Holding

The amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers as consideration for the resale/use of computer software through EULAs/distribution agreements is not payment of royalty for the use of copyright in the computer software, and does not give rise to any income taxable in India, so no TDS is required under section 195 of the Income Tax Act.

Summary

The Supreme Court considered appeals concerning whether payments made by Indian residents to non-resident foreign software suppliers for computer software, under End User Licence Agreements (EULAs) and distribution agreements, constitute 'royalty' under the Income Tax Act, 1961 and Double Taxation Avoidance Agreements (DTAAs), thereby requiring tax deduction at source (TDS) under section 195. The Court examined the definition of royalty in the DTAAs and the Income Tax Act, the nature of rights transferred under EULAs, and the provisions of the Copyright Act, 1957. It held that such payments are not royalty because the EULAs do not transfer any copyright interest; they are merely sales of goods. The Court also clarified that the DTAA definition prevails over the domestic law when more beneficial, and that the retrospective amendment (Explanation 4 to section 9(1)(vi)) cannot be applied to prior assessment years. Consequently, no TDS is required. The appeals from the Karnataka High Court were allowed, and those from the Delhi High Court were dismissed.

Issues considered

Whether amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers as consideration for the resale/use of computer software through EULAs/distribution agreements constitute 'royalty' under the Income Tax Act and DTAAs?
Whether such payments give rise to income taxable in India, requiring TDS under section 195 of the Income Tax Act?
Whether the definition of 'royalty' in the DTAAs or the Income Tax Act applies, and which is more beneficial to the assessee?
Whether the retrospective amendment (Explanation 4 to section 9(1)(vi)) can be applied to assessment years prior to 2012?
Whether the EULAs transfer any copyright interest under the Copyright Act, 1957?
Whether the doctrine of first sale/principle of exhaustion applies to computer software under section 14(b)(ii) of the Copyright Act?

Legislation cited

Copyright Act, 1957s. 14, s. 16, s. 18, s. 19, s. 2, s. 30, s. 51, s. 52, s. 58
Double Taxation Avoidance Agreement (India-China)s. Article 12
Double Taxation Avoidance Agreement (India-Finland)s. Article 12
Double Taxation Avoidance Agreement (India-Ireland)s. Article 12
Double Taxation Avoidance Agreement (India-Japan)s. Article 12
Double Taxation Avoidance Agreement (India-Netherlands)s. Article 12
Double Taxation Avoidance Agreement (India-Singapore)s. Article 12
Double Taxation Avoidance Agreement (India-UK)s. Article 12
Double Taxation Avoidance Agreement (India-USA)s. Article 12, s. Article 30
Income Tax Act, 1961s. 194E, s. 195, s. 2, s. 201, s. 4, s. 5, s. 9, s. 90

Subjects

Income TaxTax Deduction at SourceRoyaltyCopyrightDouble Taxation Avoidance AgreementComputer SoftwareEnd User Licence AgreementDoctrine of First SaleOECD CommentaryCopyright ActSection 195Section 9(1)(vi)Explanation 4Permanent Establishment

Judgment

[2021] 2 S.C.R. 321

ENGINEERING ANALYSIS CENTRE OF EXCELLENCE
PRIVATE LIMITED
v.
THE COMMISSIONER OF INCOME TAX & ANR.
(Civil Appeal Nos. 8733-8734 of 2018)
MARCH 02, 2021
[R. F. NARIMAN, HEMANT GUPTA AND B. R. GAVAI, JJ.]
Income Tax Act, 1961: s.195 – Amount paid by resident in
India to non-resident foreign software suppliers – Liability to deduct
tax at source – Held: In view of the definition of royalties contained
in Article 12 of the DTAAs, there is no obligation on the persons
mentioned in s. 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
amounts paid by resident Indian end-users/distributors to non-
resident computer software manufacturers/suppliers, as
consideration for the resale/use of the computer software through
EULAs/distribution agreements, is not the payment of royalty for
the use of copyright in the computer software, and same does not
give rise to any income taxable in India, as a result of which the
persons referred to in s.195 of the Income Tax Act are not liable to
deduct any TDS under s.195 of the Income Tax Act.
Income Tax Act, 1961: s.194E and s.195 – Distinction between
– Held: s.194E of the Income Tax Act belongs to a set of various
provisions which deal with TDS, without any reference to
chargeability of tax under the Income Tax Act by the concerned
non-resident assessee – This section is similar to s.193 and s.194 of
the Income Tax Act by which deductions have to be made without
any reference to the chargeability of a sum received by a non-resident
assessee under the Income Tax Act – On the other hand, at the
heart of s.195 of the Income Tax Act is the fact that deductions can
only be made if the non resident assessee is liable to pay tax under
the provisions of the Income Tax Act in the first place.

321
322 SUPREME COURT REPORTS [2021] 2 S.C.R.

A Income Tax Act, 1961: Applicability of Income Tax Act, 1961
when DTAA applies – Held: Once a DTAA applies, the provisions of
the Income Tax Act can only apply to the extent that they are more
beneficial to the assessee and not otherwise – Further, by explanation
4 to s.90 of the Income Tax Act, it has been clarified by the
Parliament that where any term is defined in a DTAA, the definition
B
contained in the DTAA is to be looked at – It is only where there is
no such definition that the definition in the Income Tax Act can then
be applied.
Income Tax Act, 1961: s.90 – Royalty – Meaning of – Held:
As is now reflected by explanation 4 to s.90 of the Income Tax Act
C and under Article 3(2) of the DTAA, the definition of the term
“royalties” shall have the meaning assigned to it by the DTAA,
meaning thereby that the expression “royalty”, when occurring in
s.9 of the Income Tax Act, has to be construed with reference to
Article 12 of the DTAA – This position is also clarified by CBDT
D Circular No. 333 dated 02.04.1982 – Thus, by virtue of Article 12(3)
of the DTAA, royalties are payments of any kind received as
consideration for “the use of, or the right to use, any copyright” of
a literary work, which includes a computer programme or software.
Income Tax Act, 1961: s.9(1)(vi) explanation 4; s.195 – The
E question whether persons liable to deduct TDS under s.195 can be
held liable to deduct such sums at a time when explanation 4 was
factually not on the statute book, all deductions liable to be made
and the assessment years in question being prior to the year 2012 –
This question is answered by two latin maxims, lex non cogit ad
impossibilia, i.e., the law does not demand the impossible and
F impotentia excusat legem, i.e., when there is a disability that makes it
impossible to obey the law, the alleged disobedience of the law is
excused – The “person” mentioned in s.195 cannot be expected to
do the impossible, namely, to apply the expanded definition of
“royalty” inserted by explanation 4 to s.9(1)(vi) of the Income Tax
G Act, for the assessment years in question, at a time when such
explanation was not actually and factually in the statute.
Copyright Act, 1957: Copyright – Meaning of – Though the
expression “copyright” has not been defined separately in the
“definitions” section of the Copyright Act, yet, s.14 makes it clear
H that “copyright” means the “exclusive right”, subject to the
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 323
THE COMMISSIONER OF INCOME TAX

provisions of the Act, to do or authorise the doing of certain acts A
“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 the exclusive right, subject to the provisions of the
Copyright Act, to do or authorise the doing of several acts in respect
of such work or any substantial part thereof.
B
Copyright Act, 1957: s.14(b) – Right to use computer software
– When, under a non-exclusive licence, an end-user gets the right
to use computer software in the form of a CD, the end-user only
receives a right to use the software and nothing more – The end-
user does not get any of the rights that the owner continues to retain
under s.14(b) of the Copyright Act read with sub-section (a)(i)-(vii) C
thereof – Thus, the conclusion that when computer software is
licensed for use under an EULA, what is also licensed is the right to
use the copyright embedded therein, is wholly incorrect – The licence
for the use of a product under an EULA cannot be construed as the
licence spoken of in s.30 of the Copyright Act, as such EULA only D
imposes restrictive conditions upon the end-user and does not part
with any interest relatable to any rights mentioned in ss.14(a) and
14(b) of the Copyright Act.
Copyright Act, 1957: ss.14, 16, 30, 52(1)(aa), 52(1)(b),
52(1)(ad) – Infringement of copyright – Held: No copyright exists E
in India outside the provisions of the Copyright Act or any other
special law for the time being in force, vide s.16 of the Copyright
Act – When the owner of copyright in a literary work assigns wholly
or in part, all or any of the rights contained in s.14(a) and (b) of
the Copyright Act, in the said work for a consideration, the assignee
of such right becomes entitled to all such rights comprised in the F
copyright that is assigned, and shall be treated as the owner of the
copyright of what is assigned to him – Also, under s.30 of the
Copyright Act, the owner of the copyright in any literary work may
grant any interest in any right mentioned in s.14(a) of the Copyright
Act by licence in writing by him to the licensee, under which, for G
parting with such interest, royalty may become payable – When such
licence is granted, copyright is infringed when any use, relatable
to the said interest/right that is licensed, is contrary to the conditions
of the licence so granted – Infringement of copyright takes place
when a person “makes for sale or hire or sells or lets for hire” or
H
324 SUPREME COURT REPORTS [2021] 2 S.C.R.

A “offers for sale or hire” or “distributes…so as to affect prejudicially
the owner of the copyright”, vide s.51(b) of the Copyright Act –
Importantly, the making of copies or adaptation of a computer
programme in order to utilise the said computer programme for the
purpose for which it was supplied, or to make up back-up copies
as a temporary protection against loss, destruction or damage so
B
as to be able to utilise the computer programme for the purpose for
which it was supplied, does not constitute an act of infringement of
copyright under s.52(1)(aa) of the Copyright Act – In short, what is
referred to in s.52(1)(aa) of the Copyright Act would not amount to
reproduction so as to amount to an infringement of copyright –
C s.52(1)(ad) is independent of s.52(1)(aa) of the Copyright Act, and
states that the making of copies of a computer programme from a
personally legally obtained copy for non-commercial personal use
would not amount to an infringement of copyright – s.52(1)(ad) of
the Copyright Act cannot be read to negate the effect of s.52(1)(aa),
since it deals with a subject matter that is separate and distinct from
D
that contained in s.52(1)(aa) of the Copyright Act.
Copyright Act, 1957: Copyright owner’s distribution right and
the right of the purchaser to further resale – Doctrine of first sale/
principle of exhaustion – Applicability of – Held: s.14(b)(ii) of the
Copyright Act was amended twice, first in 1994 and then again in
E 1999, with effect from 15.01.2000 – After the 1999 Amendment,
what is conspicuous by its absence is the phrase “regardless of
whether such copy has been sold or given on hire on earlier
occasions” – This is a statutory recognition of the doctrine of first
sale/principle of exhaustion.
F Words and Phrases: Expression ‘in respect of ’ – Meaning of
– Also in context of explanation 2(v) to s.9(1)(vi) of the Income Tax
Act – Held: The expression “in respect of”, when used in a taxation
statute, is only synonymous with the words “on” or “attributable
to” – Such meaning accords with the meaning to be given to the
G expression “in respect of” contained in explanation 2(v) to s.9(1)(vi)
of the Income Tax Act, and would not in any manner make the
expression otiose.
Disposing of the appeals, the Court
HELD: 1. Under section 5(2) of the Income Tax Act, the
H total income of a person who is a non-resident, includes all income
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 325
THE COMMISSIONER OF INCOME TAX

from whatever source derived, which accrues or arises or is A
deemed to accrue or arise to such person in India during such
year. This, however, is subject to the provisions of the Income
Tax Act. Certain income is deemed to arise or accrue in India,
under section 9 of the Income Tax Act, notwithstanding the fact
that such income may accrue or arise to a non-resident outside
B
India. One such income is income by way of royalty, which, under
section 9(1)(vi) of the Income Tax Act, means the transfer of all
or any rights, including the granting of a licence, in respect of any
copyright in a literary work. That such transaction may be
governed by a DTAA is then recognized by section 5(2) read
with section 90 of the Income Tax Act, making it clear that the C
Central Government may enter into any such agreement with
the government of another country so as to grant relief in respect
of income tax chargeable under the Income Tax Act or under any
corresponding law in force in that foreign country, or for the
avoidance of double taxation of income under the Income Tax
D
Act and under the corresponding law in force in that country.
What is of importance is that once a DTAA applies, the provisions
of the Income Tax Act can only apply to the extent that they are
more beneficial to the assessee and not otherwise. Further, by
explanation 4 to section 90 of the Income Tax Act, it has been
clarified by the Parliament that where any term is defined in a E
DTAA, the definition contained in the DTAA is to be looked at.
It is only where there is no such definition that the definition in
the Income Tax Act can then be applied. [Paras 25, 26][361-C-G]
2. The machinery provision contained in section 195 of the
Income Tax Act is inextricably linked with the charging provision F
contained in section 9 read with section 4 of the Income Tax Act,
as a result of which, a person resident in India, responsible for
paying a sum of money, “chargeable under the provisions of [the]
Act”, to a non-resident, shall at the time of credit of such amount
to the account of the payee in any mode, deduct tax at source at
the rate in force which, under section 2(37A)(iii) of the Income G
Tax Act, is the rate in force prescribed by the DTAA. Such
deduction is only to be made if the non resident is liable to pay
tax under the charging provision contained in section 9 read with

H
326 SUPREME COURT REPORTS [2021] 2 S.C.R.

A section 4 of the Income Tax Act, read with the DTAA. Thus, it is
only when the non-resident is liable to pay income tax in India on
income deemed to arise in India and no deduction of TDS is made
under section 195(1) of the Income Tax Act, or such person has,
after applying section 195(2) of the Income Tax Act, not deducted
such proportion of tax as is required, that the consequences of a
B
failure to deduct and pay, reflected in section 201 of the Income
Tax Act, follow, by virtue of which the resident-payee is deemed
an “assessee in default”, and thus, is made liable to pay tax,
interest and penalty thereon. [Para 27][362-E-H; 363-A-B]
GE India Technology Centre (P) Ltd. v. CIT (2010) 10
C SCC 29:[2010] 10 SCR 1142 – relied on.
3. It will be seen that section 194E of the Income Tax Act
belongs to a set of various provisions which deal with TDS,
without any reference to chargeability of tax under the Income
Tax Act by the concerned nonresident assessee. This section is
D similar to sections 193 and 194 of the Income Tax Act by which
deductions have to be made without any reference to the
chargeability of a sum received by a non-resident assessee under
the Income Tax Act. On the other hand, at the heart of section
195 of the Income Tax Act is the fact that deductions can only be
E made if the nonresident assessee is liable to pay tax under the
provisions of the Income Tax Act in the first place. [Para 31][364-
E-F]
PILCOM v. CIT, West Bengal VII, 2020 SCC Online
SC 426 – held inapplicable.
F 4.1 Under section 2(o) of the Copyright Act, a literary work
includes a computer programme and a computer programme has
been defined under section 2(ffc) of the Copyright Act to mean a
set of instructions expressed in words, codes, schemes or in any
other form capable of causing a computer to perform a particular
G task or achieve a particular result. Though the expression
“copyright” has not been defined separately in the “definitions”
section of the Copyright Act, yet, section 14 makes it clear that
“copyright” means the “exclusive right”, subject to the
provisions of the Act, to do or authorise the doing of certain acts
“in respect of a work”. When an “author” in relation to a “literary
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 327
THE COMMISSIONER OF INCOME TAX

work” which includes a “computer programme”, creates such A
work, such author has the exclusive right, subject to the
provisions of the Copyright Act, to do or authorise the doing of
several acts in respect of such work or any substantial part thereof.
In the case of a computer programme, section 14(b) specifically
speaks of two sets of acts – the seven acts enumerated in sub-
B
clause (a) and the eighth act of selling or giving on commercial
rental or offering for sale or for commercial rental any copy of the
computer programme. Insofar as the seven acts that are set out
in sub-clause (a) are concerned, they all delineate how the
exclusive right that is with the owner of the copyright may be
parted with, i.e., if there is any parting with the right to reproduce C
the work in any material form; the right to issue copies of the
work to the public, not being copies already in circulation; the
right to perform the work in public or communicate it to the public;
the right to make any cinematograph film or sound recording in
respect of the work; the right to make any translation of the work;
D
the right to make any adaptation of the work; or the right to do
any of the specified acts in relation to a translation or an
adaptation. [Paras 34 and 35][370-F-H; 371-A-D]
4.2 In essence, such right is referred to as copyright, and
includes the right to reproduce the work in any material form,
issue copies of the work to the public, perform the work in public, E
or make translations or adaptations of the work. This is made
even clearer by the definition of an “infringing copy” contained
in section 2(m) of the Copyright Act, which in relation to a
computer programme, i.e., a literary work, means reproduction
of the said work. Thus, the right to reproduce a computer F
programme and exploit the reproduction by way of sale,
transfer, license etc. is at the heart of the said exclusive right.
[Para 36][371-D-F]
5. Importantly, no copyright exists in India outside the
provisions of the Copyright Act or any other special law for the G
time being in force, vide section 16 of the Copyright Act. When
the owner of copyright in a literary work assigns wholly or in
part, all or any of the rights contained in section 14(a) and (b) of
the Copyright Act, in the said work for a consideration, the
assignee of such right becomes entitled to all such rights
H
328 SUPREME COURT REPORTS [2021] 2 S.C.R.

A comprised in the copyright that is assigned, and shall be treated
as the owner of the copyright of what is assigned to him. Also,
under section 30 of the Copyright Act, the owner of the copyright
in any literary work may grant any interest in any right mentioned
in section 14(a) of the Copyright Act by licence in writing by him
to the licensee, under which, for parting with such interest, royalty
B
may become payable. When such licence is granted, copyright is
infringed when any use, relatable to the said interest/right that is
licensed, is contrary to the conditions of the licence so granted.
Infringement of copyright takes place when a person “makes for
sale or hire or sells or lets for hire” or “offers for sale or hire” or
C “distributes…so as to affect prejudicially the owner of the
copyright”, vide section 51(b) of the Copyright Act. Importantly,
the making of copies or adaptation of a computer programme in
order to utilise the said computer programme for the purpose
for which it was supplied, or to make up back-up copies as a
temporary protection against loss, destruction or damage so as
D
to be able to utilise the computer programme for the purpose for
which it was supplied, does not constitute an act of infringement
of copyright under section 52(1)(aa) of the Copyright Act. In short,
what is referred to in section 52(1)(aa) of the Copyright Act would
not amount to reproduction so as to amount to an infringement of
E copyright. [Para 38][372-A-F]
6. Section 52(1)(ad) is independent of section 52(1)(aa) of
the Copyright Act, and states that the making of copies of a
computer programme from a personally legally obtained copy for
non-commercial personal use would not amount to an
F infringement of copyright. Section 52(1)(ad) of the Copyright Act
cannot be read to negate the effect of section 52(1)(aa), since it
deals with a subject matter that is separate and distinct from that
contained in section 52(1)(aa) of the Copyright Act. [Para 39]
[372-F-H]
G 7. As is now reflected by explanation 4 to section 90 of the
Income Tax Act and under Article 3(2) of the DTAA, the definition
of the term “royalties” shall have the meaning assigned to it by
the DTAA, meaning thereby that the expression “royalty”, when
occurring in section 9 of the Income Tax Act, has to be construed
with reference to Article 12 of the DTAA. This position is also
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 329
THE COMMISSIONER OF INCOME TAX

clarified by CBDT Circular No. 333 dated 02.04.1982. Thus, by A
virtue of Article 12(3) of the DTAA, royalties are payments of
any kind received as consideration for “the use of, or the right to
use, any copyright” of a literary work, which includes a computer
programme or software. [Paras 42, 43] [376-A-C, G-H]
8. A reading of the distribution agreement would show that B
what is granted to the distributor is only a non-exclusive, non-
transferable licence to resell computer software, it being
expressly stipulated that no copyright in the computer programme
is transferred either to the distributor or to the ultimate end-
user. This is further amplified by stating that apart from a right to
use the computer programme by the end-user himself, there is C
no further right to sub-license or transfer, nor is there any right
to reverse-engineer, modify, reproduce in any manner otherwise
than permitted by the licence to the end-user. What is paid by
way of consideration, therefore, by the distributor in India to the
foreign, non-resident manufacturer or supplier, is the price of D
the computer programme as goods, either in a medium which
stores the software or in a medium by which software is embedded
in hardware, which may be then further resold by the distributor
to the end-user in India, the distributor making a profit on such
resale. Importantly, the distributor does not get the right to use
the product at all. When it comes to an end-user who is directly E
sold the computer programme, such end-user can only use it by
installing it in the computer hardware owned by the end-user and
cannot in any manner reproduce the same for sale or transfer,
contrary to the terms imposed by the EULA. In all these cases,
the “licence” that is granted vide the EULA, is not a licence in F
terms of section 30 of the Copyright Act, which transfers an
interest in all or any of the rights contained in sections 14(a) and
14(b) of the Copyright Act, but is a “licence” which imposes
restrictions or conditions for the use of computer software. Thus,
it cannot be said that any of the EULAs in these cases are
referable to section 30 of the Copyright Act, inasmuch as section G
30 of the Copyright Act speaks of granting an interest in any of
the rights mentioned in sections 14(a) and 14(b) of the Copyright
Act. The EULAs in all the appeals do not grant any such right or

H
330 SUPREME COURT REPORTS [2021] 2 S.C.R.

A interest, least of all, a right or interest to reproduce the computer
software. Such reproduction is expressly interdicted, and it is
also expressly stated that no vestige of copyright is at all
transferred, either to the distributor or to the end-user. Thus,
what is “licensed” by the foreign, non-resident supplier to the
distributor and resold to the resident end-user, or directly supplied
B
to the resident end-user in these cases is in fact the sale of a
physical object which contains an embedded computer
programme. [Paras 45, 46, 47 and 52][386-C-H; 387-A-B;
392-G-H]
State Bank of India v. Collector of Customs, (2000) 1
C SCC 727: [2000] 1 SCR 137 – relied on.
Sundaram Finance Ltd. v. State of Kerala, [1966] 2 SCR
828 – referred to
9. There is no doubt that section 9 of the Income Tax Act
D refers to persons who are non-residents and taxes their income
as income which is deemed to accrue or arise in India, thus,
making such persons assessees under the Income Tax Act, who
are liable to pay tax. There is also no doubt that the “person
responsible for paying” spoken of in section 195 of Income Tax
Act is not a non-resident assessee, but a person resident in India,
E who is liable to make deductions under section 195 when payments
are made by it to the non-resident assessee. [Para 54][393-E-F]
Vodafone International Holdings BV v. Union of India,
(2012) 6 SCC 613 : [2012] 1 SCR 573 – relied on.

F 10. DEFINITION OF ROYALTY IN THE DTAAs VIS-À-
VIS THE INCOME TAX ACT
10.1 When Article 12 of the India-Singapore DTAA defines
the term “royalties” in sub-article (3) thereof, it does so stating
that such definition is exhaustive – it uses the expression
“means”. Secondly, the term “royalties” refers to payments of
G
any kind that are received as a consideration for the use of or the
right to use any copyright in a literary work. As opposed to this,
the definition contained in explanation 2 to section 9(1)(vi) of the
Income Tax Act, is wider in at least three respects: It speaks of
“consideration”, but also includes a lump-sum consideration
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 331
THE COMMISSIONER OF INCOME TAX

which would not amount to income of the recipient chargeable A
under the head “capital gains”; When it speaks of the transfer of
“all or any rights”, it expressly includes the granting of a licence
in respect thereof; and It states that such transfer must be “in
respect of” any copyright of any literary work. However, even
where such transfer is “in respect of” copyright, the transfer of
B
all or any rights in relation to copyright is a sine qua non under
explanation 2 to section 9(1)(vi) of the Income Tax Act. In short,
there must be transfer by way of licence or otherwise, of all or
any of the rights mentioned in section 14(b) read with section
14(a) of the Copyright Act. [Paras 63 and 64][404-H; 405-A-E]
State of Madras v. Swastik Tobacco Factory, [1966] 3 C
SCR 79 – referred to
10.2 The insertion of sub-sections (v), (vi) and (vii) in section
9(1) of the Income Tax Act, by way of an amendment through the
Finance Act 1976 was to introduce source-based taxation for
income in the hands of a non-resident by way of interest, royalty D
and fees for technical services. Consequently, section 9(1)(vi) of
the Income Tax Act was brought into force. The definition of
royalty contained in explanation 2(v) of section 9(1)(vi) of the
Income Tax Act includes the transfer of all or any rights (including
the granting of a licence) “in respect of any copyright, literary, E
artistic or scientific work”. The comma after the word “copyright”
does not fit as copyright is obviously spoken of as existing in a
literary, artistic or scientific work. As a matter of fact, this drafting
error was rectified in the Draft Taxes Code 2010, under Chapter
XIX in Part H thereof. [Paras 67, 69, 70][407-A-B; 408-C-E]
F
Carborandum & Co. v. CIT, (1977) 2 SCC 862 : [1977]
3 SCR 475 – referred to.
10.3 The transfer of “all or any rights (including the granting
of a licence) in respect of any copyright”, in the context of
computer software, is referable to sections 14(a), 14(b) and 30 of G
the Copyright Act. As has been held, the expression “in respect
of” is equivalent to “in” or “attributable to”. Thus, explanation
2(v) to section 9(1)(vi) of the Income Tax Act, when it speaks of
“all of any rights…in respect of copyright” is certainly more

H
332 SUPREME COURT REPORTS [2021] 2 S.C.R.

A expansive than the DTAA provision, which speaks of the “use
of, or the right to use” any copyright. However, when it comes to
the expression “use of, or the right to use”, the same position
would obtain under explanation 2(v) of section 9(1)(vi) of the
Income Tax Act, inasmuch as, there must, under the licence
granted or sale made, be a transfer of any of the rights contained
B
in sections 14(a) or 14(b) of the Copyright Act, for explanation
2(v) to apply. To this extent, there will be no difference in the
position between the definition of “royalties” in the DTAAs and
the definition of “royalty” in explanation 2(v) of section 9(1)(vi)
of the Income Tax Act. [Paras 71, 72][409-A-B; G-H; 410-A-B]
C CIT v. DCM Limited, ITA Nos. 87-89/1992 – referred
to.
11. The question whether persons liable to deduct TDS
under section 195 of the Income Tax Act can be held liable to
deduct such sums at a time when explanation 4 was factually not
D on the statute book, all deductions liable to be made and the
assessment years in question being prior to the year 2012. This
question is answered by two latin maxims, lex non cogit ad
impossibilia, i.e., the law does not demand the impossible and
impotentia excusat legem, i.e., when there is a disability that makes
E it impossible to obey the law, the alleged disobedience of the law
is excused. The “person” mentioned in section 195 of the Income
Tax Act cannot be expected to do the impossible, namely, to apply
the expanded definition of “royalty” inserted by explanation 4 to
section 9(1)(vi) of the Income Tax Act, for the assessment years
in question, at a time when such explanation was not actually and
F factually in the statute. [Paras 80, 81 and 85][413-D-F; 420-H;
421-A-B]
Arjun Panditrao Khotkar v. Kailash Kushanrao
Gorantyal,(2020) 7 SCC 1; Citrix Systems Asia Pacific
Ptyl. Ltd., In Re., (2012) 343 ITR 1 (AAR) – referred
G to.
Dassault Systems, K.K., In Re., (2010) 322 ITR 125
(AAR); Geoquest Systems B.V. Gevers Deynootweg, In
Re., (2010) 327 ITR 1 (AAR); Director of Income Tax
v. A.P. Moller Maersk AS, (2017) 5 SCC 651 –
H approved.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 333
THE COMMISSIONER OF INCOME TAX

12. When, under a non-exclusive licence, an end-user gets A
the right to use computer software in the form of a CD, the end-
user only receives a right to use the software and nothing more.
The end-user does not get any of the rights that the owner
continues to retain under section 14(b) of the Copyright Act read
with sub-section (a)(i)-(vii) thereof. Thus, the conclusion that when
B
computer software is licensed for use under an EULA, what is
also licensed is the right to use the copyright embedded therein,
is wholly incorrect. The licence for the use of a product under an
EULA cannot be construed as the licence spoken of in section
30 of the Copyright Act, as such EULA only imposes restrictive
conditions upon the end-user and does not part with any interest C
relatable to any rights mentioned in sections 14(a) and 14(b) of
the Copyright Act. [Para 97][431-E-G]
CIT v. Samsung Electronics Co. Ltd. (2012) 345 ITR
494 – not correct law.
13. The expression “in respect of”, when used in a taxation D
statute, is only synonymous with the words “on” or “attributable
to”. Such meaning accords with the meaning to be given to the
expression “in respect of” contained in explanation 2(v) to section
9(1)(vi) of the Income Tax Act, and would not in any manner make
the expression otiose. Secondly, section 16 of the Copyright Act, E
which states that “no person shall be entitled to
copyright…otherwise than under and in accordance with the
provisions of this Act or of any other law for the time being in
force” has been completely missed, thus making it clear that the
expression “copyright” has to be understood only as is stated in
section 14 of the Copyright Act and not otherwise. Thirdly, the F
storage of a computer programme per se would not constitute
infringement of copyright. This, again, would directly be contrary
to the terms of section 52(1)(aa) of the Copyright Act. [Paras
105, 106 and 107][439-B-E]
State of Madras v. Swastik Tobacco Factory [1966] 3 G
SCR 79 – relied on
Director of Income Tax v. Ericsson A.B., (2012) 343
ITR 470; Director of Income Tax v. Nokia Networks

H
334 SUPREME COURT REPORTS [2021] 2 S.C.R.

A OY, (2013) 358 ITR 259; Director of Income Tax v.
Infrasoft Ltd., (2014) 264 CTR 329; CIT v. ZTE
Corporation, (2017) 392 ITR 80 – approved.
14. Copyright is an exclusive right, which is negative in
nature, being a right to restrict others from doing certain acts.
B Copyright is an intangible, incorporeal right, in the nature of a
privilege, which is quite independent of any material substance.
Ownership of copyright in a work is different from the ownership
of the physical material in which the copyrighted work may happen
to be embodied. An obvious example is the purchaser of a book
or a CD/DVD, who becomes the owner of the physical article, but
C does not become the owner of the copyright inherent in the work,
such copyright remaining exclusively with the owner. Parting with
copyright entails parting with the right to do any of the acts
mentioned in section 14 of the Copyright Act. The transfer of the
material substance does not, of itself, serve to transfer the
D copyright therein. The transfer of the ownership of the physical
substance, in which copyright subsists, gives the purchaser the
right to do with it whatever he pleases, except the right to
reproduce the same and issue it to the public, unless such copies
are already in circulation, and the other acts mentioned in section
14 of the Copyright Act. A licence from a copyright owner,
E conferring no proprietary interest on the licensee, does not entail
parting with any copyright, and is different from a licence issued
under section 30 of the Copyright Act, which is a licence which
grants the licensee an interest in the rights mentioned in section
14(a) and 14(b) of the Copyright Act. Where the core of a
F transaction is to authorize the end-user to have access to and
make use of the “licensed” computer software product over which
the 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 the Copyright Act. It makes no difference
whether the end-user is enabled to use computer software that
G is customised to its specifications or otherwise. A non-exclusive,
non-transferable licence, merely enabling the use of a copyrighted
product, is in the nature of restrictive conditions which are
ancillary to such use, and cannot be construed as a licence to

H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 335
THE COMMISSIONER OF INCOME TAX

enjoy all or any of the enumerated rights mentioned in section 14 A
of the Copyright Act, or create any interest in any such rights so
as to attract section 30 of the Copyright Act. The right to
reproduce and the right to use computer software are distinct
and separate rights. The former amounting to parting with
copyright and the latter, in the context of non-exclusive EULAs,
B
not being so. [Para 117][452-C-H; 453-A-D]
State Bank of India v. Collector of Customs, (2000) 1
SCC 727 : [2000] 1 SCR 1 – relied on
15.1 Section 14(b)(ii) of the Copyright Act was amended
twice, first in 1994 and then again in 1999, with effect from C
15.01.2000. After the 1999 Amendment, what is conspicuous by
its absence is the phrase “regardless of whether such copy has
been sold or given on hire on earlier occasions”. This is a
statutory recognition of the doctrine of first sale/principle of
exhaustion. [Para 120][454-A-C]
D
Copinger and Skone James on Compyright (14 th
Edition) (1999); Warner Bros. Entertainment Inc. v.
Santosh V.G., CS (OS) No. 1682/2006 [“Warner Bros.”]
2009 SCC OnLine Del 835; John Wiley & Sons Inc. v.
Prabhat Chander Kumar Jain, IA No. 11331/2008 in
CS(OS) No. 1960/2008 2010 SCC OnLine Del 2000; E
UseSoft GmbH v. Oracle International Corp. (Case C-
128/11) – referred to.
15.2 The doctrine of first sale/principle of exhaustion is
dependent, in the first place, upon legislation which either
recognises or refuses to recognise the doctrine (thereby F
continuing to vest distribution rights in the copyright owner, even
beyond the first sale of the copyrighted work). Thus, for example,
prior to the amendment of section 14(d)(ii) in 2012, dealing with
a cinematograph film, the distribution right to sell or give on hire
or offer for sale or hire, any copy of the film, would continue to G
vest in the copyright owner, “regardless of whether such copy
ha[d] been sold or given on hire on earlier occasion”, which
manifested the legislative intent against the application of the
doctrine of first sale/principle of exhaustion. Post 2012, however,

H
336 SUPREME COURT REPORTS [2021] 2 S.C.R.

