Payments by Indian end-user to non-resident for software under EULA granting restricted use rights (no copyright transfer) do not constitute royalty under Section 9(1)(vi) or DTAA Article 12; no TDS required under Section 195.

Headnote:(A) Income Tax Act, 1961 - Sections 40(a)(i), 195, 9(1)(vi) - DTAA between India and USA - Articles 7, 12(3) - Payments for purchase of software products from non-resident under End-User Licence Agreement (EULA) - Assessing Officer disallowed payment u/s 40(a)(i) for non-deduction of TDS u/s 195 treating it as royalty - CIT(A) deleted disallowance relying on Supreme Court judgment holding that such payments by end-user for resale/use of computer software through EULAs do not constitute royalty under Article 12(3) or Section 9(1)(vi) as no copyright interest is transferred, merely restricted right to use software installed in hardware - Tribunal upheld CIT(A) finding that EULA grants non-exclusive, non-transferable licence without right to access source code, modify, reproduce or distribute, treating payment as price of goods not taxable as royalty, and non-resident had no permanent establishment in India hence business profits not taxable under Article 7 - Disallowance deleted for all years. (Paras 3, 4, 5)

Facts of the case:
Revenue appealed against CIT(A) orders deleting disallowance of payments for software purchases from non-resident supplier, claimed as royalty attracting TDS u/s 195. Assessee entered Software Procure Agreement (EULA) acknowledging supplier's ownership of software rights, granting only limited use rights for ATMs without copyright transfer. Grounds challenged CIT(A) reliance ignoring Section 9(1)(vi), Explanation 4, and prior judicial precedents.

Findings of Court:
Payments under EULA fall within Supreme Court category of end-user purchases of shrink-wrapped software from non-resident without transferring copyright, hence not royalty; no TDS obligation u/s 195 as no income deemed to accrue in India u/s 9.

Issues: Whether payments for software under EULA constitute royalty under Section 9(1)(vi)/DTAA Article 12(3) requiring TDS u/s 195, and whether disallowance u/s 40(a)(i) justified.

Ratio Decidendi: Following Supreme Court, EULA payments by Indian end-user to non-resident for software use do not transfer copyright interest but impose use restrictions; not royalty, no TDS liability u/s 195; applicable to distributor/end-user cases without permanent establishment.

Result: Revenue appeals dismissed; assessee cross-objections infructuous.

Table of Content
1. introduces appeals and procedural consolidation. (Para 1 , 2)
2. revenue challenges tds deletion on software payments. (Para 3 , 4)
3. eula payments for software not royalty under dtaa/section 195. (Para 5 , 6 , 7 , 8 , 9)

ORDER

Per Sandeep Gosain, JM:

The present appeals have been filed by the Revenue and cross objections by the assessee challenging the different impugned orders dt. 03.06.2025, 04.06.2025, 04.06.2025 & 04.06.2025 passed under section 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre (NFAC) / CIT(A) for the assessment years 2010-11, 2011-12, 2012-13 & 2013-14.

2. Since all the issues involved in these appeals and cross objections is common and identical and belongs to one assessee therefore, they have been clubbed, heard together and consolidated order is being passed. Firstly, we shall take ITA No. 5505/Mum/2025, A.Y 2010-11 as lead case and facts narrated therein.

ITA No. 5505/Mum/2025, A.Y 2010-11

3. The revenue has raised the following grounds of appeal:

1 Whether on the facts and circumstances of the case and in law, Ld. CIT(A) was justified in deleting the disallowance of Rs. 18,42,93,456/-u/s 40(a)(i) of the Income Tax Act, 1961('the Act) by holding that assessee company is not required to deduct tax u/s 195 of the Act for payment for purchase of software products from Diebold Inc. ignoring the fact that such payments come under definition of 'royalty' given in para (3) of Article 12 of DTAA between India and USA?

2. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) was justified in deleting the disallowance of Rs. 18,42,93,456/- u/s 40(a)(i) of the Income Tax Act, 1961 (the Act) by holding that assessee company is not required to deduct tax u/s 195 of the Act for payment for purchase of software products from Diebold Inc. ignoring the fact that such payments come under definition of 'royalty' as per the provisions of Section 9(1)(vi) of the Act?

3. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) was justified in deleting the disallowance of Rs. 18,42,93,456/- u/s 40(a)(i) of the Income Tax Act, 1961('the Act)' by holding that assessee company is not required to deduct tax u/s 195 of the Act for payment for purchase of software products from Diebold Inc. ignoring the judgement of the Hon'ble High Court of Karnataka in the case of CIT, International Taxation vs. Samsung Electronics Co. Limited [2012] 345 ITR 494 WHARE Hon'ble Court held that right to use software for internal business as per terms & conditions of Agreement and payment made in that regard would constitute 'royalty' as per Sec.9(1)(vi) read with Article 12 of DTAA between India and USA.?

4. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) was justified in deleting the disallowance of Rs. 18,42,93,456/u/s 40(a)(i) of the Income Tax Act, 1961(the Act)' by holding that assessee company is not required to deduct tax u/s 195 of the Act for payment for purchase of software products from Diebold Inc. ignoring the Explanation 4 to Section 9(1)(vi) of the Act inserted by Finance Act, 2012 with retrospective effect from 01.06.1976 which clarifies that the transfer of all or any rights in respect of any right, property or information has always included transfer of all or any right for use or right to use a computer software (including granting of a license)?

4. We first take up the appeal filed by the Revenue. All the grounds raised by the Revenue are inter-related interconnected and relates to challenging the order of Ld. CIT(A) in deleting the disallowance made by the Assessing Officer under section 40(a)(i) of the Act.

At the very outset, the ld. counsels for both the parties submitted that the issue involved in the present appeal is squarely covered by the judgment of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax and that the ld. CIT(A), while adjudicating t

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