Supreme Court settles the long standing dispute regarding the taxability of sale of software.

Case- ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED
Versus THE COMMISSIONER OF INCOME TAX & ANR.
Date- 2nd March 2021

The apex court today in a catena of appeals was dealing with the following four categories of cases where the issue involved was sale of software by different parties as follows:-

i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer.

ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.

iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users.

iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users.

The Apex court in a long 226 page judgement after referring to the entire history of legislation in this regard 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 under section 195 of the Income Tax Act.

This judgement is a landmark ruling in relation to the foreign tax and deduction of tax at source u/s 195 of the Income-tax Act,1961.

Ramesh Patodia
02-03-2021