A the balance between the copyright owner’s distribution right and
the right of the purchaser to further resale, was tilted in favour of
the latter, the words “regardless of whether such copy has been
sold or given on hire on earlier occasion” being deleted by the
amendment. Likewise, when it comes to section 14(a)(ii) of the
Copyright Act, the distribution right subsists with the owner of
B
copyright to issue copies of the work to the public, to the extent
such copies are not copies already in circulation, thereby
manifesting a legislative intent to apply the doctrine of first sale/
principle of exhaustion. Like section 14(d)(ii) of the Copyright
Act, section 14(b)(ii), has, after the 1999 Amendment, with effect
C from 15.01.2000, also deleted the words “regardless of whether
such copy has been sold or given on hire on earlier occasions’’,
thereby making it clear that the same tilt that had been made in
section 14(d)(ii) of the Copyright Act vide the amendment in 2012
in favour of the purchaser, is also to be found post the 1999
Amendment, in section 14(b)(ii) of the Copyright Act. [Paras 140,
D
141][470-E-H; 471-A-C]
15.3 The language of section 14(b)(ii) of the Copyright Act
makes it clear that it is the exclusive right of the owner to sell or
to give on commercial rental or offer for sale or for commercial
rental “any copy of the computer programme”. Thus, a distributor
E who purchases computer software in material form and resells it
to an end-user cannot be said to be within the scope of the
aforesaid provision. The sale or commercial rental spoken of in
section 14(b)(ii) of the Copyright Act is of “any copy of a computer
programme”, making it clear that the section would only apply to
F the making of copies of the computer programme and then selling
them, i.e., reproduction of the same for sale or commercial rental.
[Para 142][471-C-E, H]
15.4 The object of section 14(b)(ii) of the Copyright Act, in
the context of a computer program, is to interdict reproduction
G of the said computer programme and consequent transfer of the
reproduced computer programme to subsequent acquirers/end-
users. By way of contrast, once a book is sold, on further resale
of the same book, the purchaser loses the material book
altogether, as such purchaser has, for consideration, parted with

H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 337
THE COMMISSIONER OF INCOME TAX

the book once and for all. This may not be so in the case of a A
computer programme. Once it is understood that the object of
section 14(b)(ii) of the Copyright Act is not to interdict the 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
B
otherwise, it becomes clear that any sale by the author of a
computer software to a distributor for onward sale to an end-
user, cannot possibly be hit by the said provision. Further, the
distributor cannot use the computer software at all and has to
pass on the said software, as shrink-wrapped by the owner, to
the end-user for a consideration, the distributor’s profit margin C
being that of an intermediary who merely resells the same product
to the end-user. Distribution of copyrighted computer software,
on the facts of the present appeals would not constitute the grant
of an interest in copyright under section 14(b)(ii) of the Copyright
Act necessitating the deduction of tax at source under section
D
195 of the Income Tax Act. [Paras 143, 144][471-G-H; 472-A-D]
16.1 The DTAAs that have been entered into by India with
other Contracting States have to be interpreted liberally with a
view to implement the true intention of the parties. When the
definition of “royalties” is seen in all the DTAAs in these appeal,
it is found that “royalties” is defined in a manner either identical E
with or similar to the definition contained in Article 12 of the
OECD Model Tax Convention. This being the case, the OECD
Commentary on the provisions of the OECD Model Tax
Convention then becomes relevant. [Paras 145, 150][472-E;
476-C-D] F
Union of India v. Azadi Bachao Andolan, (2004) 10
SCC 1 : [2003] 4 Suppl. SCR 222; Formula One World
Championship Ltd. v. CIT, (2017) 15 SCC 602 : [2017]
2 SCR 152; CIT v. E-Funds IT Solution Inc., (2018) 13
SCC 294 : [2017] 10 SCR 157 – referred to G
Thiel v. Federal Commissioner of Taxation, High Court
of Australia, [1990] 94 ALR 647; Ram Jethmalani v.
Union of India, (2011) 8 SCC 1 : [2011] 8 SCR 725;
Director of Income Tax v. New Skies Satellite BV, (2016)
H
338 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 382 ITR 114; Ostime (Inspector of Taxes) v. Australian
Mutual Provident Society [1959] AC 259 – referred to
16.2 After India took such positions qua the OECD
Commentary, no bilateral amendment was made by India and the
other Contracting States to change the definition of royalties
B contained in any of the DTAAs in these appeals, in accordance
with its position. As a matter of fact, DTAAs that were amended
subsequently, such as the Convention between the Republic of
India and the Kingdom of Morocco for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to
Taxes On Income, [“India-Morocco DTAA”], which was amended
C on 22.10.2019, incorporated a definition of royalties, not very
different from the definition contained in the OECD Model Tax
Convention. [Para 156][485-G-H; 486-A-B]
16.3 Similarly, though the India-Singapore DTAA came into
force on 08.08.1994, it has been amended several times, including
D on 01.09.2011, and 23.03.2017. However, the definition of
“royalties” has been retained without any changes. Likewise,
the Convention between the Government of the Republic of India
and the Government of Mauritius for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to
E Taxes on Income and Capital Gains and for the Encouragement
of Mutual Trade and Investment, [“India-Mauritius DTAA”] was
entered into on 06.12.1983, and was amended subsequently on
10.08.2016, without making any change to the definition of
“royalties”. It is thus clear that the OECD Commentary on Article
12 of the OECD Model Tax Convention, incorporated in DTAAs
F in these cases will continue to have persuasive value as to the
interpretation of the term “royalties” contained therein. [Paras
157, 158][486-D-G]
Commissioner of Customs v. G.M. Exports, (2016) 1 SCC
91 : [2015] 14 SCR 848 – referred to
G
17. Given the definition of royalties contained in Article 12
of the DTAAs 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

H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 339
THE COMMISSIONER OF INCOME TAX

not create any interest or right in such distributors/end-users, A
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 the assessees, have no application
in the facts of these cases. the amounts paid by resident Indian
B
end-users/distributors to non-resident computer software
manufacturers/suppliers, as consideration for the resale/use of
the computer software through EULAs/distribution agreements,
is not the payment of royalty for the use of copyright in the
computer software, and that the same does not give rise to any
income taxable in India, as a result of which the persons referred C
to in section 195 of the Income Tax Act were not liable to deduct
any TDS under section 195 of the Income Tax Act. [Paras 168
and 169][491-G-H; 492-A-D]
Transmission Corpn. of A.P. Ltd. v. CIT, (1999) 7 SCC
266:[1999] 1 Suppl. SCR 504; Tata Consultancy D
Services v. State of A.P., 2005 (1) SCC 308 : [2004] 5
Suppl. SCR 1040 – referred to
Case Law Reference
[1999] 1 Suppl. SCR 504 referred to para 8
E
[2010] 10 SCR 1142 relied on para 9
[2003] 4 Suppl. SCR 222 referred to paras 13, 150
(2017) 5 SCC 651 referred to para 20
[2000] 1 SCR 137 relied on paras 48, 117
F
[1966] 2 SCR 828 relied on para 51
[2004] 5 Suppl. SCR 1040 referred to para 52
[2012] 1 SCR 573 relied on para 56
[1966] 3 SCR 79 referred to para 65 G
[1977] 3 SCR 475 referred to para 67
(2020) 7 SCC 1 relied on para 81
[1966] 3 SCR 79 referred to para 105
H
340 SUPREME COURT REPORTS [2021] 2 S.C.R.

A [2017] 2 SCR 152 referred to para 150
[2017] 10 SCR 157 referred to para 150
[2011] 8 SCR 725 referred to para 151
[2015] 14 SCR 848 referred to para 164
B CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 8733-
8734 of 2018
From the Judgment and Order dated 15.10.2011 of the High Court
of Karnataka in Income Tax Appeal Nos. 1258 and 1270 of 2006.
With
C
Civil Appeal Nos. 8735-8736 of 2018, 8737-8941 of 2018, 8942-
8947 of 2018, 8950-8953 of 2018, 8948-8949 of 2018, 4419 of 2012,
4420 of 2012, 10114 of 2013, 10097 of 2013, 10112-10113 of 2013, 10106
of 2013, 8954-8955 of 2018, 10115-10117 of 2013, 8956 of 2018, 8957 of
2018, 8990 of 2018, 10103 of 2013, 10104 of 2013, 8960 of 2018, 8966 of
D
2018, 8958 of 2018, 8959 of 2018, 8962 of 2018, 8961 of 2018, 8963 of
2018, 8964 of 2018, 8965 of 2018, 8969 of 2018, 8967 of 2018, 8968 of
2018, 8972 of 2018, 8971 of 2018, 8970 of 2018, 4629 of 2014, 8973 of
2018, 4631 of 2014, 4630 of 2014, 8974-8975 of 2018, 6386-6387 of
2016, 10105 of 2013, 7852 of 2012, 1416-1418 of 2013, 1403 of 2013,
E 1405 of 2013, 1410 of 2013, 1421 of 2013, 1409 of 2013, 1415 of 2013,
1414 of 2013, 1412 of 2013, 1413 of 2013, 1419 of 2013, 1411 of 2013,
1420 of 2013, 1404 of 2013, 1406 of 2013, 1408 of 2013, 1407 of 2013,
2304 of 2013, 2305 of 2013, 2306 of 2013, 10098-10102 of 2013, 2307-
2308 of 2013, 4666-4667 of 2013, 6764 of 2013, 4634 of 2014, 8976 of
2018, 8977-8988 of 2018, 781 of 2021, 782 of 2021, 783 of 2021, 10673
F
of 2016, 784 of 2021, 10674 of 2016, 785 of 2021, 3402 of 2017, 10758 of
2017, 9486 of 2017, 8711 of 2018, 8722 of 2018, 8724 of 2018, 8725 of
2018, 9551 of 2018, 786 of 2021, 2006 of 2019, and 790 of 2021.
Tushar Mehta, SG, Balbir Singh, ASG, Arvind Datar, S. Ganesh,
Percy Pardiwala, K. Radhakrishnan, Ajay Vohra, Preetesh Kapur, A.
G Shankar, Sr. Advs., Mukesh Butani, Shreyash Shah, Shankey Agarwal,
Tarun Jain, H. Raghavendra Rao, Rupesh Kumar, Rajat Nair, Zoheb
Hussain, D.L. Chidananda, Mrs. Anil Katiyar, Ms. Anuradha Dutt, Sachit
Jolly, Tushar Jarwal, Rohit Garg, Ms. Disha Jham, Vasudevan G., Ms.
B. Vijayalakshmi Menon, Ms. Kavita Jha, Anant Mann, Udit Naresh, T.
H Suryanarayan, Ms. Tanmayee Rajkumar, Ms. Yugandhara Pawar Jha,
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 341
THE COMMISSIONER OF INCOME TAX

Ms. Manasa Ananthan, Kunal Verma, Senthil Jagadeesan, Ms. Mrinal A
Kanwar, Ms. Sonakshi Malhan, Ms. Suriti Chowdhary, S. Annamalai,
Salil Kapoor, Ms. Ananya Kapoor, Sumit Lalchandani, Sanat Kapoor,
Ms. Soumya Singh, Kamal Mohan Gupta, V. Balachandran, K.R.
Vasudevan, Siddharth Naidu, Kishore Kunal, Manish Rastogi, Ms.
Tanushree Jain, Parth Jaiprakash, Jagjit Singh Chhabra, Ms. Vanita
B
Bhargava, Ajay Bhargava, Ms. Trishala Trivedi, Ms. Maithili Moondra
for M/s. Khaitan & Co., G. Sridhar, Ms. 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, Ms. Astha Prasad, Rohan Sharma,
Ujjwal Singh, Vardaan Wanchoo for M/s. Karanjawala & Co., Rony C
Oommen John, Piyush Swami, Arshdeep Singh, G.C. Srivastava, Suvinay
Kumar Dash, Piyush Sachdev, Ms. Runamoni Bhuyan, Advs. for the
appearing parties.
The Judgment of the Court was delivered by
R.F. NARIMAN, J. D

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 E
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.
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
F
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.
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- G
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 H
342 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 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
B
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
C 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
D India, from a foreign, non-resident supplier or manufacturer.3
ii) The 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
E end-users.4
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/
F 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.
3
This category includes C.A. Nos. 8733-8734/2018, C.A. No. 10114/2013, C.A. Nos.
G 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. No. 3402/
2017, SLP(C) No. 450/2019, C.A. No. 2006/2019.
4
This category includes C.A Nos. 8737-8941/2018, C.A No. 8942-8947/2018, C.A
H No. 4420/2012, C.A No. 8959/2018, C.A No. 8963/2018, C.A No. 8962/2018, C.A
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 343
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

iii) The third category concerns cases wherein the distributor A
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.5
iv) The fourth category includes cases wherein computer
software is affixed onto hardware and is sold as an integrated B
unit/equipment by foreign, non-resident suppliers to resident
Indian distributors or end-users.6
5. These cases have a chequered history. The facts of C.A. Nos.
8733- 8734/2018 shall be taken as a sample, indicative of the points of
law that arise from the various appeals before us. In this case, the appellant, C
Engineering Analysis Centre of Excellence Pvt. Ltd. [“EAC”], is a
resident Indian end-user of shrink-wrapped computer software, directly
imported from the United States of America [“USA”]. The assessment
years that we are concerned with are 2001-2002 and 2002-2003.
6. The Assessing Officer by an order dated 15.05.2002, after D
applying Article 12(3) of the Double Taxation Avoidance Agreement
[“DTAA”], between India and USA, and upon applying section 9(1)(vi)
of the Income Tax Act, found that what was in fact transferred in the
transaction between the parties was copyright which attracted the
payment of royalty and thus, it was required that tax be deducted at
source by the Indian importer and end-user, EAC. Since this was not E
done for both the assessment years, EAC was held liable to pay the
No.8958/2018, C.A No. 8961/2018, C.A No. 8960/2018, C.A Nos. 8950-8953/2018,
C.A No. 8966/2018, C.A No. 8973/2018, C.A No. 8965/2018, C.A No. 8972/2018, C.A
No. 8969/2018, C.A No. 8971/2018, C.A No. 8970/2018, C.A No. 8964/2018, C.A
No.8967/2018, C.A No. 8968/2018, C.A No. 1403/2013, C.A No. 1414/2013, C.A F
No.1412/2013, C.A No. 1413/2013, C.A Nos. 1416-1418/2013, 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. 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 Nos. 4666-4667/2013,
C.A No. 6764/2013, C.A No. 4419/2012, C.A Nos. 8977-8988/2018, C.A No. 4629/
2014, C.A No. 4631/2014, C.A No. 4630/2014, C.A No. 10105/2013.
5
This category includes C.A. No. 10758/2017, C.A. No. 8990/2018, C.A. No. 9486/ G
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. 6736/2020, C.A. No. 4634/2014.
6
This category includes C.A. Nos. 10115-10117/2013, C.A. Nos. 6386-6387/2016,
C.A. Nos. 8954-8955/2018, 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. H
344 SUPREME COURT REPORTS [2021] 2 S.C.R.

A amount of Rs. 1,03,54,784 that it had not deducted as TDS, along with
interest under section 201(1A) of the Income Tax Act amounting to Rs.
15,76,567. The appeal before the Commissioner of Income Tax [“CIT”]
was dismissed by an order dated 23.01.2004. However, the appeal before
the Income Tax Appellate Tribunal [“ITAT”] succeeded vide an order
dated 25.11.2005, in which the ITAT followed its previous order dated
B
18.02.2005, passed in Samsung Electronics Co. Ltd. v. Income Tax
Officer, ITA Nos. 264-266/Bang/2002.
7. An appeal was made from the order of the ITAT to the High
Court of Karnataka by the Revenue. The Division Bench of the High
Court of Karnataka heard a batch of appeals and framed nine questions,
C of which question nos. 8 and 9 are important and are set out as follows:
“8. Whether the Tribunal was correct in holding that since the
assessee had purchased only a right to use the copyright i.e. the
software and not the entire copyright itself, the payment cannot
be treated as Royalty as per the Double Taxation Avoidance
D Agreement and Treaties, which [are] beneficial to the assessee
and consequently section 9 of the Act should not take into
consideration.
9. Whether the Tribunal was correct in holding that the payment
partakes the character of purchase and sale of goods and therefore
E cannot be treated as royalty payment liable to Income Tax.”
8. In answering these questions, through a judgment dated
24.09.2009, the Division Bench of the High Court of Karnataka relied
heavily upon the judgment of this Court in Transmission Corpn. of
A.P. Ltd. v. CIT, (1999) 7 SCC 266 [“AP Transco”] and held that
F since no application under section 195(2) of the Income Tax Act had
been made, the resident Indian importers became liable to deduct tax at
source, without more, under section 195(1) of the Income Tax Act.
9. This view of the High Court was set aside by this Court in GE
India Technology Centre (P) Ltd. v. CIT, (2010) 10 SCC 29 [“GE
G Technology”], which ultimately found that the judgment of the High
Court dated 24.09.2009 had misread AP Transco (supra). Consequently,
this Court remanded the matter to the High Court of Karnataka to decide,
on merits, the question of law framed as follows:
“24. In our view, Section 195(2) is based on the “principle of
H proportionality”. The said sub-section gets attracted only in cases
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 345
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

where the payment made is a composite payment in which a A
certain proportion of payment has an element of “income”
chargeable to tax in India. It is in this context that the Supreme
Court stated: (Transmission Corpn. case [(1999) 7 SCC 266 :
(1999) 239 ITR 587], SCC p. 274, para 10)
“10. … If no such application is filed income tax on such sum B
is to be deducted and it is the statutory obligation of the person
responsible for paying such ‘sum’ to deduct tax thereon before
making payment. He has to discharge the obligation [to TDS].”
(emphasis supplied)
If one reads the observation of the Supreme Court, the words C
“such sum” clearly indicate that the observation refers to a case
of composite payment where the payer has a doubt regarding the
inclusion of an amount in such payment which is exigible to tax in
India. In our view, the above observations of this Court in
Transmission Corpn. case [(1999) 7 SCC 266 : (1999) 239 ITR D
587] which is put in italics has been completely, with respect,
misunderstood by the Karnataka High Court to mean that it is not
open for the payer to contend that if the amount paid by him to the
non-resident is not at all “chargeable to tax in India”, then no TAS
is required to be deducted from such payment. This interpretation
of the High Court completely loses sight of the plain words of E
Section 195(1) which in clear terms lays down that tax at source
is deductible only from “sums chargeable” under the provisions
of the IT Act i.e. chargeable under Sections 4, 5 and 9 of the IT
Act.
25. Before concluding we may clarify that in the present case on F
facts ITO(TDS) had taken the view that since the sale of the
software concerned, included a licence to use the same, the
payment made by the appellant(s) to foreign suppliers constituted
“royalty” which was deemed to accrue or arise in India and,
therefore, TAS was liable to be deducted under Section 195(1) of G
the Act. The said finding of ITO(TDS) was upheld by CIT(A).
However, in the second appeal, ITAT held that such sum paid by
the appellant(s) to the foreign software suppliers was not a “royalty”
and that the same did not give rise to any “income” taxable in
India and, therefore, the appellant(s) was not liable to deduct TAS.
However, the High Court did not go into the merits of the case H
346 SUPREME COURT REPORTS [2021] 2 S.C.R.

A and it went straight to conclude that the moment there is remittance
an obligation to deduct TAS arises, which view stands hereby
overruled.
26. Since the High Court did not go into the merits of the case on
the question of payment of royalty, we hereby set aside the
B impugned judgment of the High Court and remit these cases to
the High Court for de novo consideration of the cases on merits.
The question which the High Court will answer is: whether on
facts and circumstances of the case ITAT was justified in holding
that the amount(s) paid by the appellant(s) to the foreign software
suppliers was not “royalty” and that the same did not give rise to
C any “income” taxable in India and, therefore, the appellant(s) was
not liable to deduct any tax at source?”
10. The impugned judgment of the High Court of Karnataka, dated
15.10.2011, reported as CIT v. Samsung Electronics Co. Ltd., (2012)
345 ITR 494, dealt with a whole group of appeals, and was thus faced
D with the following question so posed by this Court:
“The question which the High Court will answer is—
“whether, on facts and circumstances of the case, the Income-
tax Appellate Tribunal was justified in holding that the amount(s)
E paid by the appellant(s) to the foreign software suppliers was not
“royalty” and that the same did not give rise to any “income”
taxable in India and, therefore, the appellant(s) was not liable to
deduct any tax at source?””
(page 498)

F 11. After setting out the facts in one of the appeals treated as the
lead matter, namely ITA No. 2808/2005 concerning Samsung Electronics
Co. Ltd., and the relevant provisions of the Income Tax Act, India’s
DTAAs with USA, France and Sweden respectively, the High Court of
Karnataka, on an examination of the End-User Licence Agreement
[“EULA”] involved in the transaction, found that what was sold by way
G of computer software included a right or interest in copyright, which
thus gave rise to the payment of royalty and would be an income deemed
to accrue in India under section 9(1)(vi) of the Income Tax Act, requiring
the deduction of tax at source.
12. Leading the charge on behalf of the appellants in the appeals
H against this impugned judgment of the High Court of Karnataka, Shri
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 347
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

Arvind Datar, learned Senior Advocate, appearing on behalf of IBM A
India Ltd. [“IBM India”] in C.A. No. 4419/2012, which is a resident
Indian distributor of computer software products purchased from IBM
Singapore Pte Ltd. [“IBM Singapore”], submitted that his client is a
non- exclusive distributor, which purchases off-the-shelf copies of shrink-
wrapped computer software from a foreign company in Singapore for
B
onward sale to Indian end-users under a Remarketer Agreement. He
stressed that IBM India, the distributor, is not party to the EULA between
IBM Singapore and the ultimate end-users/customers in India. The Indian
end-user pays IBM India, and in turn, IBM India pays this amount to
IBM Singapore after deducting a portion of profit. Importantly, under
the Remarketer Agreement, IBM India does not own any right, title or C
interest in copyright and other intellectual property owned by IBM
Singapore, and merely markets IBM Singapore’s software products in
India.
13. Shri Datar further argued that the computer software that is
imported for onward sale from Singapore constitutes “goods” and thus D
was directly covered by this Court’s judgment in Tata Consultancy
Services v. State of A.P., 2005 (1) SCC 308. He assailed the impugned
judgment of the High Court of Karnataka by referring to Article 12 of
the Agreement between the Government of the Republic of India and
the Government of the Republic of Singapore for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes on E
Income,7 [“India-Singapore DTAA”], and the definition of “royalties”
contained therein. He argued that the definition of “royalties” did not
extend to derivative products of the copyright, for example, a book or a
music CD or software products. He relied upon the judgment in Union
of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 [“Azadi Bachao F
Andolan”] to argue that by virtue of section 90(2) of the Income Tax
Act, the DTAA would prevail over domestic law to the extent it is more
beneficial to the deductor of tax under section 195 of the Income Tax
Act. According to him, even assuming that under section 9(1)(vi) of the
Income Tax Act IBM India’s transaction would entail parting with G
copyright and attract royalty, upon applying the more beneficial provisions
of the India-Singapore DTAA, it would be made clear that the amounts

7
Notification No. GSR 610(E), Dated 8-8-1994 As Amended by Notification No. SO
1022(E), Dated 18-7-2005; No. S.O. 2031(E), Dated 1-9-2011 and No. S.O. 935(E),
Dated 23-3-2017. H
348 SUPREME COURT REPORTS [2021] 2 S.C.R.

A payable were not in the nature of royalty, and no income in the hands of
the foreign supplier would be deemed to accrue in India. Thus, no tax
had to be deducted by the Indian importer under section 195(1) of the
Income Tax Act. Equally, he submitted that the retrospective amendment
to section 9(1)(vi) of the Income Tax Act brought in by the Finance Act
2012, which added explanation 4 to the provision and expanded its
B
ambit with effect from 01.06.1976, could also not be applied to the DTAA
in question.
14. Pointing to the provisions of the Copyright Act, 1957
[“Copyright Act”], Shri Datar argued that there was a difference
between a copyright in an original work and a copyrighted article, and
C that this was recognised in section 14(b) of the Copyright Act, which
refers to a “computer program” per se and a “copy of a computer
program” as two distinct subject matters. He emphasized that under the
Remarketer Agreement, no copyright was given by IBM Singapore and
that even the end-user in India only received a limited licence to use the
D product by itself, with no right to sub-license, lease, make copies etc.
The licence to use such shrink-wrapped computer software was thus
incidental to and essential to effectuate the use of the product. He strongly
relied upon the Commentaries on the Articles of the Model Tax
Convention on Income and on Capital [“OECD Commentary”] by the
Organisation for Economic Co-operation and Development [“OECD”]
E which distinguishes between the sale of a copyrighted article and the
sale of copyright itself. He further argued that the doctrine of first sale/
principle of exhaustion was cemented in section 14(b)(ii) of the Copyright
Act post the amendment brought in vide Act 49 of 1999, with effect
from 15.01.2000 [“1999 Amendment”], thereby making it clear that
F the foreign supplier’s distribution right would not extend to the sale of
copies of the work to other persons beyond the first sale. Importantly, he
added that the importer, IBM India, being only a distributor, had no right
to use the computer software, and merely purchased a sealed, shrink-
wrapped product and resold it in the same, sealed condition, and thereby
did not pay any consideration for any transfer of or interest in copyright.
G He cited a number of judgments and other authorities to buttress his
submissions.
15. Shri Percy Pardiwala, learned Senior Advocate appearing on
behalf of Rational Software Corporation India Ltd. in C.A. No. 8962/
2018, supplemented Shri Datar’s submissions, and adverted to the
H provisions of the India-Singapore DTAA, Income Tax Act and the relevant
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 349
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

EULA and Remarketer Agreement. Coming to the Finance Act 2012 A
which added explanation 4 to section 9(1)(vi) of the Income Tax Act,
he argued that the words “any right, property or information used or
services utilised” which occur in section 9(1)(vi)(b), make it clear that
explanation 4, read both textually and contextually would only apply to
section 9(1)(vi)(b), and not expand the scope of the definition of royalty
B
contained in explanation 2 to section 9(1)(vi). Further, he referred to
Circular No. 10/2002 dated 09.10.2002 by the Central Board of Direct
Taxes [“CBDT”] in which “remittance for royalties” and “remittance
for supply of articles or…computer software” were addressed as
separate and distinct payments, the former attracting the “royalty”
provision under Article 12 of the DTAA, and the latter being taxable as C
business profits under Article 7 of the DTAA, provided that the foreign,
non-resident supplier or manufacturer had a permanent establishment
[“PE”] in India.
16. Shri S. Ganesh, learned Senior Advocate appearing on behalf
of Sonata Information Technology Ltd. in C.A. Nos. 8737-8941/2018, D
submitted that to comprehend the nature of a licence, one would have to
refer to section 52 of the Indian Easements Act 1882. He stressed the
fact that the ruling by the AAR in the case of Dassault Systems, K.K.,
In Re., (2010) 322 ITR 125 (AAR), as followed in Geoquest
Systems B.V. Gevers Deynootweg, In Re., (2010) 327 ITR 1
(AAR), was not appealed against by the Revenue, and the exhaustive E
statement of law contained therein is something that he relied upon.
According to him, if the position of the Revenue were correct, arbitrary
results would ensue, inasmuch as his client, receiving a 2% commission,
would, however, after the disallowance of the deduction under section
40(a)(ia) of the Income Tax Act, end up paying tax of a huge amount, F
way beyond the commission, resulting in extreme financial hardship.
Thus, if section 195 of the Income Tax Act could be construed in a
manner so as to avoid such a result, this must be done. Further, he relied
heavily upon the OECD Commentary and went on to argue that mere
nomenclature, such as the use of the term “licence”, was not conclusive
as to the character of the transaction. He also relied upon section G
52(1)(aa) of the Copyright Act to argue that what is mentioned in the
provision is exactly what the transactions in these appeals are concerned
with, and therefore, the making of copies only in order to utilise the
product to the extent permitted by the EULA, would not constitute an
infringement of copyright, as expressly stated in this provision. Going by H
350 SUPREME COURT REPORTS [2021] 2 S.C.R.

A what the originator or creator holds by way of copyright, which he either
passes on or retains, and what is mentioned in section 52(1)(aa) of the
Copyright Act, he submitted that what was resold by his client in this
case was not copyright, but merely a copyrighted article, which constituted
goods in the hands of the end- user, without any right to transfer the
same. He also cited several judgments to buttress his submissions.
B
17. Shri Ajay Vohra, learned Senior Advocate appearing on behalf
of Sasken Communications Tech Ltd. in C.A. Nos. 10114/2013 and 8957/
2018, relied upon the Convention between the Government of the United
States of America and the Government of the Republic of India for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion
C with respect to Taxes on Income,8 [“India-USA DTAA”] and echoed
the submissions of his predecessors. In addition, he argued that the
retrospective amendment to section 9(1)(vi) of the Income Tax Act adding
explanation 4, could not be applied as the assessment years that we
are concerned with in all these cases are prior to 2012, and that the law
D cannot compel one to do the impossible, namely, to deduct tax at source
on an expanded definition of royalty which did not exist at the time of the
payment/deduction to be made under section 195 of the Income Tax
Act. He cited various judgments and relied upon the proposition that
where no assessment to tax can be made on a foreign, non-resident
supplier, the appellants could not be held to be assessees in default for
E not deducting tax at source under section 195 of the Income Tax Act.
18. Shri Preetesh Kapur, learned Senior Advocate appearing on
behalf of Sunray Computers Pvt. Ltd. in C.A. Nos. 10115-10117/2013,
stressed upon the language of section 14(b)(ii) of the Copyright Act,
both pre and post the 1999 Amendment, brought in with effect from
F 15.01.2000, and cited the doctrine of first sale/principle of exhaustion,
arguing that the amendment, after deleting the words “regardless of
whether such copy has been sold or given on hire on earlier occasions”,
was a statutory application of the doctrine of first sale/principle of
exhaustion. This, he argued, made it clear that since no distribution right
G by the original owner extended beyond the first sale of the copyrighted
goods, it can be said that only the goods, and not the copyright in the
goods, had passed onto the importer.
19. Shri Sachit Jolly, learned advocate appearing on behalf of
Engineering Analysis Centre of Excellence Pvt. Ltd. in C.A. Nos. 8733-
H 8
Notification No. GSR 992(E), dated 20-12-1990.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 351
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

8734/2018, and GE India Technology Centre Pvt. Ltd. in C.A. Nos. A
8735- 8736/2018, also echoed these submissions and in particular, relied
upon judgments which made it clear that a retrospective amendment to
a statute cannot be applied to an assessment year in which, as a matter
of fact, the expanded definition of royalty did not exist.
20. Shri Kunal Verma, learned advocate appearing on behalf of B
Infineon Technologies India Pvt. Ltd. in C.A. No. 2006/2019, argued
that in any case, in the facts of his case, the payments made by the
assessee were in the nature of reimbursement of costs under a cost-
sharing agreement with a German supplier of software, and thus no
“sum chargeable under the provisions of [the] Act” had been paid,
attracting section 195 of the Income Tax Act. To buttress his submission, C
he relied in particular upon the judgment in Director of Income Tax v.
A.P. Moller Maersk AS, (2017) 5 SCC 651.
21. Per contra, Shri Balbir Singh, the learned Additional Solicitor
General appearing on behalf of the Revenue, took us through the
provisions of the Income Tax Act, the Copyright Act, the India-USA D
DTAA and some of the EULAs between the parties. He argued that
explanation 2(v) to section 9(1)(vi) of the Income Tax Act applied to
payments to a non-resident by way of royalty for the use of or the right
to use any copyright. For this, he relied upon the language of explanation
2(v) and stressed that the words “in respect of” have to be given a wide
E
meaning. He then relied upon CBDT Circular No. 152 dated 27.11.1974,9
together with the statement of the Finance Minister made before the
Lok Sabha on 07.09.1990,10 and CBDT Notification No. 21/2012 dated
13.06.2012,11 to submit that explanation 4 to section 9(1)(vi) of the
Income Tax Act is clarificatory of the position in law right from 01.06.1976
when section 9(1)(vi) of the Income Tax Act was first brought into force. F
He then argued that the provisions for TDS are distinct from and exist
apart from provisions for assessment under the Income Tax Act. This
being so, it is clear that the India-USA DTAA and other such DTAAs
would not apply to the persons spoken of in section 195 of the Income
Tax Act who are not assessees, since the provisions of the DTAAs,
G
when read with section 90 of the Income Tax Act, applied only to persons
who could be described as assessees. He also relied upon Article 30 of
9
Circular No. 152 [F.No. 484/31/74-FTD-II], dated 27.11.1974.
10
As recorded in CBDT Circular No. 588 dated 02.01.1991.
11
Notification No. 21/2012 [F.No.142/10/2012-SO(TPL)] S.O. 1323(E), dated
13.06.2012. H
352 SUPREME COURT REPORTS [2021] 2 S.C.R.

