. The PILCOM decision would not be applicable in this present case.
  • Producing copies or adapting a computer programme to use it for the purpose for which it was delivered, or making backup copies, does not constitute an infringement of copyright and does not amount to parting with copyright, according to modified Sections 14(b)(ii) and 52(1)(aa).
  • To determine the true nature of a transaction, the EULAs must be read as a whole. According to Tata Consulting, a licence is the selling of a physical thing that has embedded computer software and is thus a sale of goods.
  • The Act’s Explanation 4 to Section 9(1)(vi) cannot be applied retrospectively.

As a result, the Supreme Court ruled in favour of the assessees in all four categories.

The Court declared that software companies are no longer required to pay TDS when purchasing software from international providers. The verdict would reduce the cost of software purchases for Indian companies since foreign sellers may choose to drop prices to take advantage of the tax relief.

This decision is said to be extremely beneficial to software companies. The Supreme Court clarified 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,” citing the definition of royalties in Article 12 of the DTAA.

In terms of the taxability of royalties paid to foreign corporations for the use of their software by Indian firms, the Court ruled that payment for utilising foreign software did not amount to a royalty payable in India. The Court determined that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers are not royalty payments for the use of copyright in the software and that they do not result in any income taxable in India, thereby excluding the persons referred to in Section 195 of the Income Tax Act.

Taxpayers, on the other hand, argued that the non-resident owner retains the proprietary rights in the programme and that the Indian company’s usage of the software is limited to producing backup copies and redistribution.


The Supreme Court’s decision, which came 20 years after the issue began, has clarified and resolved contradictory opinions held by the High Courts of Karnataka and Delhi, as well as the AARs. The decision is a positive step that will have a wide-ranging influence on software businesses doing business in India.


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