Payment to non-resident software manufacturers / suppliers for sale of software under end user license agreements / distribution agreements does not qualify as ‘royalties’ under DTAA and not liable for withholding taxes under section 195.
The Apex Court of India, has, in the matter of Engineering Analysis Centre of Excellence Private Limited and Others v. The Commissioner of Income Tax and Anr 1, ruled in favor of the taxpayers on the highly contested issue of whether consideration for the sale of software under end user license agreements (“EULAs”) or distribution agreements may be considered as ‘royalties’ under the Double Taxation Avoidance Agreements executed by India with various countries2.
The various appeals before the Apex Court were grouped into the following four categories:
Computer software is purchased directly by Indian resident end-users from foreign nonresident suppliers / manufacturers.
Computer software is purchased by resident Indian companies from foreign non-resident suppliers / manufacturers whereby such Indian companies act as distributors or resellers of the software to resident Indian end users.
Resale of computer software to resident Indian distributors / end-users by foreign non-resident distributors after purchasing the same from other foreign non-resident suppliers / manufacturers.
Computer software affixed onto hardware for sale as an integrated unit / equipment by foreign non-resident suppliers to resident Indian distributors / end users.