A the India-USA DTAA which, for the USA, fixes different dates for the
entry into force of the provisions concerning withholding taxes and other
taxes, unlike the entry into force provision for India, which makes no
such distinction. This, he argued, would make it clear that persons who
have to make deductions under section 195 of the Income Tax Act do
not fall within the subject matter of the India-USA DTAA and other
B
such DTAAs. He then relied heavily upon AP Transco (supra) and
other judgments which make it clear that a “payer” under section 195
and an “assessee” under section 2(7) of the Income Tax Act are distinct.
He also relied heavily upon a recent judgment of this Court in PILCOM
v. CIT, West Bengal- VII, 2020 SCC Online SC 426 [“PILCOM”],
C which dealt with section 194E of the Income Tax Act, for the proposition
that tax has to be deducted at source irrespective of whether tax is
otherwise payable by the non-resident assessee. He then relied upon
CBDT Circular No. 588 dated 02.01.1991,12 which clarified that tax
concessions were not available in relation to payments in respect of
software imported separately or independently of computer hardware.
D
22. Coming to the Copyright Act, the learned Additional Solicitor
General relied upon sections 2(a)(v), 19(3), 30A, 52(1)(ad), 58 and 65A
of the Copyright Act to buttress the submission that in some of the cases
before us, since adaptation of software could be made, albeit for
installation and use on a particular computer, copyright is parted with by
E the original owner. He added that section 51(b) of the Copyright Act
makes it clear that when any person makes for sale or hire, or sells or
lets for hire, or distributes, either for the purpose of trade or to such an
extent as to affect prejudicially the owner of the copyright, or imports
into India, any infringing copies of the work, such importation into India
F without a licence would amount to infringement of copyright. Further,
section 58 of the Copyright Act regards infringing copies of any work as
the property of the owner of the copyright, who accordingly may take
proceedings for the recovery of possession thereof or in respect of the
conversion thereof. From section 52(1)(ad) of the Copyright Act, the
learned Additional Solicitor General sought to argue that only the making
G of copies or the adaptation of a computer programme from a legally
obtained copy for non-commercial, personal use would not amount to
infringement, and therefore in the appeals before us, where such copies
were made for commercial use, the converse would be true. He relied
strongly upon the AAR’s ruling in Citrix Systems Asia Pacific Ptyl.
H 12
187 ITR (St.) 0063.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 353
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

Ltd., In Re., (2012) 343 ITR 1 (AAR), arguing that it approached the A
subject correctly and that the findings made therein are different and
preferable to the findings made by the AAR in Dassault Systems,
K.K., In Re., (2010) 322 ITR 125 (AAR) and Geoquest Systems
B.V. Gevers Deynootweg, In Re., (2010) 327 ITR 1 (AAR), and
the other judgments of the High Court of Delhi.
B
23. The learned Additional Solicitor General further pointed out
that the Indian Government had expressed its reservations on the OECD
Commentary, especially on the parts of the OECD Commentary dealing
with the parting of copyright and royalty. He also relied upon on the
Report of the High Powered Committee on ‘Electronic Commerce and
Taxation’ constituted by the CBDT,13 [“HPC Report 2003”] and the C
Report of the Committee on the Taxation of E-Commerce [“E-
Commerce Report 2016”], which proposed an equalization levy on
specified transactions. He then went on to rely on certain judgments to
state that even if the OECD Commentary could be relied upon, it being
a rule of international law contrary to domestic law, to the extent it was D
contrary to explanations 2 and 4 of section 9(1)(vi) of the Income Tax
Act, it must give way to domestic law. Referring to the doctrine of first
sale/principle of exhaustion, he cited a number of judgments in order to
show that under section 14(b)(ii) of the Copyright Act, this doctrine cannot
be said to apply insofar as distributors are concerned. He finally concluded
his arguments by stating that the judgments which deal with computer E
software under sales tax law and excise law have no relevance to income
tax law, as the laws relating to indirect taxes are fundamentally different
from the laws relating to direct taxes, since they must follow the drill of
the chargeability under the Income Tax Act, which is different from
chargeability under sales tax law or excise law. F
THE INCOME TAX ACT, 1961
24. Having heard the learned counsels appearing on behalf of
various parties, we first set out the relevant provisions of the Income
Tax Act that we are directly concerned with:
“2. Definitions. G
In this Act, unless the context otherwise requires,— xxx xxx xxx
(7) “assessee” means a person by whom any tax or any other
sum of money is payable under this Act, and includes—
13
F. No 500/ 122/ 99 dated December 16, 1999. H
354 SUPREME COURT REPORTS [2021] 2 S.C.R.

A (a) every person in respect of whom any proceeding under
this Act has been taken for the assessment of his income or
assessment of fringe benefits or of the income of any other
person in respect of which he is assessable, or of the loss
sustained by him or by such other person, or of the amount of
refund due to him or to such other person;
B
(b) every person who is deemed to be an assessee under any
provision of this Act;
(c) every person who is deemed to be an assessee in default
under any provision of this Act;
C xxx xxx xxx
14
(37A) “rate or rates in force” or “rates in force”, in relation to
an assessment year or financial year, means—
xxx xxx xxx
(iii) for the purposes of deduction of tax under section 194LBA
D or section 194LBB or section 194LBC or section 195, the rate
or rates of income-tax specified in this behalf in the Finance
Act of the relevant year or the rate or rates of income-tax
specified in an agreement entered into by the Central
Government under section 90, or an agreement notified by the
Central Government under section 90A, whichever is
E applicable by virtue of the provisions of section 90, or section
90A, as the case may be;”
“4. Charge of income-tax.
(1) Where any Central Act enacts that income-tax shall be charged
for any assessment year at any rate or rates, income-tax at that
F rate or those rates shall be charged for that year in accordance
with, and subject to the provisions (including provisions for the
levy of additional income-tax) of, this Act in respect of the total
income of the previous year of every person:
Provided that where by virtue of any provision of this Act income-
G tax is to be charged in respect of the income of a period other
than the previous year, income-tax shall be charged accordingly.
(2) In respect of income chargeable under sub-section (1), income-
tax shall be deducted at the source or paid in advance, where it is
so deductible or payable under any provision of this Act.”
14
H Substituted by the Finance Act 1992 (18 of 1992), sec. 3(c) (w.e.f. 1-6-1992).
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 355
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

“5. Scope of total income. A
(1) Subject to the provisions of this Act, the total income of any
previous year of a person who is a resident includes all income
from whatever source derived which—
(a) is received or is deemed to be received in India in such
year by or on behalf of such person; or B

(b) accrues or arises or is deemed to accrue or arise to him in
India during such year; or
(c) accrues or arises to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in C
India within the meaning of sub-section (6) of section 6, the income
which accrues or arises to him outside India shall not be so included
unless it is derived from a business controlled in or a profession
set up in India.
(2) Subject to the provisions of this Act, the total income of any D
previous year of a person who is a non-resident includes all income
from whatever source derived which—
(a) is received or is deemed to be received in India in such
year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in E
India during such year.
Explanation 1.—Income accruing or arising outside India shall
not be deemed to be received in India within the meaning of this
section by reason only of the fact that it is taken into account in a
balance sheet prepared in India. F
Explanation 2.—For the removal of doubts, it is hereby declared
that income which has been included in the total income of a
person on the basis that it has accrued or arisen or is deemed to
have accrued or arisen to him shall not again be so included on
the basis that it is received or deemed to be received by him in G
India.”
“9. Income deemed to accrue or arise in India.
(1) The following incomes shall be deemed to accrue or arise in
India:—
xxx xxx xxx H
356 SUPREME COURT REPORTS [2021] 2 S.C.R.

15
A (vi) income by way of royalty payable by— xxx xxx xxx
(b) a person who is a resident, except where the royalty is
payable in respect of any right, property or information used or
services utilised for the purposes of a business or profession
carried on by such person outside India or for the purposes of
B making or earning any income from any source outside India;
xxx xxx xxx
Explanation 2.—For the purposes of this clause, “royalty” means
consideration (including any lump sum consideration but excluding
any consideration which would be the income of the recipient
C chargeable under the head “Capital gains”) for—
(i) the transfer of all or any rights (including the granting of a
licence) in respect of a patent, invention, model, design, secret
formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working
D of, or the use of, a patent, invention, model, design, secret formula
or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design, secret
formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical,
E industrial, commercial or scientific knowledge, experience or
skill;
16
(iva) the use or right to use any industrial, commercial or
scientific equipment but not including the amounts referred to
in section 44BB;
F (v) the transfer of all or any rights (including the granting of a
licence) in respect of any copyright, literary, artistic or scientific
work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting;
or
G (vi) the rendering of any services in connection with the activities
referred to in 17[sub-clauses (i) to (iv), (iva) and (v)].
15
Inserted by the Finance Act 1976 (66 of 1976), sec 4(b) (w.e.f. 1-6-1976).
16
Inserted by the Finance Act 2001 (14 of 2001), sec. 4(i) (w.e.f. 1-4-2002).
17
Substituted by the Finance Act 2001 (14 of 2001), sec. 4(ii), for “sub-clauses (i) to
H (v)” (w.e.f. 1-4-2002).
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 357
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

18
Explanation 3.—For the purposes of this clause, “computer A
software” means any computer programme recorded on any disc,
tape, perforated media or other information storage device and
includes any such programme or any customized electronic data.
19
Explanation 4.—For the removal of doubts, it is hereby clarified
that the transfer of all or any rights in respect of any right, property B
or information includes and has always included transfer of all or
any right for use or right to use a computer software (including
granting of a licence) irrespective of the medium through which
such right is transferred.
20
Explanation 5.—For the removal of doubts, it is hereby clarified C
that the royalty includes and has always included consideration in
respect of any right, property or information, whether or not—
(a) the possession or control of such right, property or
information is with the payer;
(b) such right, property or information is used directly by the D
payer;
(c) the location of such right, property or information is in India.”
“90. Agreement with foreign countries or specified
territories.
E
(1) The Central Government may enter into an agreement with
the Government of any country outside India or specified territory
outside India,—
(a) for the granting of relief in respect of—
(i) income on which have been paid both income- tax under F
this Act and income-tax in that country or specified territory,
as the case may be, or
(ii) income-tax chargeable under this Act and under the
corresponding law in force in that country or specified
18
Substituted by the Finance Act 2000 (10 of 2000), sec. 4, for Explanation 3 (w.e.f. G
1-4-2001). Explanation 3 before substitution, stood as under:
“Explanation 3.- For the purposes of this clause, the expression “computer software”
shall have the meaning assigned to it in clause
(b) of the Explanation to section 80HHE”.
19
Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976).
20
Inserted by the Finance Act 2012 (23 of 2012), sec 4(b) (w.r.e.f 1-6-1976). H
358 SUPREME COURT REPORTS [2021] 2 S.C.R.

A territory, as the case may be, to promote mutual economic
relations, trade and investment, or
(b) for the avoidance of double taxation of income under this
Act and under the corresponding law in force in that country
or specified territory, as the case may be, without creating
B opportunities for non-taxation or reduced taxation through tax
evasion or avoidance (including through treaty-shopping
arrangements aimed at obtaining reliefs provided in the said
agreement for the indirect benefit to residents of any other
country or territory), or

C (c) for exchange of information for the prevention of evasion
or avoidance of income-tax chargeable under this Act or under
the corresponding law in force in that country or specified
territory, as the case may be, or investigation of cases of such
evasion or avoidance, or

D (d) for recovery of income-tax under this Act and under the
corresponding law in force in that country or specified territory,
as the case may be, and may, by notification in the Official
Gazette, make such provisions as may be necessary for
implementing the agreement.
(2) Where the Central Government has entered into an agreement
E
with the Government of any country outside India or specified
territory outside India, as the case may be, under sub-section (1)
for granting relief of tax, or as the case may be, avoidance of
double taxation, then, in relation to the assessee to whom such
agreement applies, the provisions of this Act shall apply to the
F extent they are more beneficial to that assessee.
xxx xxx xxx
21
Explanation 4.—For the removal of doubts, it is hereby declared
that where any term used in an agreement entered into under
sub-section (1) is defined under the said agreement, the said term
G
shall have the same meaning as assigned to it in the agreement;
and where the term is not defined in the said agreement, but defined
in the Act, it shall have the same meaning as assigned to it in the
Act and explanation, if any, given to it by the Central Government.”

21
H Inserted by the Finance Act 2017, sec. 39 (w.e.f. 1-4-2018).
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 359
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

“195. Other sums. A
(1) Any person responsible for paying to a non-resident, not being
a company, or to a foreign company, any interest (not being interest
referred to in section 194LB or section 194LC) or section 194LD
or any other sum chargeable under the provisions of this Act (not
being income chargeable under the head “Salaries”) shall, at the B
time of credit of such income to the account of the payee or at the
time of payment thereof in cash or by the issue of a cheque or
draft or by any other mode, whichever is earlier, deduct income-
tax thereon at the rates in force:
Provided that in the case of interest payable by the Government C
or a public sector bank within the meaning of clause (23D) of
section 10 or a public financial institution within the meaning of
that clause, deduction of tax shall be made only at the time of
payment thereof in cash or by the issue of a cheque or draft or by
any other mode.
D
Explanation 1.—For the purposes of this section, where any
interest or other sum as aforesaid is credited to any account,
whether called “Interest payable account” or “Suspense account”
or by any other name, in the books of account of the person liable
to pay such income, such crediting shall be deemed to be credit of
such income to the account of the payee and the provisions of this E
section shall apply accordingly.
22
Explanation 2.—For the removal of doubts, it is hereby clarified
that the obligation to comply with sub-section (1) and to make
deduction thereunder applies and shall be deemed to have always
applied and extends and shall be deemed to have always extended F
to all persons, resident or non-resident, whether or not the non-
resident person has—
(i) a residence or place of business or business connection in
India; or
(ii) any other presence in any manner whatsoever in India. G
(2) Where the person responsible for paying any such sum
chargeable under this Act 23(other than salary) to a non- resident
considers that the whole of such sum would not be income
22
Inserted by the Finance Act 2012 (23 of 2012), sec. 77(a)(ii) (w.r.e.f. 1-4-1962).
23
Substituted by the Finance Act 2003 (32 of 2003), sec. 80(b) (w.e.f. 1-6-2003). H
360 SUPREME COURT REPORTS [2021] 2 S.C.R.

A chargeable in the case of the recipient, he may make an application
in such form and manner to the Assessing Officer, to determine in
such manner, as may be prescribed, the appropriate proportion of
such sum so chargeable, and upon such determination, tax shall
be deducted under sub- section (1) only on that proportion of the
sum which is so chargeable.”
B
“201. Consequences of failure to deduct or pay.
(1) Where any person, including the principal officer of a
company,—
(a) who is required to deduct any sum in accordance with the
C provisions of this Act; or
(b) referred to in sub-section (1A) of section 192, being an
employer,
does not deduct, or does not pay, or after so deducting fails to pay,
the whole or any part of the tax, as required by or under this Act,
D
then, such person, shall, without prejudice to any other
consequences which he may incur, be deemed to be an assessee
in default in respect of such tax:
Provided that any person, including the principal officer of a
company, who fails to deduct the whole or any part of the tax in
E
accordance with the provisions of this Chapter on the sum paid to
a payee or on the sum credited to the account of a payee shall not
be deemed to be an assessee in default in respect of such tax if
such payee—
(i) has furnished his return of income under section 139;
F
(ii) has taken into account such sum for computing income in
such return of income; and
(iii) has paid the tax due on the income declared by him in such
return of income,
G and the person furnishes a certificate to this effect from an
accountant in such form as may be prescribed:
Provided further that no penalty shall be charged under section
221 from such person, unless the Assessing Officer is satisfied
that such person, without good and sufficient reasons, has failed
H to deduct and pay such tax.”
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 361
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

25. The scheme of the Income Tax Act, insofar as the question A
raised before us is concerned, is that for income to be taxed under the
Income Tax Act, residence in India, as defined by section 6, is necessary
in most cases. By section 4(1), income tax shall be charged for any
assessment year at any rate or rates, as defined by section 2(37A) of
the Income Tax Act, in respect of the total income of the previous year
B
of every person. Under section 4(2), in respect of income chargeable
under sub-section (1) thereof, income tax shall be deducted at source or
paid in advance, depending upon the provisions of the Income Tax Act.
Importantly, under section 5(2) of the Income Tax Act, the total income
of a person who is a non-resident, includes all income from whatever
source derived, which accrues or arises or is deemed to accrue or arise C
to such person in India during such year. This, however, is subject to the
provisions of the Income Tax Act. Certain income is deemed to arise or
accrue in India, under section 9 of the Income Tax Act, notwithstanding
the fact that such income may accrue or arise to a non-resident outside
India. One such income is income by way of royalty, which, under section
D
9(1)(vi) of the Income Tax Act, means the transfer of all or any rights,
including the granting of a licence, in respect of any copyright in a literary
work.
26. That such transaction may be governed by a DTAA is then
recognized by section 5(2) read with section 90 of the Income Tax Act,
making it clear that the Central Government may enter into any such E
agreement with the government of another country so as to grant relief
in respect of income tax chargeable under the Income Tax Act or under
any corresponding law in force in that foreign country, or for the avoidance
of double taxation of income under the Income Tax Act and under the
corresponding law in force in that country. What is of importance is that F
once a DTAA applies, the provisions of the Income Tax Act can only
apply to the extent that they are more beneficial to the assessee and not
otherwise. Further, by explanation 4 to section 90 of the Income Tax
Act, it has been clarified by the Parliament that where any term is defined
in a DTAA, the definition contained in the DTAA is to be looked at. It is
only where there is no such definition that the definition in the Income G
Tax Act can then be applied. This position has been recognised by this
Court in Azadi Bachao Andolan (supra), which held:
“21. The provisions of Sections 4 and 5 of the Act are expressly
made “subject to the provisions of this Act”, which would include
Section 90 of the Act. As to what would happen in the event of a H
362 SUPREME COURT REPORTS [2021] 2 S.C.R.

A conflict between the provision of the Income Tax Act and a
notification issued under Section 90, is no longer res integra.”
“28. A survey of the aforesaid cases makes it clear that the judicial
consensus in India has been that Section 90 is specifically intended
to enable and empower the Central Government to issue a
B notification for implementation of the terms of a Double Taxation
Avoidance Agreement. When that happens, the provisions of such
an agreement, with respect to cases to which they apply, would
operate even if inconsistent with the provisions of the Income
Tax Act. We approve of the reasoning in the decisions which we
have noticed. If it was not the intention of the legislature to make
C a departure from the general principle of chargeability to tax under
Section 4 and the general principle of ascertainment of total income
under Section 5 of the Act, then there was no purpose in making
those sections “subject to the provisions of the Act”. The very
object of grafting the said two sections with the said clause is to
D enable the Central Government to issue a notification under Section
90 towards implementation of the terms of DTACs which would
automatically override the provisions of the Income Tax Act in
the matter of ascertainment of chargeability to income tax and
ascertainment of total income, to the extent of inconsistency with
the terms of DTAC.”
E
(emphasis supplied)
27. The machinery provision contained in section 195 of the
Income Tax Act is inextricably linked with the charging provision
contained in section 9 read with section 4 of the Income Tax Act, as a
F result of which, a person resident in India, responsible for paying a sum
of money, “chargeable under the provisions of [the] Act”, to a non-
resident, shall at the time of credit of such amount to the account of the
payee in any mode, deduct tax at source at the rate in force which,
under section 2(37A)(iii) of the Income Tax Act, is the rate in force
prescribed by the DTAA. Importantly, such deduction is only to be made
G if the non- resident is liable to pay tax under the charging provision
contained in section 9 read with section 4 of the Income Tax Act, read
with the DTAA. Thus, it is only when the non-resident is liable to pay
income tax in India on income deemed to arise in India and no deduction
of TDS is made under section 195(1) of the Income Tax Act, or such
H person has, after applying section 195(2) of the Income Tax Act, not
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 363
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

deducted such proportion of tax as is required, that the consequences of A
a failure to deduct and pay, reflected in section 201 of the Income Tax
Act, follow, by virtue of which the resident-payee is deemed an “assessee
in default”, and thus, is made liable to pay tax, interest and penalty
thereon. This position is also made amply clear by the referral order in
the concerned appeals from the High Court of Karnataka, namely, the
B
judgment of this Court in GE Technology (supra).
28. However, the learned Additional Solicitor General relied strongly
upon the recent judgment of this Court in PILCOM (supra). This
judgment dealt with payments made to non-resident sportspersons or
sports associations, the relevant provision under section 194E of the
Income Tax Act reading as follows: C

“194-E. Payments to non-resident sportsmen or sports
associations. - Where any income referred to in Section 115-
BBA is payable to a non-resident sportsman (including an athlete)
who is not a citizen of India or a non-resident sports association
or institution, the person responsible for making the payment shall, D
at the time of credit of such income to the account of the payee or
at the time of payment thereof in cash or by issue of a cheque or
draft or by any other mode, whichever is earlier, deduct income
tax thereon at the rate of ten percent”
29. It is in this context that this Court referred to the judgment in E
GE Technology (supra) (see paragraph 16) and distinguished the same,
stating:
“16.1 The submission that unless permission was obtained under
Section 195(2) of the Act, the liability to deduct Tax at Source
must be with respect to the entire payment, was not accepted. F
Relying on the expression “chargeable under the provisions of the
Act” occurring in Section 195(1) of the Act, it was held “the
obligation to deduct TAS, is however, limited to the appropriate
proportion of the income chargeable under the Act forming part
of the gross sum of money payable to the non-resident”. G
16.2 This decision, in our view, has no application insofar as
payments at serial nos. (vi) and (vii) are concerned. To the extent
the payments represented amounts which could not be subject
matter of charge under the provisions of the Act, appropriate
benefit already stands extended to the Appellant.”
H
364 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 30. It was in the context of section 194E of the Income Tax Act,
that the Court went on to observe:
“18. We now come to the issue of applicability of DTAA. As
observed by the High Court, the matter was not argued before it
in that behalf, yet the issue was dealt with by the High Court. In
B our view, the reasoning that weighed with the High Court is quite
correct. The obligation to deduct Tax at Source under Section
194E of the Act is not affected by the DTAA and in case the
exigibility to tax is disputed by the assessee on whose account the
deduction is made, the benefit of DTAA can be pleaded and if the
case is made out, the amount in question will always be refunded
C with interest. But, that by itself, cannot absolve the liability under
Section 194E of the Act.
19. In the premises, it must be held that the payments made to the
Non Resident Sports Associations in the present case represented
their income which accrued or arose or was deemed to have
D accrued or arisen in India. Consequently, the Appellant was liable
to deduct Tax at Source in terms of Section 194E of the Act.”
31. It will be seen that section 194E of the Income Tax Act belongs
to a set of various provisions which deal with TDS, without any reference
to chargeability of tax under the Income Tax Act by the concerned non-
E resident assessee. This section is similar to sections 193 and 194 of the
Income Tax Act by which deductions have to be made without any
reference to the chargeability of a sum received by a non-resident
assessee under the Income Tax Act. On the other hand, as has been
noted in GE Technology (supra), at the heart of section 195 of the
F Income Tax Act is the fact that deductions can only be made if the non-
resident assessee is liable to pay tax under the provisions of the Income
Tax Act in the first place.
32. Thus, the judgment of this Court in PILCOM (supra), dealing
with a completely different provision in a completely different setting,
G has no application to the facts of this case.
THE COPYRIGHT ACT, 1957
33. The relevant provisions of the Copyright Act are as follows:
“2. Interpretation.—In this Act, unless the context otherwise
requires,—
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 365
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

(a) “adaptation” means,- A
xxx xxx xxx
(v) in relation to any work, any use of such work involving
its rearrangement or alteration;
xxx xxx xxx
B
(d) “author” means,—
24
(vi) in relation to any literary, dramatic, musical or artistic
work which is computer-generated, the person who causes
the work to be created;
xxx xxx xxx C
25
(fa) “commercial rental” does not include the rental, lease or
lending of a lawfully acquired copy of a computer programme,
sound recording, visual recording or cinematographic film for
non-profit purposes by a non-profit library or non-profit
educational institution; D
xxx xxx xxx
(ffb) “computer” includes any electronic or similar device having
information processing capabilities
(ffc) “computer programme” means a set of instructions
expressed in words, codes, schemes or in any other form, E
including a machine readable medium, capable of causing a
computer to perform a particular task or achieve a particular
result;
xxx xxx xxx
F
(m) “infringing copy” means—
(i) in relation to a literary, dramatic, musical or artistic work,
a reproduction thereof otherwise than in the form of a
cinematograph film;
(ii) in relation to a cinematographic film, a copy of the film G
made on any medium by any means;
(iii) in relation to a sound recording, any other recording
embodying the same sound recording, made by any means;
24
Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995).
25
Inserted by Act 27 of 2012, sec. 2(ii) (w.e.f. 21-6-2012). H
366 SUPREME COURT REPORTS [2021] 2 S.C.R.

A (iv) in relation to a programme or performance in which
such a broadcast reproduction right or a performer’s right
subsists under the provisions of this Act, the sound recording
or a cinematographic film of such programme or
performance,;
B if such reproduction, copy or sound recording is made or
imported in contravention of the provisions of this Act;
xxx xxx xxx
26
(o) “literary work” includes computer programmes, tables
and compilations including computer databases;”
C “14. Meaning of copyright.— For the purposes of this Act,
copyright means the exclusive right subject to the provisions of
this Act, to do or authorise the doing of any of the following acts
in respect of a work or any substantial part thereof, namely—
(a) in the case of a literary, dramatic or musical work, not
D being a computer programme,—
(i) to reproduce the work in any material form including the
storing of it in any medium by electronic means;
(ii) to issue copies of the work to the public not being copies
already in circulation;
E (iii) to perform the work in public, or communicate it to the
public;
(iv) to make any cinematograph film or sound recording in
respect of the work;
(v) to make any translation of the work;
F (vi) to make any adaptation of the work;
(vii) to do, in relation to a translation or an adaptation of the
work, any of the acts specified in relation to the work in
sub-clauses (i) to (vi);
(b) in the case of a computer programme—
G
(i) to do any of the acts specified in clause (a); 27(ii) to sell
or give on commercial rental or offer for sale or for
commercial rental any copy of the computer programme:
26
Substituted by Act 38 of 1994, sec. 2 (w.e.f. 10-5-1995).
27
H Substituted by Act 49 of 1999, sec. 3 (w.e.f. 15-1-2000).
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 367
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

Provided that such commercial rental does not apply in respect A
of computer programmes where the programme itself is not
the essential object of the rental.”
“16. No copyright except as provided in this Act.— No person
shall be entitled to copyright or any similar right in any work,
whether published or unpublished, otherwise than under and in B
accordance with the provisions of this Act or of any other law for
the time being in force, but nothing in this section shall be construed
as abrogating any right or jurisdiction to restrain a breach of trust
or confidence.”
“18. Assignment of copyright.— (1) The owner of the copyright C
in an existing work or the prospective owner of the copyright in a
future work may assign to any person the copyright either wholly
or partially and either generally or subject to limitations and either
for the whole term of the copyright or any part thereof:
Provided that in the case of the assignment of copyright in any D
future work, the assignment shall take effect only when the work
comes into existence.
28
Provided further that no such assignment shall be applied to any
medium or mode of exploitation of the work which did not exit or
was not in commercial use at the time when the assignment was E
made, unless the assignment specifically referred to such medium
or mode of exploitation of the work:
Provided also that the author of the literary or musical work included
in a cinematograph film shall not assign or waive the right to receive
royalties to be shared on an equal basis with the assignee of F
copyright for the utilisation of such work in any form other than
for the communication to the public of the work along with the
cinematograph film in a cinema hall, except to the legal heirs of
the authors or to a copyright society for collection and distribution
and any agreement to contrary shall be void:
G
Provided also that the author of the literary or musical work included
in the sound recording but not forming part of any cinematograph
film shall not assign or waive the right to receive royalties to be
shared on an equal basis with the assignee of copyright for any
28
Inserted by Act 27 of 2012, sec. 8 (w.e.f. 21-6-2012). H
368 SUPREME COURT REPORTS [2021] 2 S.C.R.

A utilisation of such work except to the legal heirs of the authors or
to a collecting society for collection and distribution and any
assignment to the contrary shall be void.
(2) Where the assignee of a copyright becomes entitled to any
right comprised in the copyright, the assignee as respects the rights
B so assigned, and the assignor as respects the rights not assigned,
shall be treated for the purposes of this Act as the owner of
copyright and the provisions of this Act shall have effect
accordingly.
(3) In this section, the expression “assignee” as respects the
assignment of the copyright in any future work includes the legal
C
representatives of the assignee, if the assignee dies before the
work comes into existence.”
“19. Mode of assignment.—
xxx xxx xxx
D (3) The assignment of copyright in any work shall also specify the
amount of royalty and any other consideration payable, to the
author or his legal heirs during the currency of the assignment
and the assignment shall be subject to revision, extension or
termination on terms mutually agreed upon by the parties.”
“30. Licences by owners of copyright— The owner of the
E copyright in any existing work of the prospective owner of the
copyright in any future work may grant any interest in the right by
licence in writing by him or by his duly authorised agent:
Provided that in the case of a licence relating to copyright in any
future work, the licence shall take effect only when the work
F comes into existence.
Explanation.—Where a person to whom a licence relating to
copyright in any future work is granted under this section dies
before the work comes into existence, his legal representatives
shall, in the absence of any provision to the contrary in the licence,
G be entitled to the benefit of the licence.
29
30A. Application of section 19.— The provisions of section
19 shall, with any necessary adaptations and modifications, apply
in relation to a licence under section 30 as they apply in relation to
assignment of copyright in a work.”
29
H Inserted by Act 38 of 1994, s. 10 (w.e.f. 10-5-1995).
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 369
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

“51. When copyright infringed. Copyright in a work shall be A
deemed to be infringed—
(a) when any person, without a licence granted by the owner of
the copyright or the Registrar of Copyrights under this Act or in
contravention of the conditions of a licence so granted or of any
condition imposed by a competent authority under this Act— B
(i) does anything, the exclusive right to do which is by this Act
conferred upon the owner of the copyright, or
(ii) permits for profit any place to be used for the communication
of the work to the public where such communication constitutes
an infringement of the copyright in the work, unless he was C
not aware and had no reasonable ground for believing that
such communication to the public would be an infringement of
copyright; or
(b) when any person—
(i) makes for sale or hire, or sells or lets for hire, or by way of D
trade displays or offers for sale or hire, or
(ii) distributes either for the purpose of trade or to such an
extent as to affect prejudicially the owner of the copyright, or
(iii) by way of trade exhibits in public, or
E
(iv) imports into India, any infringing copies of the work:
Provided that nothing in sub-clause (iv) shall apply to the import
of one copy of any work for the private and domestic use of the
importer.]
Explanation.— For the purposes of this section, the reproduction F
of a literary, dramatic, musical or artistic work in the form of a
cinematograph film shall be deemed to be an “infringing copy”.
“52. Certain acts not to be infringement of copyright.
(1) The following acts shall not constitute an infringement of
copyright, namely,— G
xxx xxx xxx
30
(aa) the making of copies or adaptation of a computer
programme by the lawful possessor of a copy of such computer
programme, from such copy—
30
Inserted by Act 38 of 1994, sec. 17 (w.e.f. 10-5-1995). H
370 SUPREME COURT REPORTS [2021] 2 S.C.R.

