Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2021 Supreme(SC) 120

SUPREME COURT OF INDIA
R.F. NARIMAN, HEMANT GUPTA, B.R. GAVAI, JJ.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED – APPELLANT
VERSUS
THE COMMISSIONER OF INCOME TAX & ANR. – RESPONDENTS
CIVIL APPEAL NOS. 8735-8736 OF 2018, CIVIL APPEAL NOS. 8737-8941 OF 2018, CIVIL APPEAL NOS. 8942-8947 OF 2018, CIVIL APPEAL NOS. 8950-8953 OF 2018, CIVIL APPEAL NOS. 8948-8949 OF 2018, CIVIL APPEAL NO. 4419 OF 2012, CIVIL APPEAL NO. 4420 OF 2012, CIVIL APPEAL NO. 10114 OF 2013, CIVIL APPEAL NO. 10097 OF 2013, CIVIL APPEAL NOS. 10112-10113 OF 2013, CIVIL APPEAL NO. 10106 OF 2013, CIVIL APPEAL NOS. 8954-8955 OF 2018,, CIVIL APPEAL NOS. 10115-10117 OF 2013, CIVIL APPEAL NO. 8956 OF 2018, CIVIL APPEAL NO. 8957 OF 2018, CIVIL APPEAL NO. 8990 OF 2018, CIVIL APPEAL NO. 10103 OF 2013, CIVIL APPEAL NO. 10104 OF 2013, CIVIL APPEAL NO. 8960 OF 2018, CIVIL APPEAL NO. 8966 OF 2018, CIVIL APPEAL NO. 8958 OF 2018, CIVIL APPEAL NO. 8959 OF 2018, CIVIL APPEAL NO. 8962 OF 2018, CIVIL APPEAL NO. 8961 OF 2018, CIVIL APPEAL NO. 8963 OF 2018, CIVIL APPEAL NO. 8964 OF 2018, CIVIL APPEAL NO. 8965 OF 2018, CIVIL APPEAL NO. 8969 OF 2018, CIVIL APPEAL NO. 8967 OF 2018, CIVIL APPEAL NO. 8968 OF 2018, CIVIL APPEAL NO. 8972 OF 2018, CIVIL APPEAL NO. 8971 OF 2018, CIVIL APPEAL NO. 8970 OF 2018, CIVIL APPEAL NO. 4629 OF 2014, CIVIL APPEAL NO. 8973 OF 2018, CIVIL APPEAL NO. 4631 OF 2014, CIVIL APPEAL NO. 4630 OF 2014, CIVIL APPEAL NOS. 8974-8975 OF 2018, CIVIL APPEAL NOS. 6386-6387 OF 2016, CIVIL APPEAL NO. 10105 OF 2013, CIVIL APPEAL NO. 7852 OF 2012, CIVIL APPEAL NOS. 1416-1418 OF 2013, CIVIL APPEAL NO. 1403 OF 2013, CIVIL APPEAL NO. 1405 OF 2013, CIVIL APPEAL NO. 1410 OF 2013, CIVIL APPEAL NO. 1421 OF 2013, CIVIL APPEAL NO. 1409 OF 2013, CIVIL APPEAL NO. 1415 OF 2013, CIVIL APPEAL NO. 1414 OF 2013, CIVIL APPEAL NO. 1412 OF 2013, CIVIL APPEAL NO. 1413 OF 2013, CIVIL APPEAL NO. 1419 OF 2013, CIVIL APPEAL NO. 1411 OF 2013, CIVIL APPEAL NO. 1420 OF 2013, CIVIL APPEAL NO. 1404 OF 2013, CIVIL APPEAL NO. 1406 OF 2013, CIVIL APPEAL NO. 1408 OF 2013, CIVIL APPEAL NO. 1407 OF 2013, CIVIL APPEAL NO. 2304 OF 2013, CIVIL APPEAL NO. 2305 OF 2013, CIVIL APPEAL NO. 2306 OF 2013, CIVIL APPEAL NOS. 10098-10102 OF 2013, CIVIL APPEAL NOS. 2307-2308 OF 2013, CIVIL APPEAL NOS. 4666-4667 OF 2013, CIVIL APPEAL NO. 6764 OF 2013, CIVIL APPEAL NO. 4634 OF 2014, CIVIL APPEAL NO. 8976 OF 2018, CIVIL APPEAL NOS. 8977-8988 OF 2018, CIVIL APPEAL NO.781 OF 2021 (@ SLP(C) NO. 37580 OF 2016), CIVIL APPEAL NO.782 OF 2021 (@ SLP(C) NO. 28867 OF 2016), CIVIL APPEAL NO. 783 OF 2021 (@ SLP(C) NO. 28868 OF 2016), CIVIL APPEAL NO. 10673 OF 2016, CIVIL APPEAL NO. 784 OF 2021 (@ SLP(C) NO. 29571 OF 2016), CIVIL APPEAL NO. 10674 OF 2016, CIVIL APPEAL NO. 785 OF 2021 (@ SLP(C) NO. 36782 OF 2016), CIVIL APPEAL NO. 3402 OF 2017, CIVIL APPEAL NO. 10758 OF 2017, CIVIL APPEAL NO. 9486 OF 2017, CIVIL APPEAL NO. 8711 OF 2018, CIVIL APPEAL NO. 8722 OF 2018, CIVIL APPEAL NO. 8724 OF 2018, CIVIL APPEAL NO. 8725 OF 2018, CIVIL APPEAL NO. 9551 OF 2018, CIVIL APPEAL NO. 786 OF 2021 (@ SLP(C) NO. 450 OF 2019), CIVIL APPEAL NO. 2006 OF 2019, CIVIL APPEAL NO. 790 OF 2021 (@ SLP(C) NO. 6736 OF 2020)
Decided on : 02-03-2021

