Taxation Law

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

AIR 2021 SC 102; (2021) 432 ITR 471

Facts

The Supreme Court decided a large batch of appeals concerning payments for imported computer software.
The transactions fell broadly into four categories:
Indian end-users buying software directly from foreign suppliers;
Indian distributors buying software for resale;
foreign distributors supplying software to Indian users;
software embedded in equipment or hardware.
The agreements generally permitted customers to install and use copies of software.
They normally prohibited customers from:
reproducing the software for commercial distribution;
modifying or adapting it;
transferring or sublicensing it;
exploiting the copyright.
The Revenue treated the payments as royalty under section 9(1)(vi) and the relevant DTAAs.
It argued that Indian payers should have deducted tax under section 195.
Assessees argued that they had purchased copyrighted products, not rights in the copyright.

Whether payment for the use or resale of standard computer software was royalty.
Whether the transaction transferred a copyright or merely a copyrighted article.
Whether Indian purchasers and distributors were required to deduct tax under section 195.

Computer software is protected as a literary work under copyright law.
A distinction exists between:
copyright itself; and
a physical or digital copy of a copyrighted work.
Royalty requires transfer of, or a right to use, one or more proprietary copyright rights, such as:
reproduction;
adaptation;
commercial distribution;
public communication.
Permission to install and operate a software copy for its intended purpose is not automatically a licence of copyright.
Under section 90(2), the relevant DTAA applies where it is more beneficial to the assessee.
A later domestic-law amendment cannot unilaterally expand the definition of royalty contained in a treaty.
Section 195 applies only where the payment contains income chargeable to tax in India.

The Court examined the actual end-user and distribution agreements.
The customers received only a limited, non-exclusive and non-transferable right to operate the software.
The restrictions preserved the foreign supplier’s copyright.
The agreements did not authorise the Indian user or distributor to:
commercially reproduce the program;
create derivative works;
exploit the source code;
transfer copyright rights to another person.
Distributors acted as intermediaries selling software copies.
They did not obtain the right to reproduce the software and independently distribute newly created copies.
Therefore, the consideration was for acquiring or reselling a copyrighted product.
It was not consideration for use of copyright.
The Court rejected the argument that every software licence necessarily transfers an interest in copyright.
A licence may simply regulate the lawful use of a purchased copy.
The 2012 amendment retrospectively expanding the domestic definition of royalty could not alter the narrower treaty meaning.
It also could not fairly create a past withholding obligation where the payer could not have anticipated that expanded interpretation.
Since the payments were not royalty under the applicable DTAAs, no income chargeable to tax arose in India.
Without chargeable income, section 195 was not triggered.

The Supreme Court held that payments made by Indian end-users and distributors for the use or resale of software under the examined agreements were not royalty.
No copyright rights were transferred.
The Indian payers were therefore not required to deduct tax under section 195.
The Revenue’s review petitions were dismissed on 11 May 2026, and the 2021 judgment remains operative.