A (i) in order to utilise the computer programme for the purpose
for which it was supplied; or
(ii) to make back-up copies purely as a temporary protection
against loss, destruction or damage in order only to utilise the
computer programme for the purpose for which it was supplied;
B xxx xxx xxx
(ad) the making of copies or adaptation of the computer programme
from a personally legally
obtained copy for non-commercial personal use;”
C “58. Rights of owner against persons possessing or dealing
with infringing copies.— All infringing copies of any work in
which copyright subsists, and all plates used or intended to be
used for the production of such infringing copies, shall be deemed
to be the property of the owner of the copyright, who accordingly
D may take proceedings for the recovery of possession thereof or
in respect of the conversion thereof:
Provided that the owner of the copyright shall not be entitled to
any remedy in respect of the conversion of any infringing copies,
if the opponent proves—
E (a) that he was not aware and had no reasonable ground to
believe that copyright subsisted in the work of which such
copies are alleged to be infringing copies; or
(b) that he had reasonable grounds for believing that such copies
or plates do not involve infringement of the copyright in any
F work.”
34. A reading of the aforesaid provisions leads to the following
conclusions. Under section 2(o) of the Copyright Act, a literary work
includes a computer programme and a computer programme has been
defined under section 2(ffc) of the Copyright Act to mean a set of
G instructions expressed in words, codes, schemes or in any other form
capable of causing a computer to perform a particular task or achieve a
particular result.
35. Though the expression “copyright” has not been defined
separately in the “definitions” section of the Copyright Act, yet, section
H 14 makes it clear that “copyright” means the “exclusive right”, subject
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 371
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

to the provisions of the Act, to do or authorise the doing of certain acts A
“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 the exclusive right, subject to the provisions of the Copyright Act, to
do or authorise the doing of several acts in respect of such work or any
substantial part thereof. In the case of a computer programme, section
B
14(b) specifically speaks of two sets of acts – the seven acts enumerated
in sub-clause (a) and the eighth act of selling or giving on commercial
rental or offering for sale or for commercial rental any copy of the
computer programme. Insofar as the seven acts that are set out in sub-
clause (a) are concerned, they all delineate how the exclusive right that
is with the owner of the copyright may be parted with, i.e., if there is any C
parting with the right to reproduce the work in any material form; the
right to issue copies of the work to the public, not being copies already in
circulation; the right to perform the work in public or communicate it to
the public; the right to make any cinematograph film or sound recording
in respect of the work; the right to make any translation of the work; the
D
right to make any adaptation of the work; or the right to do any of the
specified acts in relation to a translation or an adaptation.
36. In essence, such right is referred to as copyright, and includes
the right to reproduce the work in any material form, issue copies of the
work to the public, perform the work in public, or make translations or
adaptations of the work. This is made even clearer by the definition of E
an “infringing copy” contained in section 2(m) of the Copyright Act,
which in relation to a computer programme, i.e., a literary work, means
reproduction of the said work. Thus, the right to reproduce a computer
programme and exploit the reproduction by way of sale, transfer, license
etc. is at the heart of the said exclusive right. F
37. Section 14(b)(ii) of the Copyright Act was amended twice,
first in 1994 and then again in 1999, with effect from 15.01.2000. Prior
to the 1999 Amendment, section 14(b)(ii) of the Copyright Act read as
follows:
“(ii) to sell or give on hire, or offer for sale or hire any copy of the G
computer programme, regardless of whether such copy has been
sold or given on hire on earlier occasions;”
What is conspicuous by its absence is the phrase “regardless of
whether such copy has been sold or given on hire on earlier occasions”.
H
372 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 38. Importantly, no copyright exists in India outside the provisions
of the Copyright Act or any other special law for the time being in force,
vide section 16 of the Copyright Act. When the owner of copyright in a
literary work assigns wholly or in part, all or any of the rights contained
in section 14(a) and (b) of the Copyright Act, in the said work for a
consideration, the assignee of such right becomes entitled to all such
B rights comprised in the copyright that is assigned, and shall be treated as
the owner of the copyright of what is assigned to him (see section 18(2)
read with section 19(3) of the Copyright Act). Also, under section 30 of
the Copyright Act, the owner of the copyright in any literary work may
grant any interest in any right mentioned in section 14(a) of the Copyright
C Act by licence in writing by him to the licensee, under which, for parting
with such interest, royalty may become payable (see section 30A of the
Copyright Act). When such licence is granted, copyright is infringed
when any use, relatable to the said interest/right that is licensed, is contrary
to the conditions of the licence so granted. Infringement of copyright
takes place when a person “makes for sale or hire or sells or lets for
D hire” or “offers for sale or hire” or “distributes…so as to affect
prejudicially the owner of the copyright”, vide section 51(b) of the
Copyright Act. Importantly, the making of copies or adaptation of a
computer programme in order to utilise the said computer programme
for the purpose for which it was supplied, or to make up back-up copies
E as a temporary protection against loss, destruction or damage so as to
be able to utilise the computer programme for the purpose for which it
was supplied, does not constitute an act of infringement of copyright
under section 52(1)(aa) of the Copyright Act. In short, what is referred
to in section 52(1)(aa) of the Copyright Act would not amount to
reproduction so as to amount to an infringement of copyright.
F 39. Section 52(1)(ad) is independent of section 52(1)(aa) of the
Copyright Act, and states that the making of copies of a computer
programme from a personally legally obtained copy for non-commercial
personal use would not amount to an infringement of copyright. However,
it is not possible to deduce from this what is sought to be deduced by the
G learned Additional Solicitor General, namely, that if personally legally
obtained copies of a computer programme are to be exploited for
commercial use, it would necessarily amount to an infringement of
copyright. Section 52(1)(ad) of the Copyright Act cannot be read to
negate the effect of section 52(1)(aa), since it deals with a subject matter
that is separate and distinct from that contained in section 52(1)(aa) of
H the Copyright Act.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 373
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

DOUBLE TAXATION AVOIDANCE AGREEMENTS A
40. These appeals concern the DTAAs between India and the
following countries/parties:
1. Commonwealth of Australia
2. Canada
B
3. People’s Republic of China
4. Republic of Cyprus
5. Republic of Finland
6. Republic of France
7. Federal Republic of Germany C
8. Hong Kong Special Administrative Region of the
People's Republic of China
9. Republic of Ireland
10. Republic of Italy
11. Japan D
12. Republic of Korea
13. Kingdom of Netherlands
14. Republic of Singapore
15. Kingdom of Sweden
16. India-Taipei Association in Taipei (Taiwan) E
17. United States of America
18. United Kingdom of Great Britain and Northern Ireland

41. Insofar as is material, each of these DTAAs is based on the
OECD Model Tax Convention on Income and on Capital, and are F
therefore substantially similar, if not identical, in respect of the provisions
concerning “business profits” and “royalties”. The provisions of one of
these DTAAs, namely the India-Singapore DTAA, are set out as follows:
“ARTICLE 2 - TAXES COVERED
1. The taxes to which this Agreement shall apply are: G
(a) in India: income-tax including any surcharge thereon
(hereinafter referred to as “Indian tax”);
(b) in Singapore: the income tax (hereinafter referred to as
“Singapore tax”).
H
374 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 2. The Agreement shall also apply to any identical or substantially
similar taxes which are imposed by either Contracting State after
the date of signature of the present Agreement in addition to, or in
place of, the taxes referred to in paragraph 1. The competent
authorities of the Contracting States shall notify each other of any
substantial changes which are made in their respective taxation
B
laws.”
“ARTICLE 3 - GENERAL DEFINITIONS
xxx xxx xxx
2. As regards the application of the Agreement by a Contracting
C State, any term not defined therein shall, unless the context
otherwise requires, have the meaning which it has under the law
of that State concerning the taxes to which the Agreement
applies.”
“ARTICLE 7 - BUSINESS PROFITS
D
1. The profits of an enterprise of a Contracting State shall be
taxable only in that State unless the enterprise carries on business
in the other Contracting State through a permanent establishment
situated therein. If the enterprise carries on business as aforesaid,
the profits of the enterprise may be taxed in the other State but
E only so much of them as is directly or indirectly attributable to that
permanent establishment.”
“ARTICLE 12 - ROYALTIES AND FEES FOR
TECHNICAL SERVICES
1. Royalties and fees for technical services arising in a Contracting
F
State and paid to a resident of the other Contracting State may be
taxed in that other State.
2. However, such royalties and fees for technical services may
also be taxed in the Contracting State in which they arise and
according to the laws of that State, but if the recipient is the
G beneficial owner of the royalties or fees for technical services,
the tax so charged shall not exceed:
(a) in the case of royalties referred to in paragraph 3(a) and
fees for technical services as defined in this Article (other than
services described in subparagraph (b) of this paragraph), 15%
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 375
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

of the gross amount of the royalties and fees; A
(b) in the case of royalties referred to in paragraph 3(b) and
fees for technical services as defined in this Article that are
ancillary and subsidiary to the enjoyment of property for which
royalties under paragraph 3(b) are received, 10% of the gross
amount of the royalties and fees. B
3. The term “royalties” as used in this Article means payments of
any kind received as a consideration for the use of, or the right to
use:
(a) any copyright of a literary, artistic or scientific work,
including cinematograph films or films or tapes used for radio C
or television broadcasting, any patent, trade mark, design or
model, plan, secret formula or process, or for information
concerning industrial, commercial or scientific experience,
including gains derived from the alienation of any such right,
property or information; D
(b) any industrial, commercial or scientific equipment, other
than payments derived by an enterprise from activities described
in paragraph 4(b) or 4(c) of Article 8.”
“ARTICLE 30 - ENTRY INTO FORCE
E
1. Each of the Contracting States shall notify the other of the
completion of the procedures required by its law for the bringing
into force of this Agreement. This Agreement shall enter into force
on the date of the later of these notifications and shall thereupon
have effect:
F
(a) in India: in respect of income arising in any fiscal year
beginning on or after the first day of April 1994;
(b) in Singapore: in respect of income arising in any fiscal year
beginning on or after the first day of January 1994.
2. The Agreement between the Government of the Republic of G
India and the Government of the Republic of Singapore for the
avoidance of double taxation and the prevention of fiscal evasion
with respect to taxes on income signed in Singapore on 20th April,
1981 shall terminate and cease to be effective from the date on
which this Agreement comes into effect.”
H
376 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 42. The subject matter of each of the DTAAs with which we are
concerned is income tax payable in India and a foreign country.
Importantly, as is now reflected by explanation 4 to section 90 of the
Income Tax Act and under Article 3(2) of the DTAA, the definition of
the term “royalties” shall have the meaning assigned to it by the DTAA,
meaning thereby that the expression “royalty”, when occurring in section
B
9 of the Income Tax Act, has to be construed with reference to Article
12 of the DTAA. This position is also clarified by CBDT Circular No.
333 dated 02.04.1982,31 which states as follows:
“Circular : No. 333 dated 2-4-1982.
Specific provisions made in double taxation avoidance
C agreement - Whether it would prevail over general
provisions contained in Income-tax Act
1. It has come to the notice of the Board that sometimes effect to
the provisions of double taxation avoidance agreement is not given
by the Assessing Officers when they find that the provisions of
D the agreement are not in conformity with the provisions of the
Income-tax Act, 1961.
2. The correct legal position is that where a specific provision is
made in the double taxation avoidance agreement, that provisions
will prevail over the general provisions contained in the Income-
E tax Act. In fact that the double taxation avoidance agreements
which have been entered into by the Central Government under
section 90 of the Income-tax Act, also provide that the laws in
force in either country will continue to govern the assessment and
taxation of income in the respective countries except where
provisions to the contrary have been made in the agreement.
F
3. Thus, where a double taxation avoidance agreement
provides for a particular mode of computation of income, the
same should be followed, irrespective of the provisions in the
Income-tax Act. Where there is no specific provision in the
agreement, it is basic law, i.e., the Income-tax Act, that will
G govern the taxation of income.”
43. Thus, by virtue of Article 12(3) of the DTAA, royalties are
payments of any kind received as consideration for “the use of, or the
right to use, any copyright” of a literary work, which includes a computer
programme or software.
H 31
F. No. 506/42/81-FTD.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 377
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

END-USER LICENCE AGREEMENTS AND DISTRIBUTION A
AGREEMENTS
44. Certain sample clauses of the EULAs that are illustrative of
the transactions with which we are concerned in each category (outlined
in paragraph 4 of this judgment), are set out hereinbelow:
44. i) Category 1: B
The EULA between Samsung Electronics Co. and the end-user
(updated on 16.11.2016) contains, inter alia, the following terms:
“This End User Licence Agreement (“EULA”) is a legal
agreement between you (either an individual or a single entity)
and Samsung Electronics Co., Ltd. (“Samsung”) for software, C
whether pre-installed or downloaded, owned by Samsung and its
affiliated companies and its third party suppliers and licensors,
that accompanies this EULA, which includes computer software
and may include associated media, content and data, printed
materials, or electronic documentation in connection with your
D
use of Samsung Mobile Device, which will be defined below
(“Samsung Software”).
xxx xxx xxx
1. GRANT OF LICENCE. Samsung grants you a limited non-
exclusive licence to install, use, access, display and run one copy
of the Samsung Software on a single Samsung Mobile Device, E
local hard disk(s) or other permanent storage media of one
computer and you may not make Samsung Software available
over a network where it could be used by multiple computers at
the same time. You may make one copy of the Samsung Software
in machine readable form for backup purposes only; provided that F
the backup copy must include all copyright or other proprietary
notices contained on the original.
Certain items of the Samsung Software may be subject to open
source licences. The open source licence provisions may override
some of the terms of this EULA. We make the applicable open G
source licenses available to you on the Legal Notices section of
the Settings menu of your device.
2. RESERVATION OF RIGHTS AND OWNERSHIP.
Samsung reserves all rights not expressly granted to you in this
EULA. The Software is protected by copyright and other H
378 SUPREME COURT REPORTS [2021] 2 S.C.R.

A intellectual property laws and treaties. Samsung or its suppliers
own the title, copyright and other intellectual property rights in the
Samsung Software. The Samsung Software is licenced, not sold.
3. LIMITATIONS ON END USER RIGHTS. You shall not,
and shall not enable or permit others to, copy, reverse engineer,
B decompile, disassemble, or otherwise attempt to discover the
source code or algorithms of, the Software (except and only to
the extent that such activity is expressly permitted by applicable
law notwithstanding this limitation), or modify, or disable any
features of, the Software, or create derivative works based on
the Software. You may not rent, lease, lend, sublicense or provide
C commercial hosting services with the Software. You may not
transfer this EULA or the rights to the Samsung Software granted
herein to any third party unless it is in connection with the sale of
the mobile device which the Samsung Software accompanied. In
such event, the transfer must include all of the Samsung Software
D (including all component parts, the media and printed materials,
any upgrades, this EULA) and you may not retain any copies of
the Samsung Software. The transfer may not be an indirect
transfer, such as a consignment. Prior to the transfer, the end
user receiving the Samsung Software must agree to all the EULA
terms. Where Samsung Mobile Device is being used by your
E employee or other person using the Samsung Mobile Device as
part of your undertaking (“Your Staff”), that member of your Staff
is licenced to use the Samsung Software as if it were you and
must comply with these terms on the same basis. Any failure to
comply with these terms by your Staff shall be deemed [to be a]
F failure to comply with these terms by you.
xxx xxx xxx
7. EXPORT RESTRICTIONS. You acknowledge that the
Samsung Software is subject to export restrictions of various
countries. You agree to comply with all applicable international
G and national laws that apply to the Samsung Software, including
all the applicable export restriction laws and regulations.”
(emphasis supplied)

H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 379
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

44. ii) Category 2: A
44. ii) a. The Remarketer Agreement dated 01.10.2004, between
IBM Singapore, a foreign, non-resident supplier of computer programmes
and IBM India, an Indian distributor/remarketer, with which C.A. No.
4419/2012 is concerned, contains, inter alia, the following terms:
“IMB Distribution Agreement B

General Terms
1. Definitions
IMB shall mean International Business Machines Corporation
C
Customer is either an End User or a Remarketer. You may market
to End User or Remarketers or both.
End User is anyone, who is not a Related Company, who acquires
Programs for its own use and not for resale.
Programs shall mean instructions written, contained or recorded D
on materials, documents or machine readable media capable of
being executed on, or used in the operation of a machine and
information technology or data related thereto. The term shall
include, but is not limited to, instructions, documentation,
information or data recorded on reels of magnetic tape, magnetic
disks, microfiche cards, and other similar media, and logic manuals, E
flow charts, operational instruction guides, interface specifications,
detailed listings, application manuals, modification guides, operating
Instructions, functional specifications and design specifications
containing or related to such information, instruments or data. In
particular, the term Programs includes, but is not limited to F
supervisors, monitors, operating systems, language compiles, sorts
conversion aid programs, general purpose utilities, industry
application programs and other general purpose application
programs.
IMB Programs shall mean programs protected by IBM’s Patents G
or IMB’s Copyrights, other than or in addition to Remarketer’s
Patents and Remarkets, which are marketed by IMB or its
Subsidiaries.”
xxx xxx xxx
H
380 SUPREME COURT REPORTS [2021] 2 S.C.R.

A “3. Our Relationship
Responsibilities
Each of us agrees that:
1. you are an independent contractor, and this Agreement is non-
B exclusive. Neither of us is a legal representative or legal agent of
the other. Neither of us is legally a partner of the other (for example,
neither of us is responsible for debts incurred by the other), and
neither of us is an employee or franchise of the other nor does
this Agreement create joint venture between us

C xxx xxx xxx
5. We may withdraw a Program from marketing at any time”
“Other Responsibilities
You agree:
xxx xxx xxx
D
2. that your rights under this Agreement are not property rights
and therefore, you can not transfer them to anyone else or
encumber them in any way. For example, you can not sell your
approval to market our Programs or your rights to use Trademarks;
3. Not to assign or otherwise transfer this Agreement, your rights
E under it, or any of its approvals or delegate any duties, other than
to a Related Company, unless expressly permitted to do so under
this Agreement.”
“7. Patents, Copyrights and Intellectual Property Rights.
You agree that you do not and shall not own any right, title or
F interest in and to any and all patents, copyrights and intellectual
property rights.
You shall not alter, deface, remove, cover, mutilate, or add to, in
any manner whatsoever, any patent notice, copyright notice,
trademark, service mark, trade name, serial number, model number,
G brand name or legend that we may attach or affix to the Programs.
If a third party claims that Program we provide under this
Agreement infringes that part’s patents or copyrights, we will
defend you against that claim at our expense and pay all costs,
damages, and attorney’s fees that a court finally awards, provided
H that you:
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 381
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

1. promptly notify us in writing of the claim; and A
2. allow us to control, and cooperate with us in the defense and
any related settlement negotiations;”
“You may market to your Customers the Programs we sell to
you. We will notify you from time to time of the types of Programs
that are available for purchase by you under this Agreement. These B
terms apply to all methods of distribution including to End Users
and through distributors, resellers, solution providers, and systems
integrators.”
(emphasis supplied)
C
44. ii) b. The EULA dated 01.07.2019, involved in C.A. No. 4419/
2012, granting resident Indian end-users the licence to use the software
remarketed or distributed in India through IBM India, contains the
following terms:
“1. Definitions and Interpretation D
1.1 In this Agreement, unless the context requires otherwise, the
following words and expressions shall have the following meanings:
“Authorized Use” – the specified level at which Licensee is
authorized to execute or run the Program. That level may be
measured by number of users, millions of service units (“MSUs”), E
Processor Value Units (“PVUs” ), or other level of use specified
by IBM.
“IBM” – International Business Machines Corporation or one of
its subsidiaries.
“License Information” (“LI”) – a document that provides F
information and any additional terms specific to a Program.
“Program” – the following, including the original and all whole or
partial copies:
1) machine-readable instructions and data, G
2) components, files and modules
3) audio-visual content (such as images, text, recordings, or
pictures),
4) related licensed materials (such as keys and documentation).”
H
382 SUPREME COURT REPORTS [2021] 2 S.C.R.

A “2. License Grant
The Program is owned by IBM or an IBM supplier, and is
copyrighted and licensed, not sold. Licensee receives a license to
the Programs from Assimil8 Limited through a sublicensing
agreement between IBM and Assimil8 Limited. Assimil8 Limited
B grants Licensee a nonexclusive license to
1) use the Program up to the Authorized Use specified in the
PoE
2) make and install copies to support such Authorized Use, and

C 3) make a backup copy, all provided that
a. Licensee has lawfully obtained the Program and complies
with the terms of the Agreement;
b. The backup copy does not execute unless the backed-up
Program cannot execute
D
c. Licensee reproduces all copyright notices and other
legends of ownership on each copy, or partial copy of the
Program
d…
E e. Licensee does not:
1) use, copy, modify, or distribute the Program except
as expressly permitted in this agreement;
2) reverse assemble, reverse compile, otherwise
translate, or reverse engineer the program, except as
F expressly permitted by law without the possibility of
contractual waiver;
3) use any of the Program’s components, files, modules,
audio-visual content, or related licensed materials
separately from that program; or
G
4) sublicense, rent, or lease the Program;”
(emphasis supplied)
44. iii) Category 3:
The standard-form EULA accompanying Microsoft software
H products sold to resident Indian end-users by Microsoft
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 383
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

Corporation, a non- resident, foreign vendor includes the following A
terms:
“1. GRANT OF LICENSE: This EULA grants you the following
rights:
a. Systems Software -
You may install and use one copy of the SOFTWARE PRODUCT B
on a single computer, including a workstation, terminal, or other
digital electronic device (“COMPUTER”). You may permit a
maximum of five (5) COMPUTERS to connect to the single
COMPUTER running the SOFTWARE PRODUCT solely to
access the Internet using the Internet Connection Sharing feature C
of the SOFTWARE PRODUCT. You may not allow these
connected COMPUTERS to use any other components of the
SOFTWARE PRODUCT, nor to invoke application sharing as
described below. The five
(5) connection maximum includes any indirect connections made
D
through software or hardware that pools or aggregates
connections.
b. Storage/Network Use -
You may also store or install a copy of the SOFTWARE
PRODUCT on a storage device, such as a network server, used
on to install or run the SOFTWARE PRODUCT on your other E
COMPUTERS over an internal network: however, you must
acquire and run a licence for each separate COMPUTER on or
from which the SOFTWARE PRODUCT is installed, used,
accessed, displayed, or forgoing any number of COMPUTERS
may access or otherwise utilize the file and print services and F
peer web services of the SOFTWARE PRODUCT. In addition,
you may use the “Multiple Display” feature of the SOFTWARE
PRODUCT to expand your desktop as described in the online
Help file without obtaining a license for each display.”
“2. DESCRIPTION OF OTHER RIGHTS AND
G
LIMITATIONS
xxx xxx xxx
Limitations on Reverse Engineering, Decompilation, and
Disassembly - You may not reverse engineer, decompile, or
disassemble the SOFTWARE PRODUCT, except and only to
H
384 SUPREME COURT REPORTS [2021] 2 S.C.R.

A the extent that such activity is expressly permitted by applicable
law nothwithstanding this limitation.”
“4. COPYRIGHT- All title and intellectual property rights in and
to the SOFTWARE PRODUCT (including but not limited to any
images, photographs, animations, video, audio, music, text, and
B “applets” incorporated into the SOFTWARE PRODUCT), the
accompanying printed materials, and any copies of the
SOFTWARE PRODUCT are owned by Microsoft or its suppliers.
All title and intellectual property rights in and to the content that is
not contained in the Software Product, but may be accessed through
use of the Software Product, is the property of the respective
C content owners and may be protected by applicable copyright or
other intellectual property laws and treaties. This EULA grants
you no rights to use such content. All rights not expressly granted
are reserved by Microsoft.”
“6. BACKUP COPY- After installation of one copy of the
D SOFTWARE PRODUCT pursuant to this EULA, you may keep
the original media on which the SOFTWARE PRODUCT was
provided by Microsoft solely for backup or archival purposes. If
the original media is required to use the SOFTWARE PRODUCT
on the COMPUTER, you may make one copy of the SOFTWARE
E PRODUCT solely for backup or archival purposes. Except as
expressly provided in this EULA, you may not otherwise make
copies of the SOFTWARE PRODUCT or the printed materials
accompanying the SOFTWARE PRODUCT”
(emphasis supplied)
F 44. iv) Category 4
The Supply Contract (undated) between a resident Indian company,
JT Mobiles Ltd., and a Swedish supplier, Ericsson Radio Systems A.B.
concerning the supply of a Mobile Telephone System in C.A. Nos. 6386-
6387/2016, states the following in respect of the software licence granted:
G
“20. LICENSE
20.1 Subject to the terms of conditions set forth in this
Article 20, Licence, JT MOBILES is hereby granted a non-
exclusive restricted licence to use the Software and
Documentation, but only for JT MOBILES’ own operation and
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 385
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

maintenance of the System in accordance with this contract, A
and not otherwise.
20.2 Notwithstanding anything this Contract to the
contrary, it is understood that JT MOBILES receives no title
or ownership rights to the Software or Documentation, and all
such rights shall remain with Contractor or its suppliers. B
20.3 JT MOBILES agrees that the Software or
Documentation provided to it by Contractor under this Contract
or any renewals, extension, or expansions thereof, shall, as
between the parties hereto, be treated as proprietary and a
trade secret of Contractor or its suppliers, and be subject to C
the provisions of Article 30, Confidentiality.
20.4 In pursuance of the foregoing JT MOBILES shall:
a) not provide or make the Software or Documentation
or any portions or aspects thereof (including any methods
or concepts utilized or expressed therein) available to D
any person except to its employees on a “need to know”
basis;
b) not make any copies of Software or Documentation
or parts thereof, except for archival backup purposes;
E
c) when making permitted copies as aforesaid transfer
to the copy/copies any copyright or other marking on
the Software or Documentation.
d) not use the Software or Documentation for any other
purpose than permitted in this Article 20, License or sell
F
or in any manner alienate or part with its possession.
e) not use or transfer the Software and/or the
Documentation outside India without the written consent
of the Contractor and after having received necessary
export or re-export permits from relevant authorities.
G
20.5 JT MOBILES and any successor to JT MOBILES
title to the Hardware or part of Hardware shall have the right
without further consent of Contractor to transfer this license
to a third party which acquires the System, provided any such
third party agrees in writing to abide by all the terms and
conditions of this license. H
386 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 20.6. The obligations of JT MOBILES under this Article
20, Licence, shall survive the termination or expiration of this
Contract for any reason.
20.7 The Software licensed under this Contract is
delivered in an inseparable package also containing other
B software functionality than the Software. In order to avoid
doubt JT MOBILES may not in any use that other part of the
software functionality. However, upon JT MOBILES’ request
Contractor shall offer a licence to use such other software
functionality to JT MOBILES on the same terms and conditions
as stipulated in this Contract but not price.”
C
(emphasis supplied)
45. A reading of the aforesaid distribution agreement would show
that what is granted to the distributor is only a non-exclusive, non-
transferable licence to resell computer software, it being expressly
D stipulated that no copyright in the computer programme is transferred
either to the distributor or to the ultimate end-user. This is further amplified
by stating that apart from a right to use the computer programme by the
end-user himself, there is no further right to sub-license or transfer, nor
is there any right to reverse-engineer, modify, reproduce in any manner
otherwise than permitted by the licence to the end-user. What is paid by
E way of consideration, therefore, by the distributor in India to the foreign,
non-resident manufacturer or supplier, is the price of the computer
programme as goods, either in a medium which stores the software or in
a medium by which software is embedded in hardware, which may be
then further resold by the distributor to the end-user in India, the distributor
F making a profit on such resale. Importantly, the distributor does not get
the right to use the product at all.
46. When it comes to an end-user who is directly sold the computer
programme, such end-user can only use it by installing it in the computer
hardware owned by the end-user and cannot in any manner reproduce
G the same for sale or transfer, contrary to the terms imposed by the EULA.
47. In all these cases, the “licence” that is granted vide the EULA,
is not a licence in terms of section 30 of the Copyright Act, which transfers
an interest in all or any of the rights contained in sections 14(a) and
14(b) of the Copyright Act, but is a “licence” which imposes restrictions
or conditions for the use of computer software. Thus, it cannot be said
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 387
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

that any of the EULAs that we are concerned with are referable to A
section 30 of the Copyright Act, inasmuch as section 30 of the Copyright
Act speaks of granting an interest in any of the rights mentioned in
sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the
appeals before us do not grant any such right or interest, least of all, a
right or interest to reproduce the computer software. In point of fact,
B
such reproduction is expressly interdicted, and it is also expressly stated
that no vestige of copyright is at all transferred, either to the distributor
or to the end-user. A simple illustration to explain the aforesaid position
will suffice. If an English publisher sells 2000 copies of a particular book
to an Indian distributor, who then resells the same at a profit, no copyright
in the aforesaid book is transferred to the Indian distributor, either by C
way of licence or otherwise, inasmuch as the Indian distributor only
makes a profit on the sale of each book. Importantly, there is no right in
the Indian distributor to reproduce the aforesaid book and then sell copies
of the same. On the other hand, if an English publisher were to sell the
same book to an Indian publisher, this time with the right to reproduce
D
and make copies of the aforesaid book with the permission of the author,
it can be said that copyright in the book has been transferred by way of
licence or otherwise, and what the Indian publisher will pay for, is the
right to reproduce the book, which can then be characterised as royalty
for the exclusive right to reproduce the book in the territory mentioned
by the licence. E
48. An instructive judgment of this Court in this respect is to be
found in State Bank of India v. Collector of Customs, (2000) 1
SCC 727. In this case, the State Bank of India imported a consignment
of computer software and manuals from Kindle Software Ltd., Dublin,
Ireland, and cleared the goods for home consumption, and filed an F
application before the Additional Collector of Customs, claiming a refund
of customs duty. After setting out section 14 of the Customs Act 1962
and rule 9(1)(c) of the Customs Valuation (Determination of Price of
Imported Goods) Rules, 1988, the Court stated:
“9. Now, if we refer to the interpretative note relating to Rule G
9(1)(c) it says that royalties and licence fees may include, among
other things, payments in respect to patents, trademarks and
copyrights. There is, however, an exception which says that the
charges for the right to reproduce the imported goods in the country
of importation shall not be added to the price actually paid or
payable for the imported goods in determining the customs value. H
388 SUPREME COURT REPORTS [2021] 2 S.C.R.

A Further payments made by the buyer for the right to distribute or
resell the imported goods shall not be added to the price actually
paid or payable for the imported goods if such payments are not a
condition of the sale for the exports to the country of importation
of the imported goods.
B xxx xxx xxx
11. What we have now to see is if under the agreement SBI has
the right to reproduce the imported software and for that purpose
SBI has paid “royalties and licence fee” which have been added
to the price actually paid for the imported software for use at the
C principal place called the Support Centre. If that is so under the
press note no customs duty is leviable on the royalty so paid. This
takes us to the relevant terms of the agreement which would
indicate as to whether or not the royalty/licence fees needed to
be included in the value of the imported goods.”

D 49. The contention of the State Bank of India that the countrywide
licence fee paid by it by way of royalty was for the reproduction of the
said software and was thus exempt from customs duty, was turned down
by this Court as follows:
“17. The question that arises for consideration is if licence fee
E charged towards countrywide use of software in the second
invoice could be the charges for the right to reproduction and
were these added to the price actually paid or payable for the
imported goods. If we refer to the agreement, software is not
sold to SBI as such but it was to remain the property of Kindle.
There is no other value of the software indicated in the agreement
F except the licence fee. Price is payable only for allowing SBI to
use the software in a limited way at its own centres for a limited
period and that is why the amount charged is called the licence
fee. After five years SBI is required to pay only recurring licence
fee. Countrywide use of the software and reproduction of software
G are two different things and licence fee for countrywide use cannot
be considered as the charges for the right to reproduce the imported
goods. Under the agreement copying, storage, removal, etc. are
under the strict control of Kindle and all copies are the property
of Kindle. SBI can use the software for its internal requirements
only. Licence has been given to SBI to use the property of Kindle
H at its branches and not for reproduction of the software as claimed
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 389
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

by SBI. The words in the agreement are specific that “SBI shall A
pay the licensor the initial licence fee and the recurring licence
fees for use under the provisions of this agreement”.”
50. The Court then made an important observation, stating:
“21. Reproduction and use are two different things. Now under
the agreement user is specifically limited to licence sites. The B
transaction as a whole is to be seen. The press note is of no help
to SBI. Rule 9(1)(c) and the interpretative note thereto did not
apply as nothing was added to the price actually paid for the
imported goods by way of royalties etc. Refund would be allowable
only if there was something added on to the royalty payment which C
was not in the present case. The invoice originally presented was
complete in itself. The second invoice was not filed along with the
bill of entry. In the second invoice also it is the licence fee for the
right to use countrywide and it is not the right to reproduce as
claimed by SBI. Schedule I to the agreement is module and copies
are modalities for the use of software by SBI with various D
restrictions. If we again refer to clause 6.4 of the agreement there
is a complete restraint on SBI which says SBI shall not use, print,
copy, reproduce or disclose the software or documentation in whole
or in part except as is expressly permitted by the agreement nor
shall SBI permit any of the foregoing. SBI is also barred from E
allowing access to its software or documentation except what is
permitted under the agreement. Again SBI is barred from selling,
charging or otherwise making the software or documentation
available to any person except what is expressly permitted under
the agreement. Clause 6.5 of the agreement says that SBI shall
not copy or permit copying of the software supplied to it by Kindle F
save as may be strictly required for delivery to licence sites. The
terms of the agreement also apply to the copies.”
(emphasis supplied)
Though this judgment has been delivered under the Customs Act
1962, yet the important differentiation made between the right to G
reproduce and the right to use computer software has been recognized
by this judgment. Whereas the former would amount to a parting of
copyright by the owner thereof, the latter would not.
51. An argument was advanced by the learned Additional Solicitor
General that in some of the aforestated EULAs, it was clearly stated H
390 SUPREME COURT REPORTS [2021] 2 S.C.R.

A that what was licensed to the distributor/end-user by the non-resident,
foreign supplier would not amount to a sale, thereby making it clear that
what was transferred was not goods. This argument has no legs to stand
on. It is settled law that in all such cases, the real nature of the transaction
must be looked at upon reading the agreement as a whole. Thus, in
Sundaram Finance Ltd. v. State of Kerala, (1966) 2 SCR 828, one
B
of the questions that was raised before this Court was as to the execution
of a “sale letter” acknowledging the sale of a vehicle. This “sale letter”
was dealt with by the Court as follows:
“The appellants are financiers and their business is to advance
loans on favourable terms on the security of vehicles. This is
C effected by obtaining a promissory-note for repayment of the
amount advanced, and a hire-purchase agreement which provides
a mechanism for recovery of the amount. It is true that a “sale
letter” is obtained from the customer, but the consideration for
the sale letter is only the balance remaining payable to the dealer,
D after giving credit against the price of the vehicle the amount paid
by the customer. The application for a loan, and the letter addressed
to the appellants undertaking to insure the vehicle expressly
mention that a loan is asked for and granted on the security of the
motor-vehicle under the hire- purchase agreement. It is the
customer who insures the vehicle, and in the books of the Motor
E Vehicle Authorities he remains, with the consent of the appellants,
owner of the vehicle. Undue importance to the acknowledgment
of sale in the “sale letter” and the recital of sale in the bill and in
the receipt cannot therefore be attached. These documents —
“sale letter”, bill and receipt — must be read with the application
F for granting a loan on the security of the vehicles, the letter in
which the customer requests the appellants to pay the balance of
the price remaining to be paid by him to the dealer, the promissory-
note executed by him for that amount, the undertaking to insure
the vehicle, and intimation to the Motor Vehicles Authorities to
make note of the hire- purchase agreement.”
G
(page 839)
“The true effect of a transaction may be determined from the
terms of the agreement considered in the light of the surrounding
circumstances. In each case, the Court has, unless prohibited by
statute, power to go behind the documents and to determine the
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 391
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

nature of the transaction, whatever may be the form of the A
documents. An owner of goods who purports absolutely to convey
or acknowledges to have conveyed goods and subsequently
purports to hire them under a hire-purchase agreement is not
estopped from proving that the real bargain was a loan on the
security of the goods. If there is a bona fide and completed sale
B
of goods, evidenced by documents, anterior to and independent of
a subsequent and distinct hiring to the vendor, the transaction may
not be regarded as a loan transaction, even though the reason for
which it was entered into was to raise money. If the real transaction
is a loan of money secured by a right of seizure of the goods, the
property ostensibly passes under the documents embodying the C
transaction, but subject to the terms of the hiring agreement, which
become part of the buyer’s title, and confer a licence to seize.
When a person desiring to purchase goods and not having sufficient
money on hand borrows the amount needed from a third person
and pays it over to the vendor, the transaction between the customer
and the lender will unquestionably be a loan transaction. The real D
character of the transaction would not be altered if the lender
himself is the owner of the goods and the owner accepts the
promise of the purchaser to pay the price or the balance remaining
due against delivery of goods. But a hire- purchase agreement is
a more complex transaction. The owner under the hire-purchase E
agreement enters into a transaction of hiring out goods on the
terms and conditions set out in the agreement, and the option to
purchase exercisable by the customer on payment of all the
instalments of hire arises when the instalments are paid and not
before. In such a hire-purchase agreement there is no agreement
to buy goods; the hirer being under no legal obligation to buy, has F
an option either to return the goods or to become its owner by
payment in full of the stipulated hire and the price for exercising
the option. This class of hire- purchase agreements must be
distinguished from transactions in which the customer is the owner
of the goods and with a view to finance his purchase he enters G
into an arrangement which is in the form of a hire-purchase
agreement with the financier, but in substance evidences a loan
transaction, subject to a hiring agreement under which the lender
is given the license to seize the goods.”
(pages 841-842)
(emphasis supplied) H
392 SUPREME COURT REPORTS [2021] 2 S.C.R.

