• The Tax Terminal

Developments on Software Purchases from Foreign Firms


SC bench led by Justice Nariman in the case of Engineering Analysis Centre of Excellence Pvt Ltd vs Commissioner of Income Tax held that royalty is paid on copyright agreement. But this sort of situation i.e the sale of software purchases is an end-user license agreement and doesn’t fall under the domain of royalty. They stated that according to Section 195 of the IT Act, this will not be liable for deduction of TDS. They gave a healthy interpretation to Article 12 of the Double taxation avoidance agreement and stated that End-user license agreements don’t create an obligation on end-user to apply royalty. They arrived at this conclusion by looking at End user agreement and stated that copyright over software is non-exclusive and non-transferable thus not triggering royalty. But this might not be fruitful for companies yet as the government of India is unhappy with the said decision. They are thinking of passing legislation to tweak this aspect of law and encompass these agreements within the domestic law. In this case, it would trigger the royalty and tax would be payable at a normal amount.