Pointing out that shrink wrapped software does not transfer the right to use the copyright in it, the Delhi High Court recently clarified that the consideration for the resale/use of computer software through EULAs/distribution agreement is not Royalty for the use of copyright of the software and the same does not give rise to any taxable income in India and as a result, the persons referred to under Section 195 of the Income Tax Act were not liable to be deduct any TDS u/s 195.
This clarification was made by the Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar by referring to the decision of the Apex Court in the case of Engineering Analysis Centre of Excellence vs Commissioner of Income tax [2021 INSC 137], whereby it was held that “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 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, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS u/s 195”.
Since the counsel for the Revenue Department did not contest the applicability of the judgment of the Supreme Court in the case of Engineering Analysis Centre of Excellence to the facts of the present case, the Bench granted relief to the Respondent company as far as its liability to deduct TDS u/s 195 is concerned on the sale of ‘off-the-shelf software’, and dismissed the appeal of the Department.
Briefly, in this case, the Respondent company (taxpayer), involved in designing and providing fully tailored, off-the-shelf wireless broadband solutions throughout the USA, had sold “off the shelf” software through a non-exclusive license rights to Zylog Systems (India) Ltd. to utilize the technology in certain areas in India. The only point of dispute pertained to the additions made by the AO on account of the income of Rs. 19.24 crores earned by the Respondent from the sale of licensed IMS software to Zylog Systems India Ltd., whereby it was made taxable u/s 9(1)(vi) of the Income Tax Act as well as under Article 12 of Indo-NZ-DTAA.
Case Relied On:
Engineering Analysis Centre of Excellence vs Commissioner of Income tax [2021 INSC 137]
Appearances:
Advocates Ruchir Bhatia, Anant Mann, and Aditi Sabharwal, for the Appellants
NA, for the Respondent