A “In the light of these principles the true nature of the transactions
of the appellants may now be stated. The appellants are carrying
on the business of financiers: they are not dealing in motor-vehicles.
The motor-vehicle purchased by the customer is registered in the
name of the customer and remains at all material times so
registered in his name. In the letter taken from the customer under
B
which the latter agrees to keep the vehicle insured, it is expressly
recited that the vehicle has been given as security for the loan
advanced by the appellants. As a security for repayment of the
loan, the customer executes a promissory- note for the amount
paid by the appellants to the dealer of the vehicle. The so-called
C “sale letter” is a formal document which is not made effective by
registering the vehicle in the name of the appellants and even the
insurance of the vehicle has to be effected as if the customer is
the owner. Their right to seize the vehicle is merely a licence to
ensure compliance with the terms of the hire-purchase agreement.
The customer remains qua the world at large the owner and
D
remains in possession, and on condition of performing the
covenants, has a right to continue to remain in possession. The
right of the appellants may be extinguished by payment of the
amount due to them under the terms of the hire- purchase
agreement even before the dates fixed for payment. The
E agreement undoubtedly contains several onerous covenants, but
they are all intended to secure to the appellants recovery of the
amount advanced. We are accordingly of the view that the intention
of the appellants in obtaining the hire-purchase and the allied
agreements was to secure the return of loans advanced to their
customers, and no real sale of the vehicle was intended by the
F
customer to the appellants. The transactions were merely financing
transactions.”
(page 844)
52. There can be no doubt as to the real nature of the transactions
G in the appeals before us. What is “licensed” by the foreign, non-resident
supplier to the distributor and resold to the resident end-user, or directly
supplied to the resident end-user, is in fact the sale of a physical object
which contains an embedded computer programme, and is therefore, a
sale of goods, which, as has been correctly pointed out by the learned
counsel for the assessees, is the law declared by this Court in the context
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 393
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

of a sales tax statute in Tata Consultancy Services v. State of A.P., A
2005 (1) SCC 308 (see paragraph 27).
APPLICABILITY OF THE DOUBLE TAXATION
AVOIDANCE AGREEMENT’S PROVISIONS
53. The learned Additional Solicitor General sought to reopen a
contention made by the Revenue in the earlier round of litigation in GE B
Technology (supra) which led to this Court framing the question of law
and sending it back to the High Court to decide “on merits”. He sought
to argue, based in particular on Article 30 of the India-USA DTAA, that
the DTAA’s provisions in these cases would not apply at all, inasmuch
as provisions relatable to deduction of TDS under section 195 of the C
Income Tax Act do not refer to tax at all, but are deductions that are to
be made before assessments to tax are made. He argued that these
deductions do not partake the character of tax at all, section 195 of the
Income Tax Act speaking of “any person responsible to pay”, as opposed
to an “assessee”. He therefore differentiated between the language used
in section 9 and section 195 of the Income Tax Act and argued that the D
deductions made under section 195, not being in the nature of tax at all
and at a stage prior to the person responsible for paying defaulting, and
being declared an assessee in default (under section 201 of the Income
Tax Act), the DTAA provisions would not apply at all.
54. There is no doubt that section 9 of the Income Tax Act refers E
to persons who are non-residents and taxes their income as income
which is deemed to accrue or arise in India, thus, making such persons
assessees under the Income Tax Act, who are liable to pay tax. There is
also no doubt that the “person responsible for paying” spoken of in section
195 of the Income Tax Act is not a non-resident assessee, but a person F
resident in India, who is liable to make deductions under section 195 of
the Income Tax Act when payments are made by it to the non-resident
assessee. The submission of the learned Additional Solicitor General is
answered by the judgment of this Court in GE Technology (supra).
This judgment, after setting out section 195 of the Income Tax Act, held:
G
“8. The most important expression in Section 195(1) consists of
the words chargeable under the provisions of the Act. A person
paying interest or any other sum to a non- resident is not liable to
deduct tax if such sum is not chargeable to tax under the IT Act.
For instance, where there is no obligation on the part of the payer
and no right to receive the sum by the recipient and that the H
394 SUPREME COURT REPORTS [2021] 2 S.C.R.

A payment does not arise out of any contract or obligation between
the payer and the recipient but is made voluntarily, such payments
cannot be regarded as income under the IT Act.
9. It may be noted that Section 195 contemplates not merely
amounts, the whole of which are pure income payments, it also
B covers composite payments which have an element of income
embedded or incorporated in them. Thus, where an amount is
payable to a non-resident, the payer is under an obligation to deduct
TAS in respect of such composite payments. The obligation to
deduct TAS is, however, limited to the appropriate proportion of
income chargeable under the Act forming part of the gross sum
C of money payable to the non-resident. This obligation being limited
to the appropriate proportion of income flows from the words
used in Section 195(1), namely, “chargeable under the provisions
of the Act”. It is for this reason that vide Circular No. 728 dated
30-10-1995 CBDT has clarified that the tax deductor can take
D into consideration the effect of DTAA in respect of payment of
royalties and technical fees while deducting TAS. It may also be
noted that Section 195(1) is in identical terms with Section 18(3-
B) of the 1922 Act.
xxx xxx xxx
E 11. While deciding the scope of Section 195(2) it is important to
note that the tax which is required to be deducted at source is
deductible only out of the chargeable sum. This is the underlying
principle of Section 195. Hence, apart from Section 9(1), Sections
4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant,
while applying tax deduction at source provisions.
F
xxx xxx xxx
13. If the contention of the Department that the moment there is
remittance the obligation to deduct TAS arises is to be accepted
then we are obliterating the words “chargeable under the provisions
of the Act” in Section 195(1). The said expression in Section 195(1)
G
shows that the remittance has got to be of a trading receipt, the
whole or part of which is liable to tax in India. The payer is bound
to deduct TAS only if the tax is assessable in India. If tax is not so
assessable, there is no question of TAS being deducted. (See Vijay
Ship Breaking Corpn. v. CIT [(2010) 10 SCC 39 : (2009) 314
H ITR 309] .)
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 395
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

14. One more aspect needs to be highlighted. Section 195 falls in A
Chapter XVII which deals with collection and recovery. Chapter
XVII-B deals with deduction at source by the payer. On analysis
of various provisions of Chapter XVII one finds the use of different
expressions, however, the expression “sum chargeable under the
provisions of the Act” is used only in Section 195. For example,
B
Section 194-C casts an obligation to deduct TAS in respect of
“any sum paid to any resident”. Similarly, Sections 194-EE and
194-F inter alia provide for deduction of tax in respect of “any
amount” referred to in the specified provisions. In none of the
provisions we find the expression “sum chargeable under the
provisions of the Act”, which as stated above, is an expression C
used only in Section 195(1). Therefore, this Court is required to
give meaning and effect to the said expression. It follows,
therefore, that the obligation to deduct TAS arises only when there
is a sum chargeable under the Act.
xxx xxx xxx D
18. If the contention of the Department that any person making
payment to a non-resident is necessarily required to deduct TAS
then the consequence would be that the Department would be
entitled to appropriate the monies deposited by the payer even if
the sum paid is not chargeable to tax because there is no provision E
in the IT Act by which a payer can obtain refund. Section 237
read with Section 199 implies that only the recipient of the sum
i.e. the payee could seek a refund. It must therefore follow, if the
Department is right, that the law requires tax to be deducted on
all payments. The payer, therefore, has to deduct and pay tax,
even if the so-called deduction comes out of his own pocket and F
he has no remedy whatsoever, even where the sum paid by him is
not a sum chargeable under the Act. The interpretation of the
Department, therefore, not only requires the words “chargeable
under the provisions of the Act” to be omitted, it also leads to an
absurd consequence. The interpretation placed by the Department G
would result in a situation where even when the income has no
territorial nexus with India or is not chargeable in India, the
Government would nonetheless collect tax. In our view, Section
195(2) provides a remedy by which a person may seek a
determination of the “appropriate proportion of such sum so
H
396 SUPREME COURT REPORTS [2021] 2 S.C.R.

A chargeable” where a proportion of the sum so chargeable is liable
to tax.
xxx xxx xxx
20. We find no merit in these contentions. As stated hereinabove,
Section 195(1) uses the expression “sum chargeable under the
B provisions of the Act”. We need to give weightage to those words.
Further, Section 195 uses the word “payer” and not the word
“assessee”. The payer is not an assessee. The payer becomes an
assessee-in-default only when he fails to fulfil the statutory
obligation under Section 195(1). If the payment does not contain
C the element of income the payer cannot be made liable. He cannot
be declared to be an assessee-in-default.
21. The abovementioned contention of the Department is based
on an apprehension which is ill-founded. The payer is also an
assessee under the ordinary provisions of the IT Act. When the
D payer remits an amount to a non-resident out of India he claims
deduction or allowances under the Income Tax Act for the said
sum as an “expenditure”. Under Section 40(a)(i), inserted vide
the Finance Act, 1988 w.e.f. 1-4-1989, payment in respect of
royalty, fees for technical services or other sums chargeable under
the Income Tax Act would not get the benefit of deduction if the
E assessee fails to deduct TAS in respect of payments outside India
which are chargeable under the IT Act. This provision ensures
effective compliance with Section 195 of the IT Act relating to
tax deduction at source in respect of payments outside India in
respect of royalties, fees or other sums chargeable under the IT
F Act. In a given case where the payer is an assessee he will
definitely claim deduction under the IT Act for such remittance
and on inquiry if the AO finds that the sums remitted outside India
come within the definition of royalty or fees for technical service
or other sums chargeable under the IT Act then it would be open
to the AO to disallow such claim for deduction. Similarly, vide the
G Finance Act, 2008 w.e.f. 1-4-2008 sub-section (6) has been inserted
in Section 195 which requires the payer to furnish information
relating to payment of any sum in such form and manner as may
be prescribed by the Board. This provision is brought into force
only from 1-4-2008. It will not apply for the period with which we
H are concerned in these cases before us. Therefore, in our view,
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 397
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

there are adequate safeguards in the Act which would prevent A
revenue leakage.
xxx xxx xxx
24. In our view, Section 195(2) is based on the “principle of
proportionality”. The said sub-section gets attracted only in cases
where the payment made is a composite payment in which a B
certain proportion of payment has an element of “income”
chargeable to tax in India. It is in this context that the Supreme
Court stated: (Transmission Corpn. case [(1999) 7 SCC 266 :
(1999) 239 ITR 587], SCC p. 274, para 10)
“10. … If no such application is filed income tax on such sum C
is to be deducted and it is the statutory obligation of the person
responsible for paying such ‘sum’ to deduct tax thereon before
making payment. He has to discharge the obligation [to TDS].”
(emphasis supplied)
D
If one reads the observation of the Supreme Court, the words
“such sum” clearly indicate that the observation refers to a case
of composite payment where the payer has a doubt regarding the
inclusion of an amount in such payment which is exigible to tax in
India. In our view, the above observations of this Court in
Transmission Corpn. case [(1999) 7 SCC 266 : (1999) 239 ITR E
587] which is put in italics has been completely, with respect,
misunderstood by the Karnataka High Court to mean that it is not
open for the payer to contend that if the amount paid by him to the
non-resident is not at all “chargeable to tax in India”, then no TAS
is required to be deducted from such payment. This interpretation F
of the High Court completely loses sight of the plain words of
Section 195(1) which in clear terms lays down that tax at source
is deductible only from “sums chargeable” under the provisions
of the IT Act i.e. chargeable under Sections 4, 5 and 9 of the IT
Act.
G
25. Before concluding we may clarify that in the present case on
facts ITO(TDS) had taken the view that since the sale of the
software concerned, included a licence to use the same, the
payment made by the appellant(s) to foreign suppliers constituted
“royalty” which was deemed to accrue or arise in India and,
therefore, TAS was liable to be deducted under Section 195(1) of H
398 SUPREME COURT REPORTS [2021] 2 S.C.R.

A the Act. The said finding of ITO(TDS) was upheld by CIT(A).
However, in the second appeal, ITAT held that such sum paid by
the appellant(s) to the foreign software suppliers was not a “royalty”
and that the same did not give rise to any “income” taxable in
India and, therefore, the appellant(s) was not liable to deduct TAS.
However, the High Court did not go into the merits of the case
B
and it went straight to conclude that the moment there is remittance
an obligation to deduct TAS arises, which view stands hereby
overruled.”
55. What is made clear by the judgment in GE Technology (supra)
is the fact that the “person” spoken of in section 195(1) of the Income
C Tax Act is liable to make the necessary deductions only if the non-resident
is liable to pay tax as an assessee under the Income Tax Act, and not
otherwise. This judgment also clarifies, after referring to CBDT Circular
No.728 dated 30.10.1995, that the tax deductor must take into
consideration the effect of the DTAA provisions. The crucial link,
D therefore, is that a deduction is to be made only if tax is payable by the
non-resident assessee, which is underscored by this judgment, stating
that the charging and machinery provisions contained in sections 9 and
195 of the Income Tax Act are interlinked.
56. This conclusion is also echoed in Vodafone International
E Holdings BV v. Union of India, (2012) 6 SCC 613, wherein the
following observations were made on the scope and applicability of
section 195 of the Income Tax Act:
“171. Section 195 casts an obligation on the payer to deduct tax
at source (“TAS”, for short) from payments made to non- residents
F which payments are chargeable to tax. Such payment(s) must
have an element of income embedded in it which is chargeable to
tax in India. If the sum paid or credited by the payer is not
chargeable to tax then no obligation to deduct the tax would arise.
Shareholding in companies incorporated outside India (CGP) is
property located outside India. Where such shares become subject-
G matter of offshore transfer between two non-residents, there is
no liability for capital gains tax. In such a case, question of deduction
of TAS would not arise.
172. If in law the responsibility for payment is on a non- resident,
the fact that the payment was made, under the instructions of the
H non-resident, to its agent/nominee in India or its PE/Branch Office
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 399
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

will not absolve the payer of his liability under Section 195 to A
deduct TAS. Section 195(1) casts a duty upon the payer of any
income specified therein to a non-resident to deduct therefrom
TAS unless such payer is himself liable to pay income tax thereon
as an agent of the payee. Section 201 says that if such person
fails to so deduct TAS he shall be deemed to be an assessee-in-
B
default in respect of the deductible amount of tax (Section 201).
173. Liability to deduct tax is different from “assessment” under
the Act. Thus, the person on whom the obligation to deduct TAS
is cast is not the person who has earned the income. Assessment
has to be done after liability to deduct TAS has arisen. The object
of Section 195 is to ensure that tax due from non-resident persons C
is secured at the earliest point of time so that there is no difficulty
in collection of tax subsequently at the time of regular assessment.”
(emphasis supplied)
57. The absurd consequence that the resident in India, after making D
the deduction/payment, would not then get any excess payment made
by way of refund when regular assessment takes place, as the non-
resident assessee alone would be entitled to such refund, is also pointed
out in paragraph 18 of the judgment in GE Technology (supra). It was
after keeping all this in view that this Court then set aside the judgment
of the High Court of Karnataka dated 24.09.2009 and remanded the E
case to the High Court for a decision of the question “on merits”, i.e., on
the sole question as to whether the ITAT was justified in holding that the
amounts paid by the appellants to the foreign software suppliers did not
amount to royalty, as a result of which, no liability to deduct TDS arose.
58. Even otherwise, a look at Article 12(2) of the India-Singapore F
DTAA would demonstrate the fallacy of the aforesaid submission of the
learned Additional Solicitor General. Under Article 12(2) of the India-
Singapore DTAA, royalties may be taxed in the Contracting State in
which they arise (India) and according to the laws of that Contracting
State (Indian laws), if the recipient is a beneficial owner of the royalties, G
and the tax so charged is capped at the rate of 10% or 15%. If the
learned Additional Solicitor General is correct in his submission, as the
DTAA would then not apply, royalty would be liable to be taxed in India
at the rate mentioned in the Income Tax Act which can be much higher
than the DTAA rate, as a result of which, the deduction made under
section 195 of the Income Tax Act by the “person responsible” would H
400 SUPREME COURT REPORTS [2021] 2 S.C.R.

A have to be a proportion of a much higher sum than the tax that is ultimately
payable by the non-resident assessee. This equally absurd result cannot
be countenanced given the fact that the person liable to deduct tax is
only liable to deduct tax first and foremost if the non- resident person is
liable to pay tax, and second, that if so liable, is then liable to deduct tax
depending on the rate mentioned in the DTAA.
B
59. Further, tearing an article of a specific DTAA, namely Article
30 of the India-USA DTAA, out of context in order to buttress his
submission, in a manner far removed from the actual rationale behind
that provision, does not commend itself to us.
C 59. i) Article 30 of the India-USA DTAA, relied upon by the
learned Additional Solicitor General, reads:
“1. Each Contracting State shall notify the other Contracting State
in writing, through diplomatic channels, upon the completion of
their respective legal procedures to bring this Convention into force.
D 2. The Convention shall enter into force on the date of the latter
of such notifications and its provisions shall have effect:
(a) in the United States
(i) in respect of taxes withheld at source, for amounts paid
or credited on or after the first day of January next following
E the date on which the Convention enters into force;
(ii) in respect of other taxes, for taxable periods beginning
on or after the first day of January next following the date
on which the Convention enters into force; and
(b) in India, in respect of income arising in any taxable year
F beginning on or after the first day of April next following the
calendar year in which the Convention enters into force.”
59. ii) By way of contrast, under the Convention between the
Republic of India and the Kingdom of Netherlands for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with respect to
G Taxes on Income and on Capital,32 [“India-Netherlands DTAA”],
Article 29 reads:
“1. Each of the States shall notify to the other the completion of
the procedures required by its law for the bringing into force of
32
Notification No. GSR 382(E), dated 27-3-1989, as amended by Notification No.
H S.O. 693(E), dated 30-8-1999.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 401
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

this Convention. This Convention shall enter into force on the A
thirtieth day after the latter of the dates on which the respective
Governments have notified each other in writing that the formalities
constitutionally required in their respective States have been
complied with, and its provisions shall have effect:
(a) in the Netherlands for taxable years and periods beginning B
on or after the first day of January next following the calendar
year in which the latter of the notifications is given;
(b) in India in respect of income arising in any fiscal year
beginning on or after the first day of April next following the
calendar year in which the latter of the notifications is given. C
2. Notwithstanding the provisions of paragraph 1, the provisions
of Article 8 shall have effect:
(a) in the Netherlands for taxable years and periods beginning
on or after the first day of January, 1987;
(b) in India in respect of income arising in any fiscal year D
beginning on or after the first day of April, 1987.”
59. iii) Under the Convention between the Government of Japan
and the Government of the Republic of India for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes on
Income,33 [“India-Japan DTAA”] Article 28 is set out in the following E
terms:
“1. This Convention shall be ratified and the instruments of
ratification shall be exchanged at Tokyo as soon as possible.
2. This Convention shall enter into force on the thirtieth day after
the date of the exchange of instruments of ratification and shall F
have effect :
(a) In Japan : as regards income for any taxable year beginning
on or after the first day of January of the calendar year next
following that in which this Convention enters into force; and
G
(b) in India : as regards income for any ‘previous year’
beginning on or after the first day of April of the calendar year
next following that in which this Convention enters into force.
33
Notification : No. GSR 101(E), dated 1-3-1990, as amended by Notification Nos. SO
753(E), dated 16-8-2000 (w.r.e.f. 1-10-1999), SO 1136(E), dated 19-7-2006, w.r.e.f.
28- 6-2006 and SO 2528(E), dated 8-10-2008, w.e.f. 1-10-2008. H
402 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 3. The Agreement between Japan and India for the Avoidance of
Double Taxation in respect of Taxes on Income signed at New
Delhi on January 5, 1960 shall terminate and cease to have effect
in respect of income to which this Convention applies under the
provisions of paragraph 2.”
B 59. iv) Under the Convention between the Government of the
Republic of India and the Government of the United Kingdom of Great
Britain and Northern Ireland for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with respect to Taxes on Income and
Capital Gains,34 [“India-UK DTAA”] Article 30 reads as follows:
C (1) Each of the Contracting States shall notify to the other the
completion of the procedures required by its law for the bringing
into force of this Convention. This Convention shall enter into
force on the date of the later of these notifications and shall
thereupon have effect:

D (a) in the United Kingdom:
(i) in respect of income tax and capital gains tax, for any
year of assessment beginning on or after 6th April in the
calendar year next following that in which the later of the
notifications is given;
E (ii) in respect of corporation tax, for any financial year
beginning on or after 1st April in the calendar year next
following that in which the later of the notifications is given;
(iii) in respect of petroleum revenue tax, for any chargeable
period beginning on or after 1st January in the calendar
F year next following that in which the later of the notifications
is given;
(b) in India, in respect of income arising in any fiscal year
beginning on or after the first day of April next following the
calendar year in which the later of the notifications is given.
G (2) Subject to the provisions of paragraph (3) of this Article, the
Convention between the Government of the United Kingdom of
Great Britain and Northern Ireland and the Government of India
for the Avoidance of Double Taxation and the Prevention of Fiscal
34
GSR 91(E), dated 11-2-1994, as amended by Notification No. 10/2014 [F.No. 505/
H 1986 FTD-I], dated 10-2-2014.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 403
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

Evasion with Respect to Taxes on Income and Capital Gains signed A
in New Delhi on 16th April 1981 (hereinafter referred to as “the
1981 Convention”) shall terminate and cease to be effective from
the date upon which this Convention has effect in respect of the
taxes to which this Convention applies in accordance with the
provisions of paragraph (1) of this Article.
B
(3) Where any provisions of the 1981 Convention would have
afforded any greater relief from tax than is due under this
Convention, any such provision as aforesaid shall continue to have
effect: (a) in the United Kingdom, for any year of assessment or
financial year; and (b) in India, for any fiscal year; beginning, in
either case, before the entry into force of this Convention.” C

59. v) Article 28 of the Agreement between the Government of
the Republic of India and the Government of the People’s Republic of
China for the Elimination of Double Taxation with respect to Taxes on
Income and the Prevention of Tax Evasion and Avoidance,35 [“India-
China DTAA”], is again worded differently, as follows: D

“This Agreement shall enter into force on the thirtieth day after
the date on which diplomatic notes indicating the completion of
internal legal procedures necessary in each country for the entry
into force of this Agreement have been exchanged. This Agreement
shall have effect : E

(a) in China, in respect of income arising in any taxable year
beginning on or after the first day of January next following
the calendar year in which this Agreement enters into force;
(b) in India, in respect of income arising in any previous year F
beginning on or after the first day of April next following the
calendar year in which this Agreement enters into force.”
60. Obviously, the logic behind Article 30 of the India-USA DTAA
is for reasons connected with USA’s municipal taxation laws, and has
nothing to do with Indian municipal law governing the liability of persons
G
to deduct tax at source under section 195 of the Income Tax Act. This is
reinforced by the fact that the OECD Commentary on Articles 30 and
31 acknowledges the fact that the “entry into force” provisions, unlike
the rest of the provisions in the OECD Model Tax Convention on Income
35
Notification No. GSR 331(E), dated 5-4-1995, as amended by Notification No. S.O.
2562(E) [No.54/2019/F.No. 503/02/2008-FTD-II], dated 17-7-2019. H
404 SUPREME COURT REPORTS [2021] 2 S.C.R.

A and on Capital, depend on the domestic laws of Contracting States, as
follows:
“COMMENTARY ON ARTICLES 30 AND 31
CONCERNING THE ENTRY INTO FORCE AND THE
TERMINATION OF THE CONVENTION
B xxx xxx xxx
3. It is open to Contracting States to agree that the Convention
shall enter into force when a specified period has elapsed after
the exchange of the instruments of ratification or after the
confirmation that each State has completed the procedures
C required for such entry into force.
4. No provisions have been drafted as to the date on which the
Convention shall have effect or cease to have effect, since such
provisions would largely depend on the domestic laws of the
Contracting States concerned. Some of the States assess tax on
D the income received during the current year, others on the income
received during the previous year, others again have a fiscal year
which differs from the calendar year. Furthermore, some
conventions provide, as regards taxes levied by deduction at the
source, a date for the application or termination which differs
from the date applying to taxes levied by assessment.”
E
(emphasis supplied)
61. For all these reasons, we do not permit the learned Additional
Solicitor General to have a second bite at the same cherry, albeit through
the ingenious argument made by him based on Article 30 of the India-
USA DTAA.
F
DEFINITION OF ROYALTY IN THE DTAAs VIS-À-VIS
THE INCOME TAX ACT
62. In order to ascertain whether the question which was posed
by this Court in GE Technology (supra) was correctly answered by
the High Court of Karnataka vide the impugned judgment dated
G
15.10.2011,36 the first expression that has to be considered by us is the
expression “royalty”.
63. Firstly, it will be seen that when Article 12 of the India-
Singapore DTAA defines the term “royalties” in sub-article (3) thereof,
H 36
CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 405
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

it does so stating that such definition is exhaustive – it uses the expression A
“means”. Secondly, the term “royalties” refers to payments of any kind
that are received as a consideration for the use of or the right to use any
copyright in a literary work. As opposed to this, the definition contained
in explanation 2 to section 9(1)(vi) of the Income Tax Act, is wider in
at least three respects:
B
i. It speaks of “consideration”, but also includes a lump-sum
consideration which would not amount to income of the
recipient chargeable under the head “capital gains”;
ii. When it speaks of the transfer of “all or any rights”, it
expressly includes the granting of a licence in respect thereof; C
and
iii. It states that such transfer must be “in respect of” any
copyright of any literary work.
64. However, even where such transfer is “in respect of”
copyright, the transfer of all or any rights in relation to copyright is a sine D
qua non under explanation 2 to section 9(1)(vi) of the Income Tax
Act. In short, there must be transfer by way of licence or otherwise, of
all or any of the rights mentioned in section 14(b) read with section 14(a)
of the Copyright Act.
65. In State of Madras v. Swastik Tobacco Factory, (1966) 3 E
SCR 79, this Court construed the words “in respect of” used in rule
5(1)(i) of the Madras General Sales Tax (Turnover and Assessment)
Rules 1939, as follows:
“The House of Lords in Inland Revenue Commissioners v. Coutts
& Co. [(1963) 2 All ER 722, 732], in the context of payment of F
estate duty, construed the words “in respect of” in Section 5(2) of
the Finance Act, 1894 (57 & 58 Vict, c. 30) and observed that the
phrase denoted some imprecise kind of nexus between the property
and the estate duty. The House of Lords in Asher v. Seaford
Court Estates Ltd. [LR 1950 AC 608] in construing the provisions
G
of Section 2, sub- section (3) of Increase of Rent and Mortgage
Interest (Restrictions) Act, 1920 (10 & 11 Geo. 5, c. 17), held that
the expression “in respect of” must be read as equivalent to
“attributable”. The Privy Council in Bicher Ltd. v. CIT [(1962) 3
All ER 294] observed that the said words could mean more than
“consisting of” or “namely”. H
406 SUPREME COURT REPORTS [2021] 2 S.C.R.

A It is not necessary to refer to other decisions. It may be accepted
that the said expression received a wide interpretation, having
regard to the object of the provisions and the setting in which the
said words appeared. On the other hand, Indian tax laws use the
expression “in respect of” as synonymous with the expression
“on”: see Article 288 of the Constitution of India; Section 3 of the
B
Indian Income Tax Act, 1922; Sections 3(2) and 3(5), Second
Proviso, of the Madras General Sales Tax Act, 1939; Section 3(1-
A) of the Central Excise and Salt Act, 1944; and Section 9 of the
Kerala Sales Tax Act. We should not be understood to have
construed the said provisions, but only have referred to them to
C state the legislative practice. Consistent with the said practice,
Rule 5(1)(i) of the Rules uses the same expression. When the
said Rule says “excise duty paid in respect of the goods”, the
excise duty referred to is the excise duty paid under Section 3(1),
read with the Schedule of the Central Excises and Salt Act, 1944
(1 of 1944). Under the said Section, read with the Schedule, excise
D
duty is levied on the goods described in the Schedule. Therefore,
when Rule 5(1)(i) of the Rules refers to the duty paid in respect
of the goods to the Central Government, it necessarily refers to
the duty paid on the goods mentioned in the Schedule. As the duty
exempted from the gross turnover is the duty so paid under the
E Central Act, read with the Schedule, the expression “in respect
of” in the context can only mean excise duty paid on goods. In
our view, the expression “in respect of the goods” in Rule 5(1)(i)
of the Rules means only “on the goods”. Even if the word
“attributable” is substituted for the words “in respect of”, the result
will not be different, for the duty paid shall be attributable to the
F
goods. If it was paid on the raw material it can be attributable
only to raw material and not to the goods. We, therefore, hold that
only excise duty paid on the goods sold by the assessee is deductible
from the gross turnover under Rule 5(1)(i) of the Rules.”
(pages 82-83)
G
(emphasis supplied)
66. The aforesaid meaning accords with the meaning to be given
to the expression “in respect of” contained in explanation 2(v) to section
9(1)(vi) of the Income Tax Act.
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 407
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

ROYALTY UNDER THE INCOME TAX ACT A
67. The insertion of sub-sections (v), (vi) and (vii) in section 9(1)
of the Income Tax Act, by way of an amendment through the Finance
Act 1976,37 was to introduce source-based taxation for income in the
hands of a non-resident by way of interest, royalty and fees for technical
services. In Carborandum & Co. v. CIT, (1977) 2 SCC 862, this B
Court, applying residence-based rules of taxation, held that the technical
service fees received by the non-resident assessee (relatable to the
assessment year 1957-1958) could only be deemed to accrue in India if
such income could be attributed to a business connection in India. In the
facts of that case, since no part of the foreign assessee’s operations
were carried on in India, the technical services being rendered wholly in C
foreign territory, it was held that no part of the technical service fees
received by the foreign assessee accrued in India.
68. This position of law was altered by the Finance Act 1976,
which introduced a “source-rule” to tax income by way of royalty in the
hands of a non-resident, noted in the Memorandum explaining the D
provisions of the Finance Bill 1976, as follows:
38. “Source rule” regarding place of accrual of income by
way of interest, royalty and fees for technical services. - A
non-resident taxpayer is chargeable to tax in India in respect of
income from whatever source derived which is received or is E
deemed to be received in India or which accrues or arises or is
deemed to accrue or arise to him in India. The existing provisions
in the Income-tax Act which provide that certain incomes will be
deemed to accrue or arise in India are couched in general language.
The absence of a clear- cut source rule sometimes creates
uncertainty about the chargeability of certain types of incomes in F
the case of non- residents. In order to avoid any doubt or dispute
in regard to the accrual of income by way of interest, royalty and
fees for technical services in the case of non-residents, it is
proposed to make certain provisions in the Income-tax Act clearly
specifying the circumstances in which such income shall be G
deemed to accrue or arise in India.
xxx xxx xxx
40. Income by way of royalty payable by the Government will be
deemed to accrue or arise in India. Royalty payable by a person
37
Act 66 of 1976, (w.e.f 1-6-1976). H
408 SUPREME COURT REPORTS [2021] 2 S.C.R.

A who is resident in India will also be deemed to accrue or arise in
India, except in cases where the royalty is payable for the transfer
of any right or the use of any property or information or for utilising
the services of the recipient for the purposes of a business or
profession carried on outside India or for the purposes of making
or earning any income from a source outside India. Royalty payable
B
by a non-resident will be deemed to accrue or arise in India only
in cases where the royalty is payable in respect of any right,
property or information used or services utilised for the purposes
of a business or profession carried on by the non- resident in India
or for the purposes of making or earning any income from any
C source in India.”
69. Consequently, section 9(1)(vi) of the Income Tax Act was
brought into force. The definition of royalty contained in explanation
2(v) of section 9(1)(vi) of the Income Tax Act includes the transfer of
all or any rights (including the granting of a licence) “in respect of any
D copyright, literary, artistic or scientific work”.
70. The comma after the word “copyright” does not fit as copyright
is obviously spoken of as existing in a literary, artistic or scientific work.
As a matter of fact, this drafting error was rectified in the Draft Taxes
Code 2010,38 under Chapter XIX in Part H thereof, which set out the
E definition of “royalty” as follows:
“PART H - CHAPTER XIX INTERPRETATIONS AND
CONSTRUCTIONS
xxx xxx xxx
(314)(220) “royalty” means consideration (including any lump-
F sum consideration but excluding any consideration which would
be the income of the recipient chargeable under the head “Capital
gains”) for—
xxx xxx xxx
(g) the transfer of all or any rights (including the granting of a
G licence) in respect of — (i) any copyright of literary, artistic or
scientific work; (ii) cinematographic films or work on films,
tapes or any other means of reproduction; or (iii) live coverage
of any event”
(emphasis supplied)
H 38
This Code has, however, remained in draft form and was never enacted.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 409
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

71. The transfer of “all or any rights (including the granting of a A
licence) in respect of any copyright”, in the context of computer software,
is referable to sections 14(a), 14(b) and 30 of the Copyright Act. As has
been held hereinabove, the expression “in respect of” is equivalent to
“in” or “attributable to”. Thus, explanation 2(v) to section 9(1)(vi) of
the Income Tax Act, when it speaks of “all of any rights…in respect of
B
copyright” is certainly more expansive than the DTAA provision, which
speaks of the “use of, or the right to use” any copyright. This has been
recognised by the High Court of Delhi in CIT v. DCM Limited, ITA
Nos. 87-89/1992 in its judgment dated 10.03.2011, as follows:
“9. A bare perusal of Article XIII(3) would show that the
expression “payments of any kind” is circumscribed by the latter C
part of the definition which speaks of consideration received
(including in the form of rentals) for “use of” or “right to use”
intellectual properties. The Tribunal, in our view, rightly observed
that the CIT(A) had erred in coming to the conclusion that the
expression “payments of any kind” was broad enough to include D
even an outright sale. To drive home this point the Tribunal, once
again, has correctly drawn a distinction between the definition of
royalty as appearing in the DTAA and that which finds mention in
explanation 2 to section 9(1)(vi) of the I.T. Act. A perusal of the
provisions of the said explanation would show that it brings within
the ambit of royalty a wider range of transactions which would E
include payments made for “transfer of all” or “any right” in patents,
inventions, model, design, etc. apart from payments based for use
of such right, patent, innovation, model, design, secret formula or
process or trade mark or similar property. As a matter of fact, a
perusal of clause (i) of explanation 2 of section 9(1)(vi) of the F
I.T. Act would show that “transfer of all” or “any right” could
take place by execution of licences as well, which was the
methodology adopted by Tate and the assessee in the present
case…”
72. However, when it comes to the expression “use of, or the G
right to use”, the same position would obtain under explanation 2(v) of
section 9(1)(vi) of the Income Tax Act, inasmuch as, there must, under
the licence granted or sale made, be a transfer of any of the rights
contained in sections 14(a) or 14(b) of the Copyright Act, for explanation
2(v) to apply. To this extent, there will be no difference in the position
H
410 SUPREME COURT REPORTS [2021] 2 S.C.R.

