Facts of the Case

  • EY Global Services Ltd. (UK) provided technology services, software licenses, and support services to EY network entities globally.
  • EYGBS (India) Pvt. Ltd. entered into agreements to receive access to deliverables/services, including software.
  • Software was procured by the UK entity from third-party vendors and made accessible to member firms through a centralized system.
  • The AAR ruled that:
    • Payments for software usage constituted royalty
    • Payments were taxable in India and subject to withholding tax
  • The petitioners challenged this ruling before the Delhi High Court.

Issues Involved

  1. Whether payments for software access constitute “royalty” under Section 9(1)(vi) and Article 13 of DTAA
  2. Whether such payments qualify as Fee for Technical Services (FTS)
  3. Whether reimbursement of costs constitutes income
  4. Whether absence of Permanent Establishment (PE) affects taxability
  5. Whether TDS under Section 195 is applicable

Petitioner’s Arguments

  • Payments were for mere use/access of software, not transfer of copyright.
  • Relied on Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd.
  • No exclusive rights or rights under Section 14 of Copyright Act were transferred.
  • Therefore, payments cannot be classified as royalty under DTAA.
  • The transaction was only a licensed use, not commercial exploitation.

Respondent’s Arguments

  • Software constitutes a “literary work”, and payments for its use fall under royalty.
  • The arrangement amounted to commercial exploitation of software.
  • Amendment to Section 9(1)(vi) expanded the scope of royalty retrospectively.
  • Supreme Court judgment not applicable as facts differ.

Court Findings / Judgment

  • The Court relied heavily on Engineering Analysis (SC) judgment.
  • Held that:
    • No transfer of copyright occurred
    • Only a non-exclusive, non-transferable right to use software was granted
  • Therefore:
    • Payment does NOT qualify as royalty
    • AAR ruling was incorrect and set aside
  • Payments are not taxable in India under:
    • Income Tax Act
    • India-UK DTAA

Important Clarifications

  • Mere use of software ≠ transfer of copyright
  • Distinction between:
    • Right to use copyrighted article vs
    • Right in copyright itself
  • DTAA provisions override domestic law where beneficial
  • Retrospective amendment to Section 9(1)(vi) does not override DTAA interpretation

Sections Involved

  • Section 9(1)(vi), Income Tax Act, 1961
  • Section 2(24), Income Tax Act, 1961
  • Section 195, Income Tax Act, 1961
  • India–UK Double Taxation Avoidance Agreement (DTAA) – Article 13 (Royalty)
  • Copyright Act, 1957 – Sections 14 & 30

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:4096-DB/NAC09122021CW119572016_182945.pdf

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