Much awaited Judgement - TDS on Software
Case: Engineering Analysis Centre of Excellence Private Limited (Taxpayer) Vs. CIT & Anr. (Supreme Court of India)
Ruling: The Supreme Court held that the amounts paid to non-resident computer software manufacturers or suppliers as consideration for the resale/use of computer software through End User Licensing Agreement (EULAs) or distribution agreements by Indian Residents is not payment of royalty for the use of copyright in the computer software under various relevant tax treaties.
Conclusion: Therefore, the same is not liable for deduction of tax at source under Section 195 of the Income Tax Act, 1961.
Details of the Case
- The taxpayer who is an Indian Resident imported from the USA a shrink-wrapped computer software. The taxpayer made payments to the vendor in the AY 2001-2002 and 2002-2003 without deducting tax at source.
- The Assessing Officer held that the transfer in the transaction constituted 'copyright' which attracted the payment of royalty and was subject to deduction of tax at source by the Indian importer.
The contention of Supreme Court
The issue of taxability of payment for software as royalty has been subject to debate for the longest time. Given the nature of the commodity, the usage rights assigned to it, the rights to resell, and the right to reproduce the judgments have varied. In this case, the Supreme Court has given the above ruling.