A between the definition of “royalties” in the DTAAs and the definition of
“royalty” in explanation 2(v) of section 9(1)(vi) of the Income Tax
Act.
73. Even if we were to consider the ambit of “royalty” only under
the Income Tax Act on the footing that none of the DTAAs apply to the
B facts of these cases, the definition of royalty that is contained in
explanation 2 to section 9(1)(vi) of the Income Tax Act would make it
clear that there has to be a transfer of “all or any rights’’ which includes
the grant of a licence in respect of any copyright in a literary work. The
expression “including the granting of a licence” in clause (v) of
explanation 2 to section 9(1)(vi) of the Income Tax Act, would
C necessarily mean a licence in which transfer is made of an interest in
rights “in respect of” copyright, namely, that there is a parting with an
interest in any of the rights mentioned in section 14(b) read with section
14(a) of the Copyright Act. To this extent, there will be no difference
between the position under the DTAA and explanation 2 to section
D 9(1)(vi) of the Income Tax Act.
74. However, the learned Additional Solicitor General presses the
application of the amendment made vide the Finance Act 2012 with
retrospective effect from 01.06.1976, which added explanation 4 to
section 9(1)(vi) of the Income Tax Act.
E 75. The Memorandum explaining the provisions in the Finance
Bill 2012 states:
“Section 9(1)(vi) provides that any income payable by way of
royalty in respect of any right, property or information is deemed
to be accruing or arising in India. The term “royalty” has been
F defined in Explanation 2 which means consideration received or
receivable for transfer of all or any right in respect of certain
rights, property or information. Some judicial decisions have
interpreted this definition in a manner which has raised doubts as
to whether consideration for use of computer software is royalty
G or not; whether the right, property or information has to be used
directly by the payer or is to be located in India or control or
possession of it has to be with the payer. Similarly, doubts have
been raised regarding the meaning of the term processed.
Considering the conflicting decisions of various courts in respect
of income in nature of royalty and to restate the legislative intent,
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 411
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

it is further proposed to amend the Income Tax Act in following A
manner:-
(i) To amend Section 9(1)(vi) to clarify that the consideration
for use or right to use of computer software is royalty by
clarifying that transfer of all or any rights in respect of any
right, property or information as mentioned in Explanation 2, B
includes and has always included transfer of all or any right
for use or right to use a computer software (including granting
of a licence) irrespective of the medium through which such
right is transferred.
(ii) To amend section 9(1)(vi) to clarify that royalty includes C
and has always included consideration in respect of any right,
property or information, whether or not
(a) The possession or control of such right, property or
information is with the payer;
(b) Such right, property or information is used directly by D
the payer;
(c) The location of such right, property or information is in
India
(iii) To amend section 9(1)(vi) to clarify that the term “process”
E
includes and shall be deemed to have always included
transmission by satellite (including up-linking, amplification,
conversion for down-linking of any signal), cable, optic fibre or
by any other similar technology, whether or not such process
is secret.
F
These amendments will take effect retrospectively from 1st June,
1976 and will accordingly apply in relation to the assessment year 1977-
78 and subsequent assessment years.”
76. Shri Pardiwala argued that explanation 4, that was inserted
with retrospective effect, uses the language that is contained in section
9(1)(vi)(b) of the Income Tax Act, namely, that the expression “any G
right, property or information” occurring in section 9(1)(vi)(b) alone is
the subject matter of explanation 4, explanation 4 not expanding the
scope of the definition of royalty contained in explanation 2, which
does not contain the aforesaid expression. A reference to the
Memorandum explaining the provisions in the Finance Bill 2012 set out H
412 SUPREME COURT REPORTS [2021] 2 S.C.R.

A hereinabove, would make it clear that the expression “as mentioned in
Explanation 2” in sub-para (i) of the aforesaid Memorandum shows
that explanation 4 was inserted retrospectively to expand the scope of
explanation 2(v). In any case, explanation 2(v) contains the expression,
“the transfer of all or any rights” which is an expression that would
subsume “any right, property or information” and is wider than the
B
expression “any right, property or information”. It is therefore difficult
to accept Shri Pardiwala’s argument that explanation 4 does not expand
the scope of the expression “royalty” as contained in explanation 2 to
section 9(1)(vi) of the Income Tax Act.
77. It is equally difficult to accept the learned Additional Solicitor
C General’s submission that explanation 4 to section 9(1)(vi)of the Income
Tax Act is clarificatory of the position as it always stood, since 01.06.1976,
for which he strongly relied upon CBDT Circular No. 152 dated
27.11.1974. Quite obviously, such a circular cannot apply as it would
then be explanatory of a position that existed even before section 9(1)(vi)
D was actually inserted in the Income Tax Act vide the Finance Act 1976.
Secondly, insofar as section 9(1)(vi) of the Income Tax Act relates to
computer software, explanation 3 thereof, refers to “computer software”
for the first time with effect from 01.04.1991, when it was introduced,
which was then amended vide the Finance Act 2000. Quite clearly,
explanation 4 cannot apply to any right for the use of or the right to use
E computer software even before the term “computer software” was
inserted in the statute. Likewise, even qua section 2(o) of the Copyright
Act, the term “computer software” was introduced for the first time in
the definition of a literary work, and defined under section 2(ffc) only in
1994 (vide Act 38 of 1994).
F 78. Furthermore, it is equally ludicrous for the aforesaid amendment
which also inserted explanation 6 to section 9(1)(vi) of the Income Tax
Act, to apply with effect from 01.06.1976, when technology relating to
transmission by a satellite, optic fibre or other similar technology, was
only regulated by the Parliament for the first time through the Cable
Television Networks (Regulation) Act, 1995, much after 1976. For all
G these reasons, it is clear that explanation 4 to section 9(1)(vi) of the
Income Tax Act is not clarificatory of the position as of 01.06.1976, but
in fact, expands that position to include what is stated therein, vide the
Finance Act 2012.
79. The learned Additional Solicitor General then relied upon the
H Finance Minister’s statement made before the Lok Sabha on 07.09.1990,
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 413
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

which allowed lump sum payments to be made without the deduction of A
tax at source under section 195(1) of the Income Tax Act and did away
with the dual levy, both by way of customs duty and income tax, on
royalty payments for the licensing of software. This statement, again, in
no manner furthers the case of the Revenue that explanation 4 is merely
clarificatory of the legal position as it always stood. Likewise, Notification
B
No. 21/2012 dated 13.06.2012, which deals with section 194J of the
Income Tax Act, does no more than providing that a transferee is exempt
from deducting TDS under section 194J when TDS has already been
deducted under section 195 on the payment made in the previous transfer
of the same software which the transferee acquires without any
modification. In any case, this notification being issued on 13.06.2012, C
i.e., after explanation 4 was inserted vide the Finance Act 2012, it
would not assist the Revenue in asserting that explanation 4 clarifies
the legal position as it always stood.
80. The learned Additional Solicitor General then argued that being
covered by explanation 4 of section 9(1)(vi) of the Income Tax Act, D
the persons liable to deduct TDS under section 195 of the Income Tax
Act ought to have deducted tax at source on the footing that explanation
4 existed on the statute book with effect from 1976. We have, therefore,
to examine as to whether persons liable to deduct TDS under section
195 of the Income Tax Act can be held liable to deduct such sums at a
time when explanation 4 was factually not on the statute book, all E
deductions liable to be made and the assessment years in question being
prior to the year 2012.
81. This question is answered by two latin maxims, lex non cogit
ad impossibilia, i.e., the law does not demand the impossible and
impotentia excusat legem, i.e., when there is a disability that makes it F
impossible to obey the law, the alleged disobedience of the law is excused.
Recently, in the judgment in Arjun Panditrao Khotkar v. Kailash
Kushanrao Gorantyal, (2020) 7 SCC 1 delivered by this Court, this
Court applied the said maxims in the context of the requirement of a
certificate to produce evidence by way of electronic record under section G
65B of the Evidence Act, 1872 and held that having taken all possible
steps to obtain the certificate and yet being unable to obtain it for reasons
beyond his control, the respondent in the facts of the case, was relieved
of the mandatory obligation to furnish a certificate. In so holding, this
Court referred to previous judgments dealing with the doctrine of
impossibility and concluded as follows: H
414 SUPREME COURT REPORTS [2021] 2 S.C.R.

A “47. However, a caveat must be entered here. The facts of the
present case show that despite all efforts made by the
respondents, both through the High Court and otherwise, to get
the requisite certificate under Section 65-B(4) of the Evidence
Act from the authorities concerned, yet the authorities concerned
wilfully refused, on some pretext or the other, to give such
B
certificate. In a fact-circumstance where the requisite certificate
has been applied for from the person or the authority concerned,
and the person or authority either refuses to give such certificate,
or does not reply to such demand, the party asking for such
certificate can apply to the court for its production under the
C provisions aforementioned of the Evidence Act, CPC or CrPC.
Once such application is made to the court, and the court then
orders or directs that the requisite certificate be produced by a
person to whom it sends a summons to produce such certificate,
the party asking for the certificate has done all that he can possibly
do to obtain the requisite certificate. Two Latin maxims become
D
important at this stage. The first is lex non cogit ad impossibilia
i.e. the law does not demand the impossible, and impotentia
excusat legem i.e. when there is a disability that makes it
impossible to obey the law, the alleged disobedience of the law is
excused. This was well put by this Court in Presidential Poll, In
E re [Presidential Poll, In re, (1974) 2 SCC 33] as follows : (SCC
pp. 49-50, paras 14-15)
“14. If the completion of election before the expiration of the
term is not possible because of the death of the prospective
candidate it is apparent that the election has commenced before
F the expiration of the term but completion before the expiration
of the term is rendered impossible by an act beyond the control
of human agency. The necessity for completing the election
before the expiration of the term is enjoined by the Constitution
in public and State interest to see that the governance of the
country is not paralysed by non-compliance with the provision
G that there shall be a President of India.
15. The impossibility of the completion of the election to fill
the vacancy in the office of the President before the expiration
of the term of office in the case of death of a candidate as
may appear from Section 7 of the 1952 Act does not rob Article
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 415
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

62(1) of its mandatory character. The maxim of law impotentia A
excusat legem is intimately connected with another maxim of
law lex non cogit ad impossibilia. Impotentia excusat legem
is that when there is a necessary or invincible disability to
perform the mandatory part of the law that impotentia excuses.
The law does not compel one to do that which one cannot
B
possibly perform. ‘Where the law creates a duty or charge,
and the party is disabled to perform it, without any default in
him, and has no remedy over it, there the law will in general
excuse him.’ Therefore, when it appears that the performance
of the formalities prescribed by a statute has been rendered
impossible by circumstances over which the persons interested C
had no control, like the act of God, the circumstances will be
taken as a valid excuse. Where the act of God prevents the
compliance with the words of a statute, the statutory provision
is not denuded of its mandatory character because of
supervening impossibility caused by the act of God. (See
D
Broom’s Legal Maxims, 10th Edn. at pp. 162-63 and Craies
on Statute Law, 6th Edn. at p. 268.)”
It is important to note that the provision in question in Presidential
Poll, In re [Presidential Poll, In re, (1974) 2 SCC 33] was also
mandatory, which could not be satisfied owing to an act of God, in
the facts of that case. These maxims have been applied by this E
Court in different situations in other election cases — See Chandra
Kishore Jha v. Mahavir Prasad [Chandra Kishore Jha v.
Mahavir Prasad, (1999) 8 SCC 266] (at paras 17 and 21); Special
Reference No. 1 of 2002, In re (Gujarat Assembly Election
matter) [Special Reference No. 1 of 2002, In re (Gujarat F
Assembly Election matter), (2002) 8 SCC 237] (at paras 130 and
151) and Raj Kumar Yadav v. Samir Kumar Mahaseth [Raj
Kumar Yadav v. Samir Kumar Mahaseth, (2005) 3 SCC 601]
(at paras 13 and 14).
48. These Latin maxims have also been applied in several other G
contexts by this Court. In Cochin State Power & Light Corpn.
Ltd. v. State of Kerala [Cochin State Power & Light Corpn.
Ltd. v. State of Kerala, (1965) 3 SCR 187 : AIR 1965 SC 1688],
a question arose as to the exercise of an option of purchasing an
undertaking by the State Electricity Board under Section 6(4) of
the Electricity Act, 1910. The provision required a notice of at H
416 SUPREME COURT REPORTS [2021] 2 S.C.R.

A least 18 months before the expiry of the relevant period to be
given by such State Electricity Board to the State Government.
Since this mandatory provision was impossible of compliance, it
was held that the State Electricity Board was excused from giving
such notice, as follows : (1965) 3 SCR 187, at p. 193 : AIR pp.
1691-92, para 8
B
“8. Sub-section (1) of Section 6 expressly vests in the State
Electricity Board the option of purchase on the expiry of the
relevant period specified in the licence. But the State
Government claims that under sub-section (2) of Section 6 it is
now vested with the option. Now, under sub-section (2) of
C Section 6, the State Government would be vested with the
option only ‘where a State Electricity Board has not been
constituted, or if constituted, does not elect to purchase the
undertaking’. It is common case that the State Electricity Board
was duly constituted. But the State Government claims that
D the State Electricity Board did not elect to purchase the
undertaking. For this purpose, the State Government relies upon
the deeming provisions of sub-section (4) of Section 6, and
contends that as the Board did not send to the State Government
any intimation in writing of its intention to exercise the option
as required by the sub-section, the Board must be deemed to
E have elected not to purchase the undertaking. Now, the effect
of sub- section (4) read with sub-section (2) of Section 6 is
that on failure of the Board to give the notice prescribed by
sub-section (4), the option vested in the Board under sub-section
(1) of Section 6 was liable to be divested. Sub-section (4) of
F Section 6 imposed upon the Board the duty of giving after the
coming into force of Section 6 a notice in writing of its intention
to exercise the option at least 18 months before the expiry of
the relevant period. Section 6 came into force on 5-9-1959,
and the relevant period expired on 3-12-1960. In the
circumstances, the giving of the requisite notice of 18 months
G in respect of the option of purchase on the expiry of 2-12-
1960, was impossible from the very commencement of Section
6. The performance of this impossible duty must be excused in
accordance with the maxim, lex non cogitia ad impossibilia
(the law does not compel the doing of impossibilities), and sub-
H section (4) of Section 6 must be construed as not being
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 417
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

applicable to a case where compliance with it is impossible. A
We must, therefore, hold that the State Electricity Board was
not required to give the notice under sub-section (4) of Section
6 in respect of its option of purchase on the expiry of 25 years.
It must follow that the Board cannot be deemed to have elected
not to purchase the undertaking under sub-section (4) of Section
B
6. By the notice served upon the appellant, the Board duly
elected to purchase the undertaking on the expiry of 25 years.
Consequently, the State Government never became vested with
the option of purchasing the undertaking under sub-section (2)
of Section 6. The State Government must, therefore, be
restrained from taking further action under its notice, Ext. G, C
dated 20-11-1959.”
49. In Raj Kumar Dey v. Tarapada Dey [Raj Kumar Dey v.
Tarapada Dey, (1987) 4 SCC 398], the maxim lex non cogit ad
impossibilia was applied in the context of the applicability of a
mandatory provision of the Registration Act, 1908, as follows : D
(SCC pp. 402-03, paras 6-7)
“6. We have to bear in mind two maxims of equity which are
well settled, namely, actus curiae neminem gravabit — An
act of the court shall prejudice no man. In Broom’s Legal
Maxims, 10th Edn., 1939 at p. 73 this maxim is explained that E
this maxim was founded upon justice and good sense; and
afforded a safe and certain guide for the administration of the
law. The above maxim should, however, be applied with caution.
The other maxim is lex non cogit ad impossibilia (Broom’s
Legal Maxims, p. 162) — The law does not compel a man to
do that which he cannot possibly perform. The law itself and F
the administration of it, said Sir W. Scott, with reference to an
alleged infraction of the revenue laws, must yield to that to
which everything must bend, to necessity; the law, in its most
positive and peremptory injunctions, is understood to disclaim,
as it does in its general aphorisms, all intention of compelling G
impossibilities, and the administration of laws must adopt that
general exception in the consideration of all particular cases.
7. In this case indisputably during the period from 26-7-1978
to December 1982 there was subsisting injunction preventing
the arbitrators from taking any steps. Furthermore, as noted H
418 SUPREME COURT REPORTS [2021] 2 S.C.R.

A before the award was in the custody of the court, that is to say,
28-1- 1978 till the return of the award to the arbitrators on 24-
11-1983, arbitrators or the parties could not have presented
the award for its registration during that time. The award as
we have noted before was made on 28-11-1977 and before
the expiry of the four months from 28-11-1977, the award was
B
filed in the court pursuant to the order of the court. It was
argued that the order made by the court directing the arbitrators
to keep the award in the custody of the court was wrong and
without jurisdiction, but no arbitrator could be compelled to
disobey the order of the court and if in compliance or obedience
C with court of doubtful jurisdiction, he could not take back the
award from the custody of the court to take any further steps
for its registration then it cannot be said that he has failed to
get the award registered as the law required. The aforesaid
two legal maxims — the law does not compel a man to do
that which he cannot possibly perform and an act of the
D court shall prejudice no man would, apply with full vigour in
the facts of this case and if that is the position then the award
as we have noted before was presented before the Sub-
Registrar, Arambagh on 25-11-1983 the very next one day of
getting possession of the award from the court. The Sub-
E Registrar pursuant to the order of the High Court on 24-6-
1985 found that the award was presented within time as the
period during which the judicial proceedings were pending that
is to say, from 28-1-1978 to 24-11-1983 should be excluded in
view of the principle laid down in Section 15 of the Limitation
Act, 1963. The High Court [Tarapada Dey v. District
F Registrar, Hooghly, 1986 SCC OnLine Cal 101 : AIR 1987
Cal 107], therefore, in our opinion, was wrong in holding that
the only period which should be excluded was from 26-7-1978
till 20-12-1982. We are unable to accept this position. 26-7-
1978 was the date of the order of the learned Munsif directing
G maintenance of status quo and 20-12-1982 was the date when
the interim injunction was vacated, but still the award was in
the custody of the court and there is ample evidence as it would
appear from the narration of events hereinbefore made that
the arbitrators had tried to obtain the custody of the award
which the court declined to give to them.”
H (emphasis in original)
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 419
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

50. These maxims have also been applied to tenancy legislation A
— see B.P. Khemka (P) Ltd. v. Birendra Kumar Bhowmick
[B.P. Khemka (P) Ltd. v. Birendra Kumar Bhowmick, (1987) 2
SCC 407] (at para 12), and have also been applied to relieve
authorities of fulfilling their obligation to allot plots when such plots
have been found to be unallottable, owing to the contravention of
B
the Central statutes — see Hira Tikkoo v. State (UT of
Chandigarh) [Hira Tikkoo v. State (UT of Chandigarh), (2004)
6 SCC 765] (at paras 23 and 24).
51. On an application of the aforesaid maxims to the present case,
it is clear that though Section 65-B(4) is mandatory, yet, on the
facts of this case, the respondents, having done everything possible C
to obtain the necessary certificate, which was to be given by a
third party over whom the respondents had no control, must be
relieved of the mandatory obligation contained in the said sub-
section.”
82. As a matter of fact, even under the Income Tax Act, the High D
Court of Bombay has taken a view, applying the aforestated maxims in
the context of the provisions of the relevant DTAAs, to hold that persons
are not obligated to do the impossible, i.e., to apply a provision of a
statute when it was not actually and factually on the statute book.
83. In CIT v. NGC Networks (India) Pvt. Ltd., ITA No. 397/ E
2015, a question arose as to the applicability of explanation 6 to Section
9(1)(vi), in the context of section 194J of the Income Tax Act, which
explanation was inserted with retrospective effect. The High Court of
Bombay, applying the aforesaid maxim, held:
“(d) We find that [the] view taken by the impugned order dated F
9th July, 2014 of the Tribunal that a party cannot be called upon to
perform an impossible act i.e. to comply with a provision not in
force at the relevant time but introduced later by retrospective
amendment. This is in accord with the view taken by this Court in
CIT v/s. Cello Plast (2012) 209 Taxmann 617 – wherein this G
Court has applied the legal maxim lex non cogit ad impossibilia
(law does not compel a man to do what he cannot possibly
perform).
(e) In the present facts, the amendment by introduction of
Explanation-6 to Section 9(1)(vi) of the Act took place in the year
H
420 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 2012 with retrospective effect from 1976. This could not have
been contemplated by the Respondent when he made the payment
which was subject to tax deduction at source under Section 194C
of the Act during the subject Assessment Year, would require
deduction under Section 194J of the Act due to some future
amendment with retrospective effect.”
B
84. In CIT v. Western Coalfields Ltd., ITA No. 93/2008, the
High Court of Bombay dealt with the insertion of an explanation to
section 17(2)(ii) of the Income Tax Act with retrospective effect and
held:
C “11) We see no merit in the above contentions. The Apex Court
in Arun Kumar’s case (supra) while upholding the validity of Rule
3 has held that in the absence of any “deeming fiction” in the Act,
it is open to the assessee to contend that there is no concession in
the matter of accommodation provided by the employer to the
employees and the case is not covered by Section 17(2)(ii) of the
D Act. In other words, even after the substitution of Rule 3 with
effect from 1/4/2001, in the absence of any specific provision
under the Act, it was open to the assessee not to deduct tax at
source relating to the accommodation given to the employees on
the ground that no concession in rent has been given to the
E employees. This contention of the assessee has been in fact upheld
by the Apex Court in the case of Arun Kumar (supra). To
overcome the above decision, the law has been amended by
Finance Act, 2007 with retrospective effect from 1/4/2002. The
retrospective amendment merely takes away the above argument,
which was available to the assessee. Once the salary is paid by
F the employer after deducting tax at source as per the law prevailing
on the date of paying the salary, then any subsequent amendment
in law brought about retrospectively cannot require the employer
to deduct tax at source for the past period, because the salary for
that period has already been paid. Consequently, the employer
G cannot be made liable for the consequences set out in Section 201
of the Act on account of the retrospective amendment to Section
17(2) of the Act.”
85. It is thus clear that the “person” mentioned in section 195 of
the Income Tax Act cannot be expected to do the impossible, namely, to
H apply the expanded definition of “royalty” inserted by explanation 4 to
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 421
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

section 9(1)(vi) of the Income Tax Act, for the assessment years in A
question, at a time when such explanation was not actually and factually
in the statute.
RULINGS OF THE AAR AND JUDGMENTS OF HIGH
COURTS
86. The question of law posed before us in these appeals has B
been answered in several rulings – some by the AAR, some by the High
Court of Karnataka, and some by the High Court of Delhi. These
authorities will now be dealt with sequentially.
87. The first and most comprehensive authority dealing with the
question raised in these appeals is by the AAR in its ruling in Dassault C
Systems, K.K., In Re., (2010) 322 ITR 125 (AAR) [“Dassault
(AAR)”]. In that case, the applicant was a company incorporated under
the laws of Japan, which marketed licensed computer software products,
through a distribution channel comprising value added resellers [“VAR”],
who were independent third-party resellers in the business of selling D
software to end-users. The question posed by the AAR to itself was as
follows:
“Whether on the facts and circumstances of the case and in law
the payment received by Dassault Systems K.K. (hereinafter
referred to as the “the applicant”) from sale of software products E
to independent third party resellers will be taxable as business
profits under Article 7 of the India-Japan Double Taxation
Avoidance Agreement (“India-Japan DTAA” or “Treaty”) and
will not constitute ‘royalties and fee for technical services’ as
defined in Article 12 of India-Japan DTAA?”
F
(pages 129-130)
88. After setting out Article 12 of the India-Japan DTAA, which
is in the same terms as Article 12 of the India-Singapore DTAA and the
other DTAAs that we are concerned with, and after adverting to the
definition of “royalty” that is contained in explanation 2 to section 9(1)(vi)
G
of the Income Tax Act, the AAR then set out, from the locus classicus
on copyright law, the following passage:
“Before entering into a discussion on the applicability of the royalty
definition, it is appropriate to recapitulate certain basic principles
concerning the copyright as a legal concept. We may, in this
H
422 SUPREME COURT REPORTS [2021] 2 S.C.R.

A connection, refer to some passages from the classic treatise of
Copinger and Skone James on Copyright (1999 Edn):
“Copyright gives the owner of the copyright in a work of any
description the exclusive right to authorize or prohibit the
Copyright, Designs and Patents Act, 1988 of UK exploitation
B of the copyright work by third parties. This includes the right
to copy the work itself and also to use the work in other ways
protected under the law”.(p. 26)
Copyright is often described as a negative right. This idea is
conveyed by Copinger in the following words:
C “Copyright, however, does not essentially mean a right to do
something, but rather a right to restrict others from doing certain
acts, and, when copyright is referred to as “an exclusive right,”
the emphasis is on the word ‘exclusive’. Thus, the 1988 Act,
whilst not defining “copyright” otherwise than as a property
right, which is transmissible as personal or moveable property,
D
provides that the owner of the copyright in a work has the
exclusive right to do the acts restricted by the copyright in a
work of that description specified in the 1988 Act. [Copyright,
Designs and Patents Act, 1988 of UK.]” (p. 27)
The following passage also deserves notice:
E
“It is important to recognize that ownership of copyright in a
work is different from the ownership of the physical material
in which the copyright work may happen to be embodied. Just
as the owner of the physical material on which a copyright
work is first recorded is not necessarily the first owner of the
F copyright, so the transfer of title to the original physical material
does not by itself operate to transfer the title to the copyright…
Thus, to take an obvious example, the purchaser of a book or
video recording becomes the owner of the physical article but
he does not thereby become the owner of any part of the
G copyright in the works reproduced in it. The copyright in the
literary work remains with the copyright owner, who enjoys
and is entitled to enforce all the exclusive rights of copying,
publication, adaptation, sale, rental and so on conferred on him
by copyright law. The purchaser does not acquire by his
purchase any right, either by way of assignment or licence, to
H exercise any of those exclusive rights. (p. 217)”
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 423
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

Referring to the position of a licensee and an exclusive licensee, A
the legal position was stated as follows at p. 310:
“A mere licence from the copyright owner confers no
proprietary interest on the licensee enabling him, for example,
to bring proceedings in his own name, unless coupled with the
grant of some other interest, for example, the right to take B
property away. Statute apart, even an exclusive licence, which
is merely the leave to do a thing coupled with a promise not to
do, or give anyone else permission to do that thing, gives the
licensee no right to sue in his own name for infringement nor
any other proprietary interest. In copyright law this general
C
rule is altered by statute in the case of exclusive licences which
comply with prescribed formalities. The 1988 Act confers on
such a licensee a procedural status which enables him to bring
proceedings but otherwise the rule is unchanged: an exclusive
licensee has no proprietary interest in the copyright.””
D
(pages 132-134)
89. After setting out various provisions of the Copyright Act, the
terms of the Distribution Agreement between the applicant and the VAR,
as well as the provisions of the EULA, the AAR then held:
“In the instant case, the end-user is not given the authority to do E
any of the acts contemplated in sub-clauses (i) to (vii) of clause
(a) of Section 14, not to speak of the exclusive right to do the said
acts. In fact, the restrictions placed on the end- user and the VAR
which have been referred to earlier coupled with a declaration
that the intellectual property rights in the licensed programmes F
will remain exclusively with the applicant (or its licensors) and the
non-exclusive and non- transferable character of licence are all
meant to ensure that none of the rights vesting in the applicant as
copyright- holder can be claimed or enjoyed by the licensee and
that they will remain intact and are preserved. The entire tenor of
the Agreement and the various stipulations contained therein make G
it clear that no rights in derogation of the applicant’s exclusive
rights in relation to the copyright have been conferred on the
licensee i.e., the end-user or VAR. The core of the transaction is
to authorize the end-user to have access to and make use of the
licensed software products over which the applicant has exclusive
H
424 SUPREME COURT REPORTS [2021] 2 S.C.R.

A copyright, without giving any scope for dealing with them any
further.
Passing on a right to use and facilitating the use of a product for
which the owner has a copyright is not the same thing as
transferring or assigning rights in relation to the copyright. The
B enjoyment of some or all the rights which the copyright owner
has, is necessary to trigger the royalty definition. Viewed from
this angle, a non-exclusive and non- transferable licence enabling
the use of a copyrighted product cannot be construed as an
authority to enjoy any or all of the enumerated rights ingrained in
a copyright. Where the purpose of the licence or the transaction
C
is only to establish access to the copyrighted product for internal
business purpose, it would not be legally correct to state that the
copyright itself has been transferred to any extent. It does not
make any difference even if the computer programme passed on
to the user is a highly specialized one. The parting of intellectual
D property rights inherent in and attached to the software product in
favour of the licencee/customer is what is contemplated by the
definition clause in the Act as well as the Treaty. As observed
earlier, those rights are incorporated in Section 14. Merely
authorizing or enabling a customer to have the benefit of data or
instructions contained therein without any further right to deal
E
with them independently does not, in our view, amount to transfer
of rights in relation to copyright or conferment of the right of
using the copyright. However, where, for example, the owner of
copyright over a literary work grants an exclusive license to make
out copies and distribute them within a specified territory, the
F grantee will practically step into the shoes of the owner/grantor
and he enjoys the copyright to the extent of its grant to the exclusion
of others. As the right attached to copyright is conveyed to such
licencee, he has the authority to commercially deal with it. In
case of infringement of copyright, he can maintain a suit to prevent
it. Different considerations will arise if the grant is non-exclusive,
G
that too confined to the user purely for in- house or internal purpose.
The transfer of rights in or over copyright or the conferment of
the right of use of copyright implies that the transferee/licencee
should acquire rights - either in entirety or partially co-extensive
with the owner/transferor who divests himself of the rights he
H possesses pro tanto. That is what, in our view, follows from the
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 425
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

language employed in the definition of ‘royalty’ read with the A
provisions of Copyright Act, viz., Section 14 and other
complementary provisions.
We may refer to one more aspect here. In the definition of royalty
under the Act, the phrase “including the granting of a licence” is
found. That does not mean that even a non- exclusive licence B
permitting user for in-house purpose would be covered by that
expression. Any and every licence is not what is contemplated. It
should take colour from the preceding expression “transfer of
rights in respect of copyright”. Apparently, grant of ‘licence’ has
been referred to in the definition to dispel the possible controversy
[that a] licence — whatever be its nature, can be characterized C
as transfer.”
(pages 144-145)
90. The AAR then concluded:
“As stated in Copinger’s treatise on Copyright, “the exclusive D
right to prevent copying or reproduction of a work is the most
fundamental and historically oldest right of a copyright
owner”. We do not think that such a right has been passed on to
the end-user by permitting him to download the computer
programme and storing it in the computer for his own use. The E
copying/reproduction or storage is only incidental to the facility
extended to the customer to make use of the copyrighted product
for his internal business purpose. As admitted by the Revenue’s
representative, that process is necessary to make the programme
functional and to have access to it and is qualitatively different
from the right contemplated by the said provision because it is F
only integral to the use of copyrighted product. Apart from such
incidental facility, the customer has no right to deal with the product
just as the owner would be in a position to do. In so far as the
licensed material reproduced or stored is confined to the four
corners of its business establishment, that too on a non- exclusive G
basis, the right referred to in sub-clause (i) of Section 14(a) would
be wholly out of place. Otherwise, in respect of even off the shelf
software available in the market, it can be very well said that the
right of reproduction which is a facet of copyright vested with the
owner is passed on to the customer. Such an inference leads to
unintended and irrational results. We may in this context refer to H
426 SUPREME COURT REPORTS [2021] 2 S.C.R.