Advocates appeared:
For the parties :Arvind P. Datar, S. Ganesh, Percy Pardiwala, Mukesh Butani, Shreyash Shah, Shankey Agarwal, Tarun Jain, H. Raghavendra Rao, Tushar Mehta, Balbir Singh, K. Radhakrishnan, Rupesh Kumar, Rajat Nair, Zoheb Hussain, D.L. Chidananda, Anil Katiyar, Anuradha Dutt, Sachit Jolly, Tushar Jarwal, Rohit Garg, Rahul Sateeja, Disha Jham, Vasudevan G., B. Vijayalakshmi Menon, Ajay Vohra, Kavita Jha, Anant Mann, Udit Naresh, Percy Pardiwala, T. Suryanarayan, Tanmayee Rajkumar, Yugandhara Pawar Jha, Manasa Ananthan, Kunal Verma, Preetesh Kapur, Senthil Jagadeesan, Mrinal Kanwar, Sonakshi Malhan, Suriti Chowdhary, Percy Pardiwala, Senthil Jagadeesan, Mrinal Kanwar, Sonakshi Malhan, Suriti Chowdhary, A. Shankar, Senthil Jagadeesan, S. Annamalai, Mrinal Kanwar, Sonakshi Malhan, Suriti Chowdhary, Salil Kapoor, Ananya Kapoor, Sumit Lalchandani, Sanat Kapoor, Soumya Singh, Kamal Mohan Gupta, V. Balachandran, K.R. Vasudevan, Siddharth Naidu, Kishore Kunal, Manish Rastogi, Tanushree Jain, Parth Jaiprakash, Jagjit Singh Chhabra, Vanita Bhargava, Ajay Bhargava, Trishala Trivedi, Maithili Moondra, for M/s. Khaitan & Co., G. Sridhar, Gayatri Gulati, Siddharth Vasudev, Rahul Unnikrishnan, Sandeep Bagmar, T. V. S. Raghavendra Sreyas, Ambhoj Kumar Sinha, Vishal Kalra, S.S. Tomar, Anil Kumar Gautam, Debmalya Banerjee, Kartik Bhatnagar, Astha Prasad, Rohan Sharma, Ujjwal Singh, Vardaan Wanchoo, for M/s. Karanjawala & Co., Rony Oommen John, Piyush Swami, Arshdeep Singh, G.C. Srivastava, Suvinay Kumar Dash, Piyush Sachdev, Runamoni Bhuyan, Jagjit Singh Chhabra, Kavita Jha, Senthil Jagadeesan, Anil Katiyar, Anil Kumar Gautam, V. Balachandran, B. Vijayalakshmi Menon, Kunal Verma, Rony Oommen John, M/S. Karanjawala & Co., M/S. Khaitan & Co., Ambhoj Kumar Sinha, H. Raghavendra Rao, T. V. S. Raghavendra Sreyas, B. Vijayalakshmi Menon, Kamal Mohan Gupta, Runamoni Bhuyan, Anil Katiyar, Kishore Kunal, Advocates

IMPORTANT POINTS
(1) No copyright exists in India outside provisions of Copyright Act or any other special law for time being in force.
(2) Ownership of copyright in a work is different from ownership of physical material in which copyrighted work may happen to be embodied.
(3) TDS – Amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for resale/use of computer software through EULAs/distribution agreements, is not payment of royalty for use of copyright in computer software and same does not give rise to any income taxable in India, as a result of which persons referred to in Section 195 of Income Tax Act were not liable to deduct any TDS under Section 195 of Income Tax Act.

