Supreme Court held that no TDS is applicable for amount paid to foreign supplier for use of software through EULA
The Supreme Court held in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. that tax deductible at source is not applicable to Indian companies for amounts paid to foreign software manufacturers and suppliers for use or re-sale of computer software through end-user license agreements (EULA).
Major observations of the Hon SC:
- In this case, the computer software is sold in the form of a CD to an Indian buyer under a non-exclusive license. Again, the Indian buyer only receives the right to use the software.
- Explanation 2 of Sec 9(vi) defines royalty to include transfer of all or any rights in respect of any copyright. Copyright has been defined in section 14(b)(ii) of the Copyright Act and in the context of a computer program, involves reproduction of the said computer programmed.
- In this case, the Indian buyer does not get any copyright on the software. He only receives a right to use the software and nothing more. The end-user does not get any of the rights that the owner continues to retain.
- An obvious example is the purchaser of a book or a CD/DVD, who becomes the owner of the physical article, but does not become the owner of the copyright inherent in the work, such copyright remaining exclusively with the owner.
- Therefore, distribution of copyrighted computer software will not necessitate the deduction of tax at source under section 195 of the Income Tax Act.
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