A Section 52(aa) of C.R. Act (extracted supra) which makes it clear
that “the making of copies or adaptation” of a computer program
by the lawful possessor of a copy of such program, from such
copy (i) in order to utilize the computer program, for the purpose
for which it was supplied or (ii) to make back up copies purely as
a temporary protection against loss, destruction, or damage in order
B
to utilize the computer program for the purpose of which it was
supplied” will not constitute infringement of copyright.
Consequently, customization or adaptation, irrespective of the
degree, will not constitute ‘infringement’ as long as it is to ensure
the utilization of the computer program for the purpose for which
C it was supplied. Once there is no infringement, it is not possible to
hold that there is transfer or licensing of ‘copyright’ as defined in
CR Act and as understood in common law. This is because, as
pointed out earlier, copyright is a negative right in the sense that it
is a right prohibiting someone else to do an act, without
authorization of the same, by the owner.
D
It seems to us that reproduction and adaptation envisaged by
Section 14(a)(i) and (vi) can contextually mean only reproduction
and adaptation for the purpose of commercial exploitation.
Copyright being a negative right (in the sense explained in para 9
supra), it would only be appropriate and proper to test it in terms
E of infringement. What has been excluded under S. 52(aa) is not
commercial exploitation, but only utilizing the copyrighted product
for one’s own use. The exclusion should be given due meaning
and effect; otherwise, Section 52(aa) will be practically redundant.
In fact, as the law now stands, the owner need not necessarily
F grant licence for mere reproduction or adaptation of work for
one’s own use. Even without such licence, the buyer of product
cannot be said to have infringed the owner’s copyright. When the
infringement is ruled out, it would be difficult to reach the conclusion
that the buyer/licensee of product has acquired a copyright therein.
The following observations of the Constitution Bench of the
G
Supreme Court in Tata Consultancy Services v. The State of
Andhra Pradesh case are quite apposite, though made in a
different context:
“a software programme may consist of various commands
which enable the computer to perform a designated task. The
H copyright in that programme may remain with the originator of
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 427
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

the programme. But the moment copies are made and marketed, A
[they become] goods, which are susceptible to sales tax.”
Viewed from any angle, we have no hesitation in rejecting the
contention of the Revenue referred to in para 18 supra.”
(pages 147-148)
91. Referring to section 14(b)(ii) of the Copyright Act, the AAR B
then held:
“Next, it has been argued on behalf of the Revenue that the right
to sell or offer for sale the applicant’s software product has been
conferred on the VAR and therefore such authority given to VAR
amounts to conferment of rights in or over the copyright in view
of cl. (b)(ii) of Section 14. We are unable to sustain this contention. C
First of all, this contention of Revenue goes contrary to its stand
that the product was licensed but not sold. Be that as it may, even
for other reasons, the contention has to be rejected. VAR has not
been given an independent right to sell or offer for sale the software
products of the applicant to the end-users. What the VAR does in D
the course of carrying out its marketing function is to canvass for
orders, collect the purchase order from the interested customer
and forward that offer to the applicant. It is the applicant that
accepts or rejects that offer. For this purpose, a non-exclusive
and non-transferable license to distribute the product has been
given to VAR. The transaction emanating from the order of the E
end-user followed up by back to back order of VAR is finalized
by the applicant and unless the purchase order is accepted by the
applicant, the transaction does not materialize. The VAR’s role is
only to forward the order to the applicant with the necessary
documents. It is upto the applicant to accept it or not to accept it.
F
Once the product is delivered to the end- user, the sale if any by
VAR takes place simultaneously and that transaction is a different
one. In the absence of an independent right to conclude the sale
or offer for sale, sub- clause (ii) of clause (b) of Section 14 cannot
be invoked to bring the case within the fold of Art. 12.3 of the
Treaty or Section 9(1)(vi) of the Act. It is also noteworthy that G
VAR is not an exclusive distributor for a territory and he does not
pay any consideration to the applicant distinctly for acquiring the
distribution rights. He gets the discount for each individual
transaction at the agreed rate.”
(pages 148-149)
H
428 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 92. Consequently, the question posed to itself was answered by
the AAR as follows:
“The answer to the question framed by the applicant is broadly in
the negative. It is ruled that the payment received by the applicant
from VARs. (“third party re-sellers”) on account of supplies of
B software products to the end- customers (from whom the licence
fee is collected and appropriated by VAR) does not result in income
in the nature of royalty to the applicant and moreover payments
received by the applicant cannot be taxed as business profits in
India in the absence of permanent establishment as envisaged by
Article 7 of the India-Japan Tax Treaty.”
C
(pages 157-158)
93. Close on the heels of this determination, the AAR followed
this determination in Geoquest Systems B.V. Gevers Deynootweg,
In Re., (2010) 327 ITR 1 (AAR) [“Geoquest (AAR)”] qua an
applicant which was a company incorporated in the Netherlands and
D sold certain software packages to the Oil and Natural Gas Corporation
in India. After referring to and relying upon the determination in Dassault
(AAR) (supra), the AAR concluded that the amount payable to the
applicant did not amount to “royalties” within the meaning of Article 12
of the India- Netherlands DTAA.
E 94. However, a discordant note was soon struck by the AAR in
Citrix Systems Asia Pacific Ptyl. Ltd., In Re., (2012) 343 ITR 1
(AAR) [“Citrix Systems (AAR)”], which ruling is impugned in C.A.
No. 8990/2018 before us. In this case, the same question that arose
before the AAR in the earlier two cases, namely Dassault (AAR) (supra)
F and Geoquest (AAR) (supra), arose. The case concerned an applicant
incorporated in Australia that had entered into a distribution agreement
with an independent Indian company engaged in the business of
distribution of computer software and hardware. “Ingram” was appointed
as the non-exclusive distributor of the products of the applicant in India.
This time, the AAR, after referring to the provisions of the Income Tax
G Act and the Convention between the Government of the Republic of
India and the Government of Australia for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes on
Income,39 [“India-Australia DTAA”], together with the provisions of
39
Notification No. GSR 60(E), dated 22-1-1992 as amended by Notification No.74/
H 2013 [F.No.503/1/2009-FTD-II]/SO 2820(E), dated 20-9-2013.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 429
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

the Copyright Act, arrived at a conclusion diametrically opposite to that A
contained in the rulings in Dassault (AAR) (supra) and Geoquest
(AAR) (supra). The AAR held as follows:
“Thus, a reference to the Copyright Act indicates that use of a
copyright either by an owner or a licensee, would not be an
infringement of a copyright. The transfer of ownership can be by B
an assignment to another of the copyright either wholly or partially,
either generally or with special limitations and either for the whole
term of the copyright or any part thereof. Similarly, a license can
be granted by the owner of the copyright of any interest in the
right. An exclusive right also can be granted excluding even oneself
from the right to use the copyright owned. So, a transgression of C
the limitations of an assignment or of a license would prime facie
be an infringement of the copyright and invite the consequences
provided for under the Act. Similarly, the act of taking copies or
act of adaptation will not be an infringement only if it is done by a
lawful possessor of a copy of the computer programme. A lawful D
possessor can only be an assignee, an exclusive licensee or a
licensee of the programme. When he acquires a computer
programme, he also gets the right to use that programme to a
limited extent. This in our view, is on the basis that in so acquiring
the computer programme, he has also got a right, absolute or limited
to use the copyright. E

When a software is created by a person who acquires a copyright
for it, he becomes the owner of that copyright. He can transfer or
license that right either by himself or through an agent. When he
sells or licenses the software for use, he is also selling or licensing
the right to use the copyright embedded therein. If a software is F
used without being lawfully acquired either by purchase or by
license, that would amount to an infringement of the copyright
obviously because of the copyright embedded in the software.
The software is a literary work and clearly the copyright of the
creator over the software is an important and commercially G
valuable right. So, whenever a software is assigned or licensed
for use, there is involved an assignment of the right to use the
embedded copyright in the software or a license to use the
embedded copyright, the Intellectual Property Right in the software.
Therefore, it appears to us that it is not possible to divorce the
H
430 SUPREME COURT REPORTS [2021] 2 S.C.R.

A software from the Intellectual Property Right of the creator of
the software embedded therein. The amendment to Section
14(1)(b) of the Copyright Act, by Act 49 of 1999, clarifying that in
the case of a computer programme, copyright means the right to
sell or give on commercial rental or offer for sale or commercial
rental any copy of the computer programme, seems to be
B significant. This addition would suggest that even the right to sell
or give on rental, would amount to a copyright and would be a
right to be dealt with as a copyright.”
(pages 13-14)
95. The AAR disagreed with the determination in Dassault (AAR)
C (supra), stating:
“In Dassault (AAR 821 of 2009), it was noticed that the core of
the transaction in that case was to authorise the end-user to have
access to and make use of the licensed software products over
which the applicant had exclusive copyright without giving any
scope for dealing with them any further.
D
The reasoning or the line of reasoning in Factset on applicability
of the Copyright Act, in this context, was followed. It was also
noticed that in Tata Consultancy Services (271 ITR 401), the
Supreme Court had held that “a software programme may consist
of various commands which enable the computer to perform a
E designated task. The copyright in that programme may remain
with the originator of the programme. But, the moment copies are
made and marketed it becomes goods which are susceptible to
sales-tax.” The Supreme Court was speaking in the context of
the Sales-tax Act. The Court had no occasion to consider what
was involved in the sale of a software programme. The Court
F
had no occasion to consider what all are the rights that pass on to
the grantee when a software programme is transferred or licensed
to him. It was concluded in Dassault, that in the absence of an
independent right to conclude a sale or offer for sale, section 14
could not be invoked to bring the case within Section 9(1)(vi) of
G the Act by invoking sub-clause (ii) of Clause (b) of that section. It
was concluded that no right to use the copyright as such has been
conferred on the licensee. In our view whenever software is
transferred or licensed for use, it takes within it the copyright
embedded in the software and the one cannot be divorced from
the other.”
H (page 17)
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 431
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

96. The AAR then reasoned that the fact that a licence had been A
granted would be sufficient to conclude that there was a transfer of
copyright, and that there was no justification for the use of the doctrine
of noscitur a sociis to confine the transfer by way of a licence to only
include a licence which transferred rights in respect of copyright, by
referring to explanation 2 to section 9(1)(vi) of the Income Tax Act. It
B
then held:
“Considerable arguments are raised on the so-called distinction
between a copyright and copyrighted articles. What is a
copyrighted article? It is nothing but an article which incorporates
the copyright of the owner, the assignee, the exclusive licensee or
the licencee. So, when a copyrighted article is permitted or licensed C
to be used for a fee, the permission involves not only the physical
or electronic manifestation of a programme, but also the use of or
the right to use the copyright embedded therein. That apart, the
Copyright Act or the Income-tax Act or the DTAC does not use
the expression ‘copyrighted article’, which could have been used D
if the intention was as claimed by the applicant. In the
circumstances, the distinction sought to be made appears to be
illusory.”
(page 19)
97. This ruling of the AAR flies in the face of certain principles. E
When, under a non-exclusive licence, an end-user gets the right to use
computer software in the form of a CD, the end-user only receives a
right to use the software and nothing more. The end-user does not get
any of the rights that the owner continues to retain under section 14(b)
of the Copyright Act read with sub-section (a)(i)-(vii) thereof. Thus, the F
conclusion that when computer software is licensed for use under an
EULA, what is also licensed is the right to use the copyright embedded
therein, is wholly incorrect. The licence for the use of a product under
an EULA cannot be construed as the licence spoken of in section 30 of
the Copyright Act, as such EULA only imposes restrictive conditions
upon the end-user and does not part with any interest relatable to any G
rights mentioned in sections 14(a) and 14(b) of the Copyright Act.
98. As a matter of fact, even otherwise, on first principles, the
extract from Copinger and Skone James on Copyright (14th Edition)
(1999) referred to in Dassault (AAR) (supra) makes it clear that the
ownership of copyright in a work is different from the ownership of the H
432 SUPREME COURT REPORTS [2021] 2 S.C.R.

A physical material in which the copyrighted work may happen to be
embedded. This important passage correctly relied upon by the AAR in
the Dassault (AAR) (supra) ruling has been completely missed.
99. Further, it is difficult to understand the reasoning contained in
this determination. It is self-contradictory when it says that the DTAA
B which defines “royalties” must somehow be given a go-bye, as this term
must be understood as it is commonly understood. It is also difficult to
understand the holding that the AAR need not be constrained by the
definition of “copyright” contained in section 14 of the Copyright Act,
when construing a DTAA, when we have already seen how section 16
of the Copyright Act makes it clear that no person shall be entitled to
C copyright otherwise than under the provisions of the Copyright Act or
any other law in force.
100. Also, any ruling on the more expansive language contained
in the explanations to section 9(1)(vi) of the Income Tax Act would
have to be ignored if it is wider and less beneficial to the assessee than
D the definition contained in the DTAA, as per section 90(2) of the Income
Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA.
Further, the expression “copyright” has to be understood in the context
of the statute which deals with it, it being accepted that municipal laws
which apply in the Contracting States must be applied unless there is
E any repugnancy to the terms of the DTAA. For all these reasons, the
determination of the AAR in Citrix Systems (AAR) (supra) does not
state the law correctly and is thus set aside.
101. The High Court of Karnataka, in a judgment impugned in
various appeals before us, namely, CIT v. Samsung Electronics Co.
F Ltd., (2012) 345 ITR 494, also held that what was sold/licensed by
way of computer software, included the grant of a right or interest in
copyright, and thus gave rise to the payment of royalty, which then
required the deduction of TDS. The reasoning of this judgment under
appeal is set out as follows:

G “…Accordingly, we hold that right to make a copy of the software
and use it for internal business by making copy of the same and
storing the same in the hard disk of the designated computer and
taking back up copy would itself amount to copyright work under
section 14(1) of the Act and licence is granted to use the software
by making copies, which [would], but for the licence granted, have
H constituted infringement of copyright and the licensee is in
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 433
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

possession of the legal copy of the software under the licence. A
Therefore, the contention of the learned senior counsel appearing
for the respondents that there is no transfer of any part of copyright
or copyright and transaction only involves sale of copy of the
copyright software cannot be accepted.
It is also to be noted that what is supplied is the copy of the B
software of which the respondent-supplier continues to be the
owner of the copyright and what is granted under the licence is
only right to copy the software as per the terms of the agreement,
which, but for the licence would amount to infringement of
copyright and in view of the licence granted, the same would not
amount to infringement under section 52 of the Copyright Act as C
referred to above.
Therefore, the amount paid to the non-resident supplier towards
supply of shrink-wrapped software, or off-the-shelf software is
not the price of the C.D. alone nor software alone nor the price of
licence granted. This is a combination of all and in substance, D
unless licence is granted permitting the end user to copy, and
download the software, the dumb C.D. containing the software
would not in any way be helpful to the end user as software would
become operative, only if it is downloaded to the hardware of the
designated computer as per the terms and conditions of the E
agreement and that makes, the difference between the computer
software and copyright, in respect of books or prerecorded music
[C.D.], as book and prerecorded music C.D. can be used once
they are purchased, but so far as software stored in dumb C.D. is
concerned, the transfer of dumb C.D. by itself would not confer
any, right, upon the end user and the purpose of the F

C.D. is only to enable the end user to take a copy of the software
and to store it in the hard disk of the designated computer if licence
is granted in that behalf and in the absence of licence, the same
would amount to infringement of copyright, which is exclusively
owned by non-resident suppliers, who would continue to be the G
proprietor of copyright. Therefore, there is no similarity between
the transaction of purchase of the book or prerecorded music
C.D. or the C.D. containing software and in view of the same,
the Legislature in its wisdom, has treated the literary work like
books and other articles separately from “computer” software H
434 SUPREME COURT REPORTS [2021] 2 S.C.R.

A within the meaning of the “copyright” as referred to above under
section 14 of the Copyright Act.
It is also clear from the abovesaid analysis of the DTAA, the
Income-tax Act, the Copyright Act that the payment would
constitute “royalty” within the meaning of article 12(3) of the
B DTAA and even as per the provisions of section 9(1)(vi) of the
Act as the definition of “royalty” under clause 9(1)(vi) of the Act
is broader than the definition of “royalty” under the DTAA as the
right that is transferred in the present case is the transfer of
copyright including the right to make copy of software for internal
business, and payment made in that regard would constitute
C “royalty” for imparting of any information concerning technical,
industrial, commercial or scientific knowledge, experience or skill
as per clause (iv) of Explanation 2 to section 9(1)(vi) of the Act.
In any view of the matter, in view of the provisions of section 90
of the Act, agreements with foreign countries DTAA would
D override the provisions of the Act. Once it is held that payment
made by the respondents to the non-resident companies would
amount to “royalty” within the meaning of article 12 of the DTAA
with the respective country, it is clear that the payment made by
the respondents to the non-resident supplier would amount to
royalty. In view of the said finding, it is clear that there is obligation
E on the part of the respondents to deduct tax at source under section
195 of the Act and consequences would follow as held by the
hon’ble Supreme Court while remanding these appeals to this
court. Accordingly, we answer the substantial question of law in
favour of the Revenue and against the assessee by holding that
F on the facts and in the circumstances of the case, the Income-tax
Appellate Tribunal was not justified in holding that the amount(s)
paid by the respondents) to the foreign software suppliers was
not “royalty” and that the same did not give rise to any “income”
taxable in India and wherefore, the respondent(s) were not liable
to deduct any tax at source and pass the following order:
G All the appeals are allowed. The order passed by the Income-tax
Appellate Tribunal, Bangalore Bench “A” impugned in these
appeals is set aside and the order passed by the Commissioner of
Income-tax (Appeals) confirming the order passed by the
Assessing Officer (TDS)-I is restored.”
H (pages 527-528)
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 435
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

102. The reasoning of this judgment also does not commend itself A
to us. The same error as was made by the AAR in Citrix Systems
(AAR) (supra), was made in this judgment, i.e., no distinction was made
between computer software that was sold/licensed on a CD/other
physical medium and the parting of copyright in respect of any of the
rights or interest in any of the rights mentioned in sections 14(a) and
B
14(b) of the Copyright Act. This being the case, the reasoning of this
judgment suffers from the same fundamental defect that the ruling in
Citrix Systems (AAR) (supra) suffers from. By no stretch of
imagination, can the payment for such computer software amount to
royalty within the meaning of Article 12 of the DTAA or section 9(1)(vi)
of the Income Tax Act. C
103. In another judgment of the High Court of Karnataka, dated
03.08.2020, in CIT v. Synopsis International Old Ltd., ITA Nos.
11-15/2008 [“Synopsis Intl.”], 40 the High Court relied upon the
expression “in respect of” in section 9(1)(vi) of the Income Tax Act,
holding: D
“27. The words “in respect of” [denote] the intention of the
Parliament to give a broader meaning. The words “in respect of”
admit of a wide connotation, than the word “in” or “on”. The
expression “in respect of” means “attributable to”. If it is given a
wider meaning “relating to or with reference to”, it has been used E
in the sense of being “connected with”. Whether it is a fiscal
legislation or any legislation for that matter, the golden rule of
interpretation equally applies to all of them, i.e., the words in a
statute should be given its literal meaning. In respect of fiscal
legislation those words should be strictly construed. If those words
are capable of two meanings that meaning which is beneficial to F
an assessee should be given. However, when the meaning of the
words used are clear, unambiguous, merely because it is a fiscal
legislation, the meaning cannot be narrowed down and it cannot
be interpreted so as to give benefit to the assessee only. Then it
would be re-writing the section, under the guise of interpreting a G
fiscal legislation, which is totally impermissible in law. When the
legislature has advisedly used the words “in respect of”, the
intention is clear and manifest. The said phrase being capable of
40
This judgment has been relied upon by several judgments of the High Court of
Karnataka impugned in the appeals before us. H
436 SUPREME COURT REPORTS [2021] 2 S.C.R.

A a broader meaning, the same is used in the section to bring within
the tax net all the incomes from the transfer of all or any of the
rights in respect of a copyright. In a taxing statute provisions
enacted to prevent tax evasion are to be given a liberal construction
to effectuate the purpose of suppressing tax evasion, although
provisions imposing a charge are construed strictly there being no
B
a priori liability to pay a tax and the purpose of charging section
being only to levy a charge on persons and activities brought within
its clear terms. Therefore, the specific words used in a taxing
statute, charging tax cannot be ignored. It is not the consideration
for transfer of all or any of the rights in the copyright. Without
C transferring a right in the copyright it is possible to receive
consideration for the use of the intellectual property for which the
owner possesses a copyright. Ultimately, the consideration paid is
for the usefulness of the material object in respect of which there
exists a copyright. Therefore, the intention was not to exclude the
consideration paid for the use of such material object which is
D
popularly called as copyrighted article. Even in respect of a
copyrighted article the same is transferred, no doubt the right in
the copyright is not transferred, but a right in respect of a copyright
contained in the copyrighted article is transferred. Therefore, the
Parliament thought it fit to use the phrase “in respect of” as contra
E distinct from the word “in” copyright. The meaning is clear,
intention is clear, there is no ambiguity. Therefore, there is no
scope for interpretation of this expressed term inasmuch as in the
context in which it is used in the provision. Any other interpretation
would lead to the aforesaid provision becoming otiose.”
F 104. After so holding, the High Court of Karnataka went on to
state:
“32. … Therefore, the expression ‘copyright’ used in the Act
cannot be the same as used in the Income-tax Act, when the
legislature advisedly used the word ‘in respect of a copyright’ it
G cannot be construed as a right in the copyright and assign the
meaning assigned in the Copyright Act to the second explanation.
The language in Explanation (2) explicitly makes it clear for the
purpose of clause (vi) of sub-section (1) of section 9 royalty means
consideration for transfer of all or any rights including the granting
of a licence in respect of any copyright, literary, artistic or scientific
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 437
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

work. Therefore, the word exclusive right used in section 14 of A
the Act do not fit into the meaning of the word ‘royalty’ in
Explanation 2 because royalty means the consideration for the
transfer of all or any rights including the granting of a licence
which is certainly not an exclusive right or transfer of all rights in
the copyright or literary work. Payments made for the acquisition
B
of partial rights in the copyright without the transfer fully alienating
the copyright rights will represent a royalty where the consideration
is for granting of lights to use the program[m]e in a manner that
would, without such license, constitute an infringement of copyright.
In these circumstances, the payments are for the right to use the
copyright in the program i.e., to exploit the rights that would C
otherwise be the sole prerogative of the copyright holder.
Therefore, to constitute royalty under the Income-tax Act it is not
necessary that there should be transfer of exclusive right in
copyright, it is sufficient if there is transfer of any interest in the
right and also a licence and consideration paid for grant of a licence
D
constitutes royalty for the purpose of the said clause in the Income-
tax Act. It is in this background, the discussion whether the payment
is for a copyright or for a copyright article would be totally
irrelevant. The crux of the issue is whether any consideration is
paid for any right, or for granting of licence in respect of a
copyright. The word ‘in respect of’ gives a broader meaning. It E
has been used in the sense of being connected with. When the
legislature has advisedly used the words ‘in respect of’, the
intention is clear and manifest. The said phrase being capable of
a broader meaning, the same is used in the section to bring within
the tax net all the incomes from the transfer of all or any of the
F
rights in respect of the copyright.
xxx xxx xxx
35. The copyright subsists in a computer program. It is not only
unauthorised reproduction but also the storage of a program in a
computer constitutes copyright infringement. Copying a literary G
work (such as a computer program) includes storing the work in
any medium by electronic means. Copying includes the making of
copies which are transient or some other use of the work.
xxx xxx xxx
H
438 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 39. It is no doubt true the provisions of the DTAA overrides the
provisions of the Income-tax Act. In the DTAA the term ‘royalty’
means payments of any kind received as a consideration for the
use or the right to use any copyright of literary, artistic or scientific
work whereas in the Income-tax Act, royalty means consideration
for the transfer of all or any rights including the granting of a
B
licence. Therefore, under the DTAA to constitute royalty there
need not be any transfer of or any rights in respect of any copyright.
It is sufficient if consideration is received for use of or the right to
use any copyright. Therefore, if the definition of royalty in the
DTAA is taken into consideration it is not necessary there should
C be a transfer of any exclusive right. A mere right to use or the use
of a copyright falls within the mischief of Explanation
(2) to clause (v) of sub-section (1) of section 9 and is liable to tax.
Therefore, we do not see any substance in the said contention.
xxx xxx xxx
D
43. A licence is a permission to do something that would otherwise
be unlawful. The question arises, therefore, as to what legal
permission is granted by a software licence. The answer is, briefly,
that in some cases the licence will be a permission to use
confidential information, and in virtually [...] all cases it will be a
E permission to copy a copyright work. If the software has been
kept secret by the producer, or only supplied on conditions of
confidentiality and has not been published too widely, then the
software licence will be akin to a licence of confidential information
or know-how. The owner or licensor of a copyright, has a right to
F grant permission to use the software or a computer programme,
in respect of which they have a copyright, without transferring
the right in copyright. It is one of the right[s] of a copyright owner
or licensor. Without such right being transferred, the end-user has
no right to use the software or computer programme. If he uses
it, it amounts to infringement of copyright. For transfer of such
G right if consideration is paid, it is not a consideration for transfer
of a copyright but for use of intellectual property embedded in the
copyright, and therefore it is for transfer of one of those rights of
the owner of the copyright. It is not a right in copyright but it is in
respect of a copyright. When a copyrighted article is sold also,
H the end-user gets the right to use the intellectual property embedded
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 439
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

in the copyright and not a right in the copyright as such. Therefore A
the mode adopted or the terminology given is not decisive to decide
the nature of transfer. Ultimately, it is the substance which has to
be looked into.”
105. The reasoning of the High Court of Karnataka in Synopsis
Intl. (supra) does not commend itself to us. First and foremost, as held B
in State of Madras v. Swastik Tobacco Factory, (1966) 3 SCR 79,
the expression “in respect of”, when used in a taxation statute, is only
synonymous with the words “on” or “attributable to”. Such meaning
accords with the meaning to be given to the expression “in respect of”
contained in explanation 2(v) to section 9(1)(vi) of the Income Tax
Act, and would not in any manner make the expression otiose, as has C
wrongly been held by the High Court of Karnataka.
106. Secondly, section 16 of the Copyright Act, which states that
“no person shall be entitled to copyright…otherwise than under and in
accordance with the provisions of this Act or of any other law for the
time being in force” has been completely missed, thus making it clear D
that the expression “copyright” has to be understood only as is stated in
section 14 of the Copyright Act and not otherwise.
107. Thirdly, when it comes to computer programmes, the High
Court in Synopsis Intl. (supra) was wholly incorrect in stating that the
storage of a computer programme per se would constitute infringement E
of copyright. This, again, would directly be contrary to the terms of
section 52(1)(aa) of the Copyright Act.
108. Fourthly, the High Court is not correct in referring to section
9(1)(vi) of the Income Tax Act after considering it in the manner that it
has and then applying it to interpret the provisions under the Convention F
between the Government of the Republic of India and the Government
of Ireland for the Avoidance of Double Taxation and for the Prevention
of Fiscal Evasion with respect to Taxes on Income And Capital Gains,41
[“India-Ireland DTAA”]. Article 12 of the aforesaid treaty defining
“royalties” would alone be relevant to determine taxability under the G
DTAA, as it is more beneficial to the assessee as compared to section
9(1)(vi) of the Income Tax Act, as construed by the High Court. Here
again, section 90(2) of the Income Tax Act, read with explanation 4
thereof, has not been properly appreciated.
41
Notification : No. GSR 105(E) [45/2002 (F. No. 503/6/99-FTD)], dated 20-2-2002. H
440 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 109. Fifthly, the finding that when a copyrighted article is sold,
the end-user gets the right to use the intellectual property rights embodied
in the copyright which would therefore amount to transfer of an exclusive
right of the copyright owner in the work, is also wholly incorrect.
For all these reasons, therefore, the judgment of the High Court
B of Karnataka in Synopsis Intl. (supra) also does not state the law
correctly.
110. A series of judgments by the High Court of Delhi have dealt
with the same question that now lies before us. In Director of Income
Tax v. Ericsson A.B., (2012) 343 ITR 470 [“Ericsson A.B.”], which
C happens to be impugned in C.A. Nos. 6386-6387/2016 before us, the
assessee was a company incorporated in Sweden which entered into an
agreement with Indian cellular operators, pursuant to which the assessee
supplied various equipment (hardware) embedded with software to the
said cellular operators. The High Court in this case, found:

D “Once we proceed on the basis of aforesaid factual findings, it is
difficult to hold that payment made to the assessee was in the
nature of royalty either under the Income-Tax Act or under the
DTAA. We have to keep in mind what was sold by the assessee
to the Indian customers was a GSM which consisted both of the
hardware as well as the software, therefore, the Tribunal is right
E in holding that it was not permissible for the Revenue to assess
the same under two different articles. The software that was
loaded on the hardware did not have any independent existence.
The software supply is an integral part of the GSM mobile
telephone system and is used by the cellular operator for providing
F the cellular services to its customers. There could not be any
independent use of such software. The software is embodied in
the system and the revenue accepts that it could not be used
independently. This software merely facilitates the functioning of
the equipment and is an integral part thereof. On these facts, it
would be useful to refer to the judgment of the Supreme Court in
G TATA Consultancy Services v. State of Andhra Pradesh, 271
ITR 401, wherein the Apex Court held that software which is
incorporated on a media would be goods and, therefore, liable to
sales tax. Following discussion in this behalf is required to be noted:-

H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 441
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

“In our view, the term “goods” as used in Article 366(12) of A
the Constitution of India and as defined under the said Act are
very wide and include all types of movable properties, whether
those properties be tangible or intangible. We are in complete
agreement with the observations made by this Court in
Associated Cement Companies Ltd. (supra). A software
B
programme may consist of various commands which enable
the computer to perform a designated task. The copyright in
that programme may remain with the originator of the
programme. But the moment copies are made and marketed,
it becomes goods, which are susceptible to sales tax. Even
intellectual property, once it is put on to a media, whether it be C
in the form of books or canvas (In case of painting) or computer
discs or cassettes, and marketed would become “goods”. We
see no difference between a sale of a software programme on
a CD/floppy disc from a sale of music on a cassette/CD or a
sale of a film on a video cassette/CD. In all such cases, the
D
intellectual property has been incorporated on a media for
purposes of transfer. Sale is not just of the media which by
itself has very little value. The software and the media cannot
be split up. What the buyer purchases and pays for is not the
disc or the CD. As in the case of paintings or books or music
or films the buyer is purchasing the intellectual property and E
not the media i.e. the paper or cassette or disc or CD. Thus a
transaction sale of computer software is clearly a sale of
“goods” within the meaning of the term as defined in the said
Act. The term “all materials, articles and commodities” includes
both tangible and intangible/incorporeal property which is
F
capable of abstraction, consumption and use and which can be
transmitted, transferred, delivered, stored, possessed etc. The
software programmes have all these attributes.”
In Advent Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir.
1991), relied on by Mr. Sorabjee, the court was concerned with
interpretation of uniform civil code which “applied to transactions G
in goods”. The goods therein were defined as “all things (including
specially manufactured goods) which are moveable at the time of
the identification for sale”. It was held:
“Computer programs are the product of an intellectual process,
but once implanted in a medium are widely distributed to H
442 SUPREME COURT REPORTS [2021] 2 S.C.R.

A computer owners. An analogy can be drawn to a compact
disc recording of an orchestral rendition. The music is produced
by the artistry of musicians and in itself is not a “good”, but
when transferred to a laser- readable disc becomes a readily
merchantable commodity. Similarly, when a professor delivers
a lecture, it is not a good, but, when transcribed as a book, it
B
becomes a good.
That a computer program may be copyrightable as intellectual
property does not alter the fact that once in the form of a
floppy disc or other medium, the program is tangible, moveable
and available in the marketplace. The fact that some programs
C may be tailored for specific purposes need not alter their status
as “goods” because the Code definition includes “specially
manufactured goods.”
A fortiorari when the assessee supplies the software which is
incorporated on a CD, it has supplied tangible property and the
D payment made by the cellular operator for acquiring such property
cannot be regarded as a payment by way of royalty.
(pages 499-500)
“Be that as it may, in order to qualify as royalty payment, within
E the meaning of Section 9(1)(vi) and particularly clause (v) of
Explanation-II thereto, it is necessary to establish that there is
transfer of all or any rights (including the granting of any license)
in respect of copyright of a literary, artistic or scientific work.
Section 2(o) of the Copyright Act makes it clear that a computer
programme is to be regarded as a ‘literary work’. Thus, in order
F to treat the consideration paid by the cellular operator as royalty,
it is to be established that the cellular operator, by making such
payment, obtains all or any of the copyright rights of such literary
work. In the presence case, this has not been established. It is not
even the case of the Revenue that any right contemplated under
G Section 14 of the Copyright Act, 1957 stood vested in this cellular
operator as a consequence of Article 20 of the Supply Contract.
Distinction has to be made between the acquisition of a “copyright
right” and a “copyrighted article”.
Mr. Dastur is right in this submission which is based on the
commentary on the OECD Model Convention. Such a distinction
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 443
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

has been accepted in a recent ruling of the Authority for Advance A
Ruling (AAR) in Dassault Systems KK 229 CTR 125. We also
find force in the submission of Mr. Dastur that even assuming the
payment made by the cellular operator is regarded as a payment
by way of royalty as defined in Explanation 2 below Section
9(1)(vi), nevertheless, it can never be regarded as royalty within
B
the meaning of the said term in article 13, para 3 of the DTAA.
This is so because the definition in the DTAA is narrower than
the definition in the Act. Article 13(3) brings within the ambit of
the definition of royalty a payment made for the use of or the right
to use a copyright of a literary work. Therefore, what is
contemplated is a payment that is dependent upon user of the C
copyright and not a lump sum payment as is the position in the
present case.
We thus hold that payment received by the assessee was towards
the title and GSM system of which software was an inseparable
parts incapable of independent use and it was a contract for supply D
of goods. Therefore, no part of the payment therefore can be
classified as payment towards royalty.”
(pages 501-502)
111. This judgment was followed in Director of Income Tax v.
Nokia Networks OY, (2013) 358 ITR 259 [“Nokia Networks E
OY”],42 with the High Court of Delhi, adverting, this time, to the further
expanded definition of “royalty” that is contained in the retrospective
amendment that inserted explanation 4 to section 9(1)(vi) of the Income
Tax Act. In this case, the High Court was concerned with the Agreement
between the Republic of India and the Republic of Finland for the F
Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with respect to Taxes on Income,43 [“India-Finland DTAA”]. After
setting out the rationale for the clarificatory amendment made vide the
Finance Act 2012, the High Court held :
“He, thus submitted that the question of “copyrighted article” or G
actual copyright does not arise in the context of software both in
the DTAA and in the Income Tax Act since the right to use
simpliciter of a software program itself is a part of the copyright
42
This judgment has been relied upon by various judgments of the High Court of Delhi
impugned in the appeals before us.
43
Notification No. 36/2010 [F. No. 501/13/1980-FTD-I], dated 20-5-2010. H
444 SUPREME COURT REPORTS [2021] 2 S.C.R.

A in the software irrespective of whether or not a further right to
make copies is granted. The decision of the Delhi Bench of the
ITAT has dealt with this aspect in its judgment in Gracemac Co.
v. ADIT 134 TTJ (Delhi) 257 pointing out that even software
bought off the shelf, does not constitute a “copyrighted article” as
sought to be made out by the Special Bench of the ITAT in the
B
present case. However, the above argument misses the vital point
namely the assessee has opted to be governed by the treaty and
the language of the said treaty differs from the amended Section
9 of the Act. It is categorically held in CIT v. Siemens
Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments
C cannot be read into the treaty. On the wording of the treaty, we
have already held in Ericsson (supra) that a copyrighted article
does not fall within the purview of Royalty. Therefore, we decide
question of law no. 1 & 2 in favour of the assessee and against
the Revenue.”
(page 281)
D
The High Court then followed its own judgment in Ericsson A.B.
(supra), deciding the case in favour of the assessee.
112. In Director of Income Tax v. Infrasoft Ltd., (2014) 264
CTR 329 [“Infrasoft”],44 a Division Bench of the High Court of Delhi,
E by an exhaustive analysis of the provisions contained the India-USA
DTAA, the Income Tax Act and the Copyright Act, dealt with a situation
in which the assessee who was primarily into the business of developing
and manufacturing civil engineering software, licensed the said software
to persons engaged in civil engineering work in India. The High Court
referred to a decision of the Special Bench of the ITAT (New Delhi) in
F Motorola Inc. v. Deputy CIT, dated 22.06.2005 [“Motorola (ITAT)”]
as follows:
“65. The issue whether consideration for software was royalty
came up for consideration before the Special Bench of the Tribunal
in Delhi in the case of Motorola Inc v. Deputy Cit And Deputy
G Cit V. Nokia (2005) 147 TAXMAN 39 (DELHI). The Tribunal
has held as under:
155. It appears to us from a close examination of the manner
in which the case has proceeded before the Income-tax
44
This judgment has been relied upon by various judgments of the High Court of Delhi
H impugned in the appeals before us.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 445
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

authorities and the arguments addressed before us that the A
crux of the issue is whether the payment is for a copyright or
for a copyrighted article. If it is for copyright, it should be
classified as royalty both under the Income-tax Act and under
the DTAA and it would be taxable in the hands of the Assessee
on that basis. If the payment is really for a copyrighted article,
B
then it only represents the purchase price of the article and,
therefore, cannot be considered as royalty either under the
Act or under the DTAA. This issue really is the key to the
entire controversy and we may now proceed to address this
issue.
156. We must look into the meaning of the word “copyright” C
as given in the Copyright Act, 1957. Section 14 of this Act
defines “Copyright” as “the exclusive right subject to the
provisions of this Act, to do or authorize the doing of any of the
following acts in respect of a work or any substantial part
thereof [ … ] D
It is clear from the above definition that a computer programme
mentioned in Clause (b) of the section has all the rights
mentioned in Clause (a) and in addition also the right to sell or
give on commercial rental or offer for sale or for commercial
rental any copy of the computer programme. This additional E
right was substituted w.e.f. 15.1.2000. The difference between
the earlier provision and the present one is not of any relevance.
What is to be noted is that the right mentioned in Sub-clause
(ii) of Clause (b) of Section 14 is available only to the owner of
the computer programme. It follows that if any of the cellular
operators does not have any of the rights mentioned in Clauses F
(a) and (b) of Section 14, it would mean that it does not have
any right in a copyright. In that case, the payment made by the
cellular operator cannot be characterized as royalty either under
the Income-tax Act or under the DTAA. The question,
therefore, to be answered is whether any of the operators can G
exercise any of the rights mentioned in the above provisions
with reference to the software supplied by the Assessee.
157. We may first look at the supply contract itself to find out
what JTM, one of the cellular operators, can rightfully do with
reference to the software. We may remind ourselves that JTM H
446 SUPREME COURT REPORTS [2021] 2 S.C.R.

A is taken as a representative of all the cellular operators and
that it was common ground before us that all the contracts
with the cellular operators are substantially the same. Clause
20.1 of the Agreement, under the title “License”, says that
JTM is granted a non-exclusive restricted license to use the
software and documentation but only for its own operation
B and maintenance of the system and not otherwise. This clause
appears to militate against the position, if it were a copyright,
that the holder of the copyright can do anything with respect to
the same in the public domain. What JTM is permitted to do is
only to use the software for the purpose of its own operation
C and maintenance of the system. There is a clear bar on the
software being used by JTM in the public domain or for the
purpose of commercial exploitation.
158. Secondly, under the definition of “copyright” in Section
14 of the Copyright Act, the emphasis is that it is an exclusive
D right granted to the holder thereof. This condition is not satisfied
in the case of JTM because the license granted to it by the
Assessee is expressly stated in Clause 20.1 as a “non exclusive
restricted license”. This means that the supplier of the software,
namely, the Assessee, can supply similar software to any
number of cellular operators to which JTM can have no
E objection and further all the cellular operators can use the
software only for the purpose of their own operation and
maintenance of the system and not for any other purpose. The
user of the software by the cellular operators in the public
domain is totally prohibited, which is evident from the use of
the words in Article 20.1 of the agreement, “restricted” and
F
“not otherwise”. Thus JTM has a very limited right so far as
the use of software is concerned. It needs no repetition to
clarify that JTM has not been given any of the seven rights
mentioned in Clause (a) of Section 14 or the additional right
mentioned in Sub-clause (ii) of Clause (b) of the section which
G relates to a computer programme and, therefore, what JTM or
any other cellular operator has acquired under the agreement
is not a copyright but is only a copyrighted article.””
(pages 362-364)
113. Further, the Court noted that the same argument that found
H favour with the AAR in Citrix Systems (AAR) (supra) was pressed
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 447
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

into service by the learned senior counsel who appeared for the Revenue A
in the case of Motorola (ITAT) (supra), and this was correctly turned
down as follows:
“163. We may now briefly deal with the objections of Mr. G.C.
Sharma, the learned senior counsel for the Department. He
contended that if a person owns a copyrighted article then he B
automatically has a right over the copyright also. With respect,
this objection does not appear to us to be correct. Mr. Dastur filed
an extract from Iyengar’s Copyright Act (3rd Edition) edited by
R.G. Chaturvedi. The following observations of the author are on
the point:
C
“(h) Copyright is distinct from the material object, copyrighted:
It is an intangible incorporeal right in the nature of a privilege,
quite independent of any material substance, such as a
manuscript. The copyright owner may dispose of it on such
terms as he may see fit. He has an individual right of exclusive D
enjoyment. The transfer of the manuscript does not, of itself,
serve to transfer the copyright therein. The transfer of the
ownership of a physical thing in which copyright exists gives
to the purchaser the right to do with it (the physical thing)
whatever he pleases, except the right to make copies and issue
them to the public” (underline is ours).” E

The above observations of the author show that one cannot have
the copyright right without the copyrighted article but at the same
time just because one has the copyrighted article, it does not follow
that one has also the copyright in it. Mr. Sharma’s objection cannot
be accepted.” F
(pages 365-366)
114. Referring to the High Court’s earlier judgments in Ericsson
A.B. (supra) and Nokia Networks OY (supra) and the determinations
of the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supra),
the High Court concluded: G
“87. In order to qualify as royalty payment, it is necessary to
establish that there is transfer of all or any rights (including the
granting of any licence) in respect of copyright of a literary, artistic
or scientific work. In order to treat the consideration paid by the
Licensee as royalty, it is to be established that the licensee, by H
448 SUPREME COURT REPORTS [2021] 2 S.C.R.

A making such payment, obtains all or any of the copyright rights of
such literary work. Distinction has to be made between the
acquisition of a “copyright right” and a “copyrighted article”.
Copyright is distinct from the material object, copyrighted.
Copyright is an intangible incorporeal right in the nature of a
privilege, quite independent of any material substance, such as a
B
manuscript. Just because one has the copyrighted article, it does
not follow that one has also the copyright in it. It does not amount
to transfer of all or any right including licence in respect of
copyright. Copyright or even right to use copyright is distinguishable
from sale consideration paid for “copyrighted” article. This sale
C consideration is for purchase of goods and is not royalty.
88. The license granted by the Assessee is limited to those
necessary to enable the licensee to operate the program. The
rights transferred are specific to the nature of computer programs.
Copying the program onto the computer’s hard drive or random
D access memory or making an archival copy is an essential step in
utilizing the program. Therefore, rights in relation to these acts of
copying, where they do no more than enable the effective operation
of the program by the user, should be disregarded in analyzing the
character of the transaction for tax purposes. Payments in these
types of transactions would be dealt with as business income in
E accordance with Article 7.
89. There is a clear distinction between royalty paid on transfer
of copyright rights and consideration for transfer of copyrighted
articles. Right to use a copyrighted article or product with the
owner retaining his copyright, is not the same thing as transferring
F or assigning rights in relation to the copyright. The enjoyment of
some or all the rights which the copyright owner has, is necessary
to invoke the royalty definition. Viewed from this angle, a non-
exclusive and non- transferable licence enabling the use of a
copyrighted product cannot be construed as an authority to enjoy
G any or all of the enumerated rights ingrained in Article 12 of DTAA.
Where the purpose of the licence or the transaction is only to
restrict use of the copyrighted product for internal business purpose,
it would not be legally correct to state that the copyright itself or
right to use copyright has been transferred to any extent. The
parting of intellectual property rights inherent in and attached to
H the software product in favour of the licensee/customer is what is
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 449
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

contemplated by the Treaty. Merely authorizing or enabling a A
customer to have the benefit of data or instructions contained
therein without any further right to deal with them independently
does not, amount to transfer of rights in relation to copyright or
conferment of the right of using the copyright. The transfer of
rights in or over copyright or the conferment of the right of use of
B
copyright implies that the transferee/licensee should acquire rights
either in entirety or partially co-extensive with the owner/transferor
who divests himself of the rights he possesses pro tanto.”
(pages 385-386)
115. The High Court of Delhi also expressed its disagreement C
with the impugned judgment of the High Court of Karnataka dated
15.10.2011, in CIT v. Samsung Electronics Co. Ltd., (2012) 345
ITR 494, as follows:
“96. The amount received by the Assessee under the licence
agreement for allowing the use of the software is not royalty under D
the DTAA.
97. What is transferred is neither the copyright in the software
nor the use of the copyright in the software, but what is transferred
is the right to use the copyrighted material or article which is
clearly distinct from the rights in a copyright. The right that is E
transferred is not a right to use the copyright but is only limited to
the right to use the copyrighted material and the same does not
give rise to any royalty income and would be business income.
98. We are not in agreement with the decision of the [Karnataka]
High Court in the case of SAMSUNG ELECTRONICS CO. LTD F
(SUPRA) that right to make a copy of the software and storing
the same in the hard disk of the designated computer and taking
backup copy would amount to copyright work under section 14(1)
of the Copyright Act and the payment made for the grant of the
licence for the said purpose would constitute royalty. The license
granted to the licensee permitting him to download the computer G
programme and storing it in the computer for his own use was
only incidental to the facility extended to the licensee to make use
of the copyrighted product for his internal business purpose. The
said process was necessary to make the programme functional
and to have access to it and is qualitatively different from the
H
450 SUPREME COURT REPORTS [2021] 2 S.C.R.

A right contemplated by the said provision because it is only integral
to the use of copyrighted product. The right to make a backup
copy purely as a temporary protection against loss, destruction or
damage has been held by the Delhi High Court in DIT v. Nokia
Networks OY (Supra) as not amounting to acquiring a copyright
in the software.”
B
(page 388)
116. Likewise, in CIT v. ZTE Corporation, (2017) 392 ITR
80 [“ZTE”],45 a Division Bench of the High Court of Delhi dealt with
the India-China DTAA and after referring to its earlier judgments, held
C as follows:
“The misconception that the revenue harbors stems from its flawed
appreciation of a copyright license. True, “copyright” is not
defined; yet what works are capable of copyright protection
is spelt out in the Copyright Act. Sections 13 and 14 of the
D Copyright Act flesh out the essential ingredients that make
copyright a property right.”
(page 93)
“Thus, Section 14 categorically provides that copyright “means
the exclusive right to do or authorizing the doing of any of
E the acts mentioned in Section 14 (a) to (e) or any “substantial
part thereof”. The content of copyright in respect of computer
programmes is spelt out in Section 14 (b). A joint reading of the
controlling provisions of the earlier part of Section 14 with clause
(b) implies that in the case of computer programs, copyright would
mean the doing or authorizing the doing-in respect of work (i.e.
F the programme) or any substantial part thereof —
(b) In the case of a computer programme,-
(i) to do any of the acts specified in clause (a)
(ii) to sell or give on commercial rental or offer for sale or for
G commercial rental any copy of the computer programme:
Provided that such commercial rental does not apply in respect
of computer programmes where the programme itself is not
the essential object of the rental.
45
This judgment has been relied upon by various judgments of the High Court of Delhi
H impugned in the appeals before us.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 451
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

The reference to clause (a) and (b) means that all the rights which A
are in literary works i.e.”(i) to reproduce the work in any material
form including the storing of it in any medium by electronic means;
(ii) to issue copies of the work to the public not being copies already
in circulation; (iii) to perform the work in public, or communicate
it to the public; (iv) to make any cinematograph film or sound
B
recording in respect of the work; (v) to make any translation of
the work; (vi) to make any adaptation of the work; (vii) to do, in
relation to a translation or an adaptation of the work, any of the
acts specified in relation to the work in sub clauses (i) to (vi)”
inhere in the owner of copyright of a computer programme.
Therefore, the copyright owner ’s rights are spelt out C
comprehensively by this provision. In the context of the facts of
this case, the assessee is the copyright proprietor; it made available,
through one time license fee, the software to its customers; this
software without the hardware which was sold, is useless.
Conversely the hardware sold by the assessee to its customers is
D
also valueless and cannot be used without such software. This
analysis is to show that what was conveyed to its customers by
the assessee bears a close resemblance to goods-significantly
enough, Section 14(1) talks of sale or rental of a “copy”. The
question of conveying or parting with copyright in the software
itself would mean that the copyright proprietor has to assign it, E
divesting itself of the title implying that it has divested itself of all
the rights under Section 14. This would mean an outright sale of
the copyright or assignment, under Section 18 of the Act. Section
16 of the Copyright Act enacts that there cannot be any other
kind of right termed as “copyright”.
F
In the present case, the facts are closely similar to Ericsson. The
supplies made (of the software) enabled the use of the hardware
sold. It was not disputed that without the software, hardware use
was not possible. The mere fact that separate invoicing was done
for purchase and other transactions did not imply that it was royalty
payment. In such cases, the nomenclature (of license or some G
other fee) is indeterminate of the true nature. Nor is the
circumstance that updates of the software are routinely given to
the assessee’s customers. These facts do not detract from the
nature of the transaction, which was supply of software, in the
nature of articles or goods. This court is also not persuaded with H
452 SUPREME COURT REPORTS [2021] 2 S.C.R.

A the submission that the payments, if not royalty, amounted to
payments for the use of machinery or equipment. Such a
submission was never advanced before any of the lower tax
authorities; moreover, even in Ericsson (supra), a similar provision
existed in the DTAA between India and Sweden.”
B (pages 95-96)
117. The conclusions that can be derived on a reading of the
aforesaid judgments are as follows:
i) Copyright is an exclusive right, which is negative in nature,
being a right to restrict others from doing certain acts.
C
ii) Copyright is an intangible, incorporeal right, in the nature of
a privilege, which is quite independent of any material
substance. Ownership of copyright in a work is different
from the ownership of the physical material in which the
copyrighted work may happen to be embodied. An obvious
D example is the purchaser of a book or a CD/DVD, who
becomes the owner of the physical article, but does not
become the owner of the copyright inherent in the work,
such copyright remaining exclusively with the owner.
iii) Parting with copyright entails parting with the right to do any
E of the acts mentioned in section 14 of the Copyright Act.
The transfer of the material substance does not, of itself,
serve to transfer the copyright therein. The transfer of the
ownership of the physical substance, in which copyright
subsists, gives the purchaser the right to do with it whatever
F he pleases, except the right to reproduce the same and issue
it to the public, unless such copies are already in circulation,
and the other acts mentioned in section 14 of the Copyright
Act.
iv) A licence from a copyright owner, conferring no proprietary
interest on the licensee, does not entail parting with any
G
copyright, and is different from a licence issued under section
30 of the Copyright Act, which is a licence which grants the
licensee an interest in the rights mentioned in section 14(a)
and 14(b) of the Copyright Act. Where the core of a
transaction is to authorize the end-user to have access to
H and make use of the “licensed” computer software product
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 453
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

over which the licensee has no exclusive rights, no copyright A
is parted with and consequently, no infringement takes place,
as is recognized by section 52(1)(aa) of the Copyright Act.
It makes no difference whether the end-user is enabled to
use computer software that is customised to its specifications
or otherwise.
B
v) A non-exclusive, non-transferable licence, merely enabling
the use of a copyrighted product, is in the nature of restrictive
conditions which are ancillary to such use, and cannot be
construed as a licence to enjoy all or any of the enumerated
rights mentioned in section 14 of the Copyright Act, or create
any interest in any such rights so as to attract section 30 of C
the Copyright Act.
vi) The right to reproduce and the right to use computer software
are distinct and separate rights, as has been recognized in
SBI v. Collector of Customs, 2000 (1) SCC 727 (see
paragraph 21), the former amounting to parting with copyright D
and the latter, in the context of non-exclusive EULAs, not
being so.
118. Consequently, the view contained in the determinations of
the AAR in Dassault (AAR) (supra) and Geoquest (AAR) (supra)
and the judgments of the High Court of Delhi in Ericsson A.B. (supra), E
Nokia Networks OY (supra), Infrasoft (supra), ZTE (supra), state
the law correctly and have our express approval. We may add that the
view expressed in the aforesaid judgments and determinations also
accords with the OECD Commentary on which most of India’s DTAAs
are based. F
DOCTRINE OF FIRST SALE/PRINCIPLE OF
EXHAUSTION
119. The learned Additional Solicitor General argued that on the
facts of these cases, the doctrine of first sale/principle of exhaustion
would have no application inasmuch as this doctrine is not statutorily G
recognised in section 14(b)(ii) of the Copyright Act. This being so, since
the distributors of copyrighted software “license” or sell such computer
software to end-users, there would be a parting of a right or interest in
copyright inasmuch as such “license” or sale would then be hit by section
14(b)(ii) of the Copyright Act.
H
454 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 120. As has been mentioned hereinabove, section 14(b)(ii) of the
Copyright Act was amended twice, first in 1994 and then again in 1999,
with effect from 15.01.2000. Prior to the 1999 Amendment, section
14(b)(ii) of the Copyright Act read as follows:
“(ii) to sell or give on hire, or offer for sale or hire any copy of the
B computer programme, regardless of whether such copy has been
sold or given on hire on earlier occasions;”
(emphasis supplied)
After the 1999 Amendment, what is conspicuous by its absence
is the phrase “regardless of whether such copy has been sold or given
C on hire on earlier occasions”. This is a statutory recognition of the doctrine
of first sale/principle of exhaustion.
121. The doctrine of first sale/principle of exhaustion is explained
by the locus classicus on this subject, Copinger and Skone James on
Copyright (14th Edition) (1999), as follows:
D
“The distribution right: general. One of the acts restricted by
the copyright in all work is the issue of the original or copies of the
work to the public, often called the “distribution right”. This right
is provided for in section 18 of the 1988 Act. Infringement of the
distribution right is a primary infringement under UK law, and so
E there is no need to prove knowledge or reason to believe that the
copy in question is infringing. Thus it is a powerful weapon against
those at the top of a chain of distribution. In accordance with
general principles, section 18 must be interpreted so far as possible
in such a way as to conform with relevant EU Directives, in this
F instance, the Software Directive and the Information Society
Directive. Recent case law of the CJEU has made a conforming
interpretation more difficult. An important aspect of the distribution
right is that it is exhausted in relation to a particular article by the
first sale (and, in the case of the Information Society Directive,
the first transfer of ownership) of that article in the Community
G by the rightholder or with his consent. For the purposes of the
Software Directive, certain forms of distribution of electronic
copies are considered to exhaust the distribution right in respect
of such copies.”
(pages 613-614)
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 455
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

“Exhaustion of the distribution right: tangible objects. A
Exhaustion applies to the tangible object into which a protected
work or its copy is incorporated if it has been placed on the market
with the copyright holder’s consent. In the case of artistic works,
the consent of the copyright holder does not cover the distribution
of an object incorporating his work if that object has been altered
B
after its initial marketing in such a way that it constitutes a new
reproduction of the work; in such an event, the distribution right is
exhausted only upon the first sale or transfer of ownership of that
new object with the consent of the rightholder. Accordingly, where
a defendant (without the licence of the rightholder) transferred
an image of a work of a famous painter from a poster onto canvas C
by physically lifting the ink from the poster, producing a result
closer to the original and leaving a blank piece of paper behind,
and this amounted to copying, the rightholder’s distribution right
had not been exhausted.
Exhaustion: computer programs. Similar considerations apply D
in relation to tangible copies of computer programs as to other
works: the first sale of a copy of a program by the rightholder or
with his consent exhausts the distribution right with the exception
of the right to control further rental of the program or a copy
thereof. As to copies made available in intangible form (e.g. by
downloading from a website), for these purposes the word “sale” E
is to be given an autonomous Community interpretation. Where a
seller makes a program available for download under a licence
for an unlimited period in return for a licence fee, the intention is
to make the copy usable by the customer, permanently, in return
for payment of a fee designed to enable the copyright owner to F
obtain a remuneration corresponding to the economic value of the
copy of the work. Accordingly, that amounts to a transfer of the
right of ownership of the copy in question and thus a sale for the
purposes of the exhaustion of the distribution right. The same
applies if the copy is made available by means of a material
medium such as a CD- ROM or DVD and if the download is free G
but the licence is granted and paid for separately. It does not
matter if the software is the subject of a maintenance agreement:
the exhaustion applies to the copy as corrected and updated
pursuant to the agreement. Any other interpretation would
undermine the effectiveness of article 4(2) of the Directive since H
456 SUPREME COURT REPORTS [2021] 2 S.C.R.

A suppliers would merely have to call a contract a licence rather
than a sale in order to circumvent the rule of exhaustion and divest
it of all scope. The result is that a purchaser from the original
licensee and any subsequent acquirer are lawful acquirers of the
software for the purposes of article 5(1) of the Software Directive
and benefit from the right of reproduction provided for in that
B
provision.”
(pages 621-622)
122. In Warner Bros. Entertainment Inc. v. Santosh V.G.,
CS (OS) No. 1682/2006 [“Warner Bros.”] reported in 2009 SCC
C OnLine Del 835, a Single Judge of the High Court of Delhi dealt with
copyright in a cinematograph film, as a result of which, section 14(d)(ii)
of the Copyright Act, before it was amended in 2012,46 came up for
consideration. The said section, prior to being amended in 2012, read as
follows:

D “14. Meaning of Copyright.— For the purposes of this Act,
“copyright” means the exclusive right subject to the provisions of
this Act, to do or authorise the doing of any of the following acts
in respect of a work or any substantial part thereof, namely
xxx xxx xxx
E (d) in the case of a cinematograph film,— xxx xxx xxx
(ii) to sell or give on hire or offer for sale or hire, any copy
of the film, regardless of whether such copy has been sold
or given on hire on earlier occasion”
123. The learned Single Judge of the High Court of Delhi explained
F
the principle of exhaustion as follows:
“57. The doctrine of exhaustion of copyright enables free trade in
material objects on which copies of protected works have been
fixed and put into circulation with the right holder’s consent. The
“exhaustion” principle in a sense arbitrates the conflict between
G the right to own a copy of a work and the author’s right to control
the distribution of copies. Exhaustion is decisive with respect to
the priority of ownership and the freedom to trade in material
carriers on the condition that a copy has been legally brought into
46
By Act 27 of 2012, s. 5(ii)(b) (w.e.f. 21.06.2012).
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 457
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

trading. Transfer of ownership of a carrier with a copy of a work A
fixed on it makes it impossible for the owner to derive further
benefits from the exploitation of a copy that was traded with his
consent. The exhaustion principle is thus termed legitimate by
reason of the profits earned for the ownership transfer, which
should be satisfactory to the author if the work is not being exploited
B
in a different exploitation field.
58. Exhaustion of rights is linked to the distribution right. The
right to distribute objects (making them available to the public)
means that such objects (or the medium on which a work is fixed)
are released by or with the consent of the owner as a result of the
transfer of ownership. In this way, the owner is in control of the C
distribution of copies since he decides the time and the form in
which copies are released to the public. Content-wise the
distribution right are to be understood as an opportunity to provide
the public with copies of a work and put them into circulation, as
well as to control the way the copies are used. The exhaustion of D
rights principle thus limits the distribution right, by excluding control
over the use of copies after they have been put into circulation for
the first time.”
(emphasis in original)
124. The learned Single Judge then arrived at the following E
conclusion:
“62. … The court is of opinion therefore that the existence or
applicability of the “exhaustion” principle cannot be inferred
automatically; it would have to depend on the situation, and the
structure of the legislation in question.” F
125. Coming to section 14(a)(ii) of the Copyright Act, the learned
Single Judge then held:
“63. The defendant in this case, accepts that the renting/hiring of
films carried on by it is without the plaintiffs’ license. The Plaintiffs
G
urge that since the importation, for the purpose of renting of these
cinematographic films has not been authorized by them in India,
the copies are infringing copies. Hence their import would be barred
under Section 51(b)(iv). The defendant’s argument, however, is
that the copies were legitimately purchased in the course of trade;
they are rental copies, and can be used for purpose of renting, in H
458 SUPREME COURT REPORTS [2021] 2 S.C.R.

A India. He says that the device of zoning, whereby the plaintiffs
restrict the licensee owner to use it in territories other than what
is indicated by them, is artificial, and unenforceable. Such “long
arm” conditions are inapplicable. Particular reference is made to
the explanation to Section 14, which describes the content of
copyright; it clarifies that “For the purposes of this section, a
B
copy which has been sold once shall be deemed to be a copy
already in circulation.” Though attractive, this contention is
unfeasible for more than one reason. The reference to copies in
circulation is in the context of copyright in literary, artistic, dramatic
or musical work, — not computer programme — (Section 14(a);
C the statute enables the copyright owner to “issue copies of the
work to the public not being copies already in circulation”.
But for the explanation, it could arguably be said that the copyright
owner lost his domain, or right to control the manner of further
dealing in copies which were in circulation. Yet, a careful reading
of Section 14 would reveal that the content of copyrights in respect
D
of each nature of work (literary, dramatic, or musical work, on
the one hand, computer programme, artistic work, cinematograph
film, etc on the other) are distinct — evident from the listing out
of such rights, separately, in clauses (a) to (f) of the section. The
reference to “copies in circulation” has to be therefore, in the
E context; the phrase is used to limit the copyright owner’s right to
dictate further use of a literary, musical and dramatic work (Section
14(a)(ii)). None of the owners of other classes of work are subject
to that limitation. The restriction of one class of copyright owner,
structured in the statute serves a dual purpose- it limits the owner
of that class of copyright; and at the same time leaves it open to
F
the copyright owner of other kinds of work, to place such
restrictions.”
(emphasis in original)
126. Contrasting the aforesaid with section 14(d)(ii) of the
G Copyright Act, as it stood prior to the amendment in 2012, the learned
Single Judge then went on to hold:
“64. The second reason is that Section 14(1)(d) provides that the
copyright owner has, in case of cinematographic films, the
exclusive right to sell or give on hire or offer for sale or hire, any
H copy of the film, regardless of whether such copy has been sold
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 459
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

or given on hire on earlier occasion. The copyright owner, therefore A
continues to be entitled to exercise rights in a particular copy of
the film regardless of whether it has been sold previously- in
express contrast to literary works, which are “already in
circulation”. This is reinforced by Section 51(b)(i), which
unambiguously provides that copyright in a work shall be infringed
B
if a person does anything the exclusive right do which is by the
Act, conferred upon the owner of the copyright; it is also
emphasized by Section 51(b)(i) which makes for sale or hire, or
sells or lets for hire, or by way of trade displays or offers for sale
or hire, any infringing copies of the work. The proviso, crucially,
exempts from the definition importation of a single infringing copy C
for “the private and domestic use of the importer”. As noted earlier,
importation of a copy into India, in contravention of the Act — for
instance, without the license, or authorization of the copyright
owner, is an infringement; such copy is an infringing copy under
Section 2(m).”
D
(emphasis in original)
127. Thus, the Single Judge concluded:
“67. The express indication in Section 14(a)(ii) that a copyright
owner of literary works cannot exercise domain over copies in
circulation, shows that exhaustion, if one may term it, applies only E
in relation to the class of copyrights in Section 14(a) and to the
extent specified in clause (ii). Thus, the copyright owner of a
literary work, cannot dictate how and under what conditions a
copy can be re-sold, once it is “circulated”. This limited
“exhaustion” negates the applicability of the principle in regard to F
other classes of copyrights. Thus, Parliament having intervened
in one category of copyrights to grant a limited kind of “exhaustion”
and consciously chosen not to extend it to others, sleight of judicial
reasoning cannot extend its application…”
128. However, the learned Additional Solicitor General relied upon G
the judgment of another learned Single Judge of the High Court of Delhi
who had occasion to consider the aforesaid doctrine in John Wiley &
Sons Inc. v. Prabhat Chander Kumar Jain, IA No. 11331/2008 in
CS(OS) No. 1960/2008 reported in 2010 SCC OnLine Del 2000.
The case involved the sale of low-priced editions of books meant for the
Indian market in foreign territories, contrary to the terms prescribed by H
460 SUPREME COURT REPORTS [2021] 2 S.C.R.

A the copyright licence. After referring to a number of authorities, the
learned Single Judge held:
“68. The legal propositions which emanate from this discussion
are as under:
a) That the court will measure the infringement of the copyright
B from the rights of the owner of the copyright when the owner
is before the court for violation of its rights.
b) That the rights of the owner may be broader than the limited
rights of the exclusive licencee, although the exclusive licencee
has the independent right to sue for infringement of the
C copyright.
c) The rights of the owner and exclusive licencee may not be
the same and the rights of the exclusive licensee shall also be
subject to the fetters imposed by the agreement between the
licensor and licencee.
D
69. Applying these principles to the present case, it can be seen
that the plaintiff no. 1, 3 and 5 are the worldwide owners of the
books and their copyright as mentioned and averred in the plaint.
The plaintiff nos. 2, 4 and 6 are the exclusive licensees licensed to
publish the said books in India and other territories. The plaintiffs’
E grievance is that Defendant no. 3 Technischer Overseas Pvt. Ltd.
which is a bookseller in Delhi is purchasing the said Low Price
Editions of the books meant for the Indian market and the territories
defined from the plaintiffs no. 2, 4, 6 and is offering the said low
prize books from the websites www.alibris.com, www.biblio.com
F to territories outside the prescribed ones on the book is infringing
the copyright of the plaintiffs.
70. The said acts of the defendants of purchase of the books
from the exclusive licensees/licensees are legitimate in nature and
do not hinder or take away anyone’s rights including the rights of
exclusive licensees/licensee. But once the said defendant no. 3
G
offers for sale the books or publications (which are fettered by
territorial restrictions purchased from exclusive licensees) and puts
them into circulation by selling or offering for sale or by taking
orders for sale to the territories beyond the ones for which
permission has been granted by the owners of the copyright, the
H said acts are prima facie tantamount to putting into circulation or
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 461
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

issuance of copies not being in circulation in other territories where A
the right to do so is of the owner to exercise and violates the
rights of the owner of the copyright under Section 14 read with
Section 51 of the Act, if not the rights of the exclusive licensee. In
other words, the said acts of selling the books from India or offering
for sale from India through website and thereafter accepting the
B
money and couriering the books to an unauthorized territory will
violate the right of the owners of the copyright which are plaintiff
no. 1, 3, 5 to issue the copies to the public not already in circulation
(not of exclusive licensees) and thus will, prima facie, infringe
their copyright.
xxx xxx xxx C

79. The said position of the licensee is equally applicable in cases
of computer software and is seen in normal course when anyone
purchases the software. Computer software are mostly licensed
and are sold and distributed with their own conditions and limitations.
The purchasers of the said computer software either from the D
owner or from the licensee is aware of the arrangement or license
agreement that the said computer software for instance is meant
for single user or multiple usage. The said purchaser is within
notice while making purchase of the said software and is thus
bound by the said conditions of the license. Once the said purchaser E
violates the condition of the said license, he/she becomes liable
for infringement of copyright of the owner.
80. Likewise is the case with the books in the present matter.
Once the defendants purchase the Low Price Editions books of
the plaintiffs from their exclusive licensee, they are conscious of F
the fact that the said editions are subject to territorial restrictions
which are meant to be sold within the limited territories only. The
notice on the book itself gives knowledge to the purchaser about
the said territorial restriction. The said knowledge is also evident
when the defendant themselves offer the same books to the
customers outside the territories while representing that “it is an G
international edition in paperback. The contents are identical
to the American Edition, word for word. The ISBN differs from
the American Edition and the book is in black and white but
the contents are completely same as the American Edition at
a great price.”” H
462 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 129. The learned Single Judge then embarked upon a discussion
of the doctrine of first sale/principle of exhaustion, finding the absence
of an express provision in the Copyright Act recognising international
exhaustion, and summed up its impact in the context of the facts before
him as follows:
B “100. a) At the outset, again, I would like to reiterate the three
propositions a) the meaning of copyright has been defined under
Section 14 of the Copyright Act as is clear from the opening words
of the Section; b) The rights of the owner have to be looked into
as per Section 51 of the Act while measuring infringement; c)
The rights of the owner may be broader than that of the licensee.
C In the present case, the first sale has been effected by the exclusive
licensees plaintiff nos. 2, 4, 6 and their rights are limited and are
subject to the conditions and limitations imposed by the agreement.
That being so, the applicability of the first sale doctrine qua the
sales effected by the exclusive licensee to the defendants will at
D best exhaust the rights of the exclusive licensees to complain and
not the rights of the owner. The right of the owner to complain for
remaining infringement in unauthorised territories for violation of
the permission granted and violation of the rights will remain intact.
Thus, the applicability of first sale doctrine will partially exhaust
the rights of the licencee and not of the owner of the copyright
E i.e. plaintiff nos. 1, 3 and 5. xxx xxx xxx
104. The discussion makes it apparent that the learned single
judge has doubted the mode of the applicability of the first sales
doctrine in India as per the existing law. The same may lead to
partial or regional exhaustion or international exhaustion. As per
F my opinion, as the express provision for international exhaustion
is absent in our Indian law, it would be appropriate to confine the
applicability of the same to regional exhaustion. Be that as it may,
in the present case, the circumstances do not even otherwise
warrant this discussion as the rights if at all are exhausted are to
the extent