Headnote:
(A) Copyright Act, 1957 – Sections 14 and 16 – Copyright – Import – Copyright” means “exclusive right”, subject to provisions of Act, to do or authorise doing of certain acts “in respect of a work” – When an author in relation to a literary work which includes a computer programme, creates such work, such author has exclusive right, subject to provisions of Copyright Act, to do or authorise doing of several acts in respect of such work or any substantial part thereof – In essence, such right is referred to as copyright and includes right to reproduce work in any material form, issue copies of work to public, perform work in public, or make translations or adaptations of work – Right to reproduce a computer programme and exploit reproduction by way of sale, transfer, license etc. is at heart of said exclusive right – No copyright exists in India outside provisions of Copyright Act or any other special law for time being in force. (Paras 35, 36 and 38)
(B) Copyright Act, 1957 – Section 14 – Copyright – Import – Copyright is an exclusive right which is negative in nature, being a right to restrict others from doing certain acts – Copyright is an intangible, incorporeal right, in nature of a privilege which is quite independent of any material substance – Ownership of copyright in a work is different from ownership of physical material in which copyrighted work may happen to be embodied – Parting with copyright entails parting with right to do any of acts mentioned in Section 14 of Copyright Act – Transfer of material substance does not, of itself, serve to transfer copyright therein – Transfer of ownership of physical substance in which copyright subsists, gives purchaser right to do with it whatever he pleases, except right to reproduce the same and issue it to public, unless such copies are already in circulation and other acts mentioned in Section 14 of Copyright Act – A licence from a copyright owner, conferring no proprietary interest on licensee, does not entail parting with any copyright, and is different from a licence issued under Section 30 of Copyright Act which is a licence which grants licensee an interest in rights mentioned in Section 14(a) and 14(b) of Copyright Act – Where core of a transaction is to authorize end-user to have access to and make use of “licensed” computer software product over which licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by Section 52(1)(aa) of Copyright Act – It makes no difference whether end-user is enabled to use computer software that is customised to its specifications or otherwise – A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of enumerated rights mentioned in Section 14 of Copyright Act, or create any interest in any such rights so as to attract Section 30 of Copyright Act – Right to reproduce and right to use computer software are distinct and separate rights, former amounting to parting with copyright and latter, in context of non-exclusive EULAs, not being so. (Para 117)
(C) Copyright Act, 1957 – Section 14(b)(ii) – Copyright – It is exclusive right of owner to sell or to give on commercial rental or offer for sale or for commercial rental any copy of computer programme – A distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within scope of the provision – Sale or commercial rental spoken of in Section 14(b)(ii) of Copyright Act is of any copy of a computer programme, making it clear that section would only apply to making of copies of computer programme and then selling them, i.e., reproduction of same for sale or commercial rental – Once it is understood that object of Section 14(b)(ii) of Copyright Act is not to interdict sale of computer software that is licensed to be sold by a distributor, but that it is to prevent copies of computer software once sold being reproduced and then transferred by way of sale or otherwise, any sale by author of a computer software to a distributor for onward sale to an end-user, cannot possibly be hit by said provision – Distributor cannot use computer software at all and has to pass on said software, as shrink-wrapped by owner, to end-user for a consideration, distributor’s profit margin being that of an intermediary who merely resells same product to end-user. (Paras 142 and 143)
(D) Income Tax Act, 1961 – Section 195 – Tax Deductible at Source (TDS) – Amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for resale/use of computer software through EULAs/distribution agreements, is not payment of royalty for use of copyright in computer software and same does not give rise to any income taxable in India, as a result of which persons referred to in Section 195 of Income Tax Act were not liable to deduct any TDS under Section 195 of Income Tax Act – Answer to this question will apply to all four categories of cases – first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer; second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users ; third category concerns cases wherein distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users; fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users. (Paras 168 and 169)
Facts of the case:
Appeals in these cases are by both the assessees as well as the Department of Revenue, Ministry of Finance [Revenue]. Whereas assessees have succeeded in the question that was posed before the High Court of Delhi,1 the Revenue has succeeded insofar as the same question was posed before the High Court of Karnataka,2 and in the ruling by the Authority for Advance Rulings [AAR], impugned in C.A. No. 8990/2018.
Findings of Court:
There is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to assessees, have no application in the facts of these cases.
Result : Appeals allowed.

JUDGMENT :

R.F. Nariman, J.

