Facts of the Case

The petitioners, EY Global Services Ltd. (UK) and EYGBS (India) Pvt. Ltd., challenged the rulings dated 10.08.2016 passed by the Authority for Advance Rulings (AAR).

EY Global Services Ltd. (UK) provided technology support services and procured software licenses from third-party vendors for use by EY network entities globally. EYGBS (India) entered into agreements to receive the right to benefit from such services and software (deliverables).

The AAR ruled that payments relating to software access constituted “royalty” under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 13 of the India-UK DTAA.

Aggrieved, the petitioners approached the Delhi High Court challenging the classification of such payments.

Issues Involved

  1. Whether payments for software access/services constitute Fees for Technical Services (FTS) under Article 13 of India-UK DTAA.
  2. Whether reimbursement of costs qualifies as income under Section 2(24) of the Income-tax Act.
  3. Whether payments for “right to benefit from deliverables/software” amount to royalty under Section 9(1)(vi) and DTAA.
  4. Whether such payments are taxable in India in absence of Permanent Establishment (PE).
  5. Applicability of withholding tax under Section 195.

Petitioner’s Arguments

  • The petitioner contended that no copyright in the software was transferred; only a limited right to use was granted.
  • The arrangement involved a non-exclusive, non-transferable license, without rights of reproduction or commercial exploitation.
  • Reliance was placed on the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021).
  • It was argued that payments for use of software do not constitute royalty, as there is no transfer of rights under Section 14 of the Copyright Act.

Respondent’s Arguments

  • The Revenue argued that the arrangement involved commercial exploitation of software through centralized procurement and distribution.
  • Software was treated as a “literary work”, and payments for its use qualify as royalty under Article 13 of DTAA.
  • It was contended that retrospective amendments to Section 9(1)(vi) expanded the definition of royalty.
  • The Supreme Court ruling in Engineering Analysis was claimed to be inapplicable to the present facts.

Court’s Findings / Order

The Delhi High Court set aside the AAR ruling and held:

  • Mere access to software without transfer of copyright does not amount to royalty.
  • A non-exclusive, non-transferable license only enables use and does not transfer proprietary rights.
  • The principles laid down in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) squarely apply.
  • The transaction does not involve transfer of rights under Section 14 of the Copyright Act.

Final Holding:

Payments received by EY Global Services Ltd. (UK) for providing access to software are NOT taxable as royalty under:

  • Section 9(1)(vi) of the Income-tax Act, 1961
  • Article 13 of the India-UK DTAA

Important Clarification

  • Distinction between “right to use software” vs “right to use copyright” reaffirmed.
  • Even centralized procurement and shared usage models do not amount to royalty unless copyright rights are transferred.
  • Retrospective amendments cannot override DTAA provisions where beneficial to the taxpayer.
  • The judgment reinforces that DTAA provisions prevail over domestic law.

Sections Involved

  • Section 9(1)(vi), Income-tax Act, 1961 (Royalty)
  • Section 2(24), Income-tax Act, 1961 (Income)
  • Section 195, Income-tax Act, 1961 (TDS on non-residents)
  • Article 13, India-UK DTAA (Royalties & FTS)
  • Section 14, Copyright Act, 1957

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

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