LL 2021 SC 124
INTRODUCTION
The case was decided by the Supreme Court of India on 2nd of March in the year 2021. The Appellant in this case is The Engineering Analysis Centre of Excellence Private Ltd and the Respondent is The Commissioner of Income Tax. The Judges were Justice. R.F.Nariman, Justice Hemant Gupta and Justice BR Gavai. The legislations that were referred for the case includes: Indian Copyright Act, 1957, Finance Act, 2012 and Income Tax Act 1961.
FACTS
The Engineering Analysis Centre of Excellence Private Ltd (Appellant) was a resident of our country who used to be involved in the re-selling of the Shrink wrapped Computer Software which was imported from the Corporation of a Non Resident. But the appellant was not deducting the tax because it was considered as sale of goods. The Revenue Department said that the transaction between the parties was a copyright for software usage, resulting in royalty payments, and so tax needs to be reduced according to the Section 195 of the Act. Two appeals were filed, one in High Court of Delhi judgments and High court of Karnataka.The High Court of Delhi favoring the appellant and High Court of Karnataka decided favoring the Revenue Department.
While the matter was in the High court of Karnataka, it decided the matter by using its precedent “CIT vs Samsung Electronics Co ltd and Ors”. In the case, it was held that the things which are sold as the computer softwares would include an interest in the copyright which in turn would lead to the royalty payment and is considered as the resident’s income and requires the tax to be deducted according to the Sec 9 (1) (vi) of the Income tax act.
The appellant with other aggrieved parties filed an appeal before the Supreme Court of India and the Hon’ble court classified the appeal into 4 types based on the computer softwares.
ISSUES
- Whether the payment of the Indian resident with regards to the purchase of the softwares of computer from the suppliers are considered under the scope of the definition of “royalty” under explanation number 2 of the Section 9(1)(vi) of the Income Tax Act and Double Taxation Avoidance Agreement (DTAA)?
- Whether the appellant needs to deduct the tax at the source of the payment made, as mentioned under the Section 195 of the Income Tax Act is applicable?
CONTENTIONS
The appellant argued that, according to the Double Taxation Avoidance Agreement (DTAA) the products that are derived from the copyrights are not subjected to royalties. The same is accepted by various International Organisations such as, Organisation for Economic Cooperation and Development (OECD), UN etc. Generally the amount of tax that has to be paid is decided by the Double Taxation Avoidance Agreement. The learned Senior Counsel Shri. Preetesh Kapur also argued that it was the product which was provided to the importing person and not the copyright. This is evidential by the section 14(b)(ii) of the Copyright Act of 1957, which states that the word ‘first sale’ means that once something is sold, then the owner of the copyright cannot control the resale of the same.
Another learned Senior Counsel Shri. Arvind Datar argued that the Income Tax Amendment Act, 2021 has broadened the meaning of the word royalty and the same does not apply to the DTAA because this new definition was not there during the time the tax was assessed. He also referred to the case of Union of India vs Azadi Bachao Andolan, where it was said by the court that DTAA is required to take priority over the domestic laws if it benefits the taxpayer under the section 195. Hence, the Indian importer is not required to deduct the tax.
The Additional Solicitor General who was representing the Revenue Department contended that the DTAA would not apply to the persons, if they are not considered as assessees, mentioned under the section 195 of the act. Therefore, Section 195 applies only to the person mentioned as assessees. For the same, he referred the case of Transmission Corporation of AP Ltd vs CIT, where the difference between a payer and an assessee was laid down by the court. He also cited the case of PILCOM vs The Commissioner of Income Tax, where the Supreme Court had held that the tax needs to be reduced at the source, even if the NRI need not pay the tax. He added that the doctrine of exhaustion would not be applicable because it was not recognized by the statutory under Section 14 (b) (iii) of the Copyright Act, 1957.
The Solicitor General also cited the judgement given by the Court in the case of Tata Consultancy Services vs State of Andhra Pradesh, it was said that the softwares could be considered as goods under the Taxation laws.
JUDGEMENT AND RATIONALE
The Supreme Court decided that the Indian importers/ companies who are buying softwares from the NRI corporations need not necessarily deduct the tax at source. If there is no need for the foreign exporters to pay tax, then they might reduce the cost of the softwares making it easy for Indians to purchase. According to the DTAA, the exporters will not acquire any kind of copyright. Because they do not acquire any copyright, they need not deduct the tax at the source.
It was also held that the definition of the word royalty under Section 9 (1) (vi) of the Finance Act, 2012 would not apply to retrospective transactions. Instead of the Domestic Taxation laws, Double Taxation Avoidance Agreement has to be applied if it gives out more benefits to the Indian taxpayers. Using the copies for backup simply does not amount to the point that the user received the copyrights. In order to know about the true nature of the transactions, the End user License Agreement must be read as a whole and completely. Additionally, the court said that the Tax Deduction at Source would apply only in cases where a NRI is in a position to pay taxes to India under few provisions and DTAA. The case of PILCOM vs Commissioner of Tax Commission will not apply to the circumstances of this case.
Therefore, the Supreme Court of India gave its judgment in favor of the appellant i.e., the assessees and simultaneously upheld the decision made by the Delhi High Court.
DEFECTS OF LAW
After analysing the case and its precedents it is clearly seen that there has always been a confusion with regards to few words and provisions of various legislations. It was subjected to various interpretations because of which it led to ambiguities on those topics. Words like the Royalty, Double Taxation Avoidance Agreement (DTAA), and few provisions of the acts like Income tax act, Copyright act, Finance act caused a confusion as it was interpreted in different ways based on the understanding of those judges. There seems to exist an ambiguity with regards to who should be given importance at what point of time. As the society and its people are dynamic in nature, even the law should evolve and be subjected to amendments to accommodate every kind of new problem which arises.
INFERENCES
Through the judgement of this case the court made sure that it gave a significant relief and it benefits to many Indian software importers because it was ruled that they were not compelled any more to deduct tax at source (DTS). This helped in reducing the burdens with regards to compliance with taxation provisions and benefited them to save money.
Name: Krishnamiraa
University: CMR