1. Leave granted.

2. The appeals in these cases are by both the assessees as well as the Department of Revenue, Ministry of Finance [“Revenue”]. Whereas the assessees have succeeded in the question that was posed before the High Court of Delhi, ¹[This includes the judgments impugned in C.A No. 8990/2018, C.A Nos. 6386-6387/2016, SLP(C) No. 37580/2016, SLP(C) No. 28867/2016, SLP(C) No. 28868/2016, C.A No. 10673/2016, SLP(C) No. 29571/2016, C.A No. 10674/2016, SLP(C) No. 36782/2016, C.A No. 10758/2017, C.A No. 9486/2017, C.A No. 8711/2018, C.A No. 8722/2018, C.A No. 8724/2018, C.A No. 8725/2018, C.A No. 9551/2018, SLP(C) NO. 450/2019, SLP(C) No. 6736/2020.] the Revenue has succeeded insofar as the same question was posed before the High Court of Karnataka, ²[This includes the judgments impugned in C.A Nos. 8735-8736/2018, C.A Nos. 8737-8941/2018, C.A Nos. 8942-8947/2018, C.A Nos. 8950-8953/2018, C.A Nos. 8948-8949/2018, C.A No. 4419/2012, C.A No. 4420/2012, C.A No. 10114/2013, C.A No. 10097/2013, C.A Nos. 10112-10113/2013, C.A No. 10106/2013, C.A Nos. 8954-8955/2018, C.A Nos. 10115-10117/2013, C.A No. 8956/2018, C.A No. 8957/2018, C.A No. 10103/2013, C.A No. 10104/2013, C.A No. 8960/2018, C.A No. 8966/2018, C.A No. 8958/2018, C.A No. 8959/2018, C.A No. 8962/2018, C.A No. 8961/2018, C.A No. 8963/2018, C.A No. 8964/2018, C.A No. 8965/2018, C.A No. 8969/2018, C.A No. 8967/2018, C.A No. 8968/2018, C.A No. 8972/2018, C.A No. 8971/2018, C.A No. 8970/2018, C.A No. 4629/2014, C.A No. 8973/2018, C.A No. 4631/2014, C.A No. 4630/2014, C.A Nos. 8974-8975/2018, C.A No. 10105/2013, C.A No. 7852/2012, C.A Nos. 1416-1418/2013, C.A No. 1403/2013, C.A No. 1405/2013, C.A No. 1410/2013, C.A No. 1421/2013, C.A No. 1409/2013, C.A No. 1415/2013, C.A No. 1414/2013, C.A No. 1412/2013, C.A No. 1413/2013, C.A No. 1419/2013, C.A No. 1411/2013, C.A No. 1420/2013, C.A No. 1404/2013, C.A No. 1406/2013, C.A No. 1408/2013, C.A No. 1407/2013, C.A No. 2304/2013, C.A No. 2305/2013, C.A No. 2306/2013, C.A Nos. 10098-10102/2013, C.A Nos. 2307-2308/2013, C.A Nos. 4666-4667/2013, C.A No. 6764/2013, C.A No. 4634/2014, C.A No. 8976/2018, C.A Nos. 8977-8988/2018, C.A No. 3402/2017, C.A No. 2006/2019.] and in the ruling by the Authority for Advance Rulings [“AAR”], impugned in C.A. No. 8990/2018.

3. One group of appeals arises from a common judgment of the High Court of Karnataka dated 15.10.2011 reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, by which the question which was posed before the High Court, was answered stating that the amounts paid by the concerned persons resident in India to non-resident, foreign software suppliers, amounted to royalty and as this was so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 [“Income Tax Act”], thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source [“TDS”] under section 195 of the Income Tax Act. This judgment dated 15.10.2011 has been relied upon by the subsequent impugned judgments passed by the High Court of Karnataka to decide the same question in favour of the Revenue.

4. The appeals before us may be grouped into four categories:

(i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. ³[This category includes C.A. Nos. 8733-8734/2018, C.A. No. 10114/2013, C.A. Nos. 10112-10113/2013, C.A. No. 10106/2013, C.A. No. 10103/2013, C.A. No. 10104/2013, C.A. Nos. 10098-10102/2013, C.A. Nos. 8735-8736/2018, C.A. Nos. 8948-8949/2018, C.A. No. 8956/2018, C.A. No. 8957/2018, C.A. No. 7852/2012, C.A. Nos. 8974-8975/2018, C.A. No. 2304/2013, C.A. No. 2305/2013, C.A. No. 2306/2013, C.A. Nos. 2307-2308/2013, C.A. No. 10097/2013, C.A. No. 8976/2018, C.A.

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2021 Supreme(SC) 120

Cases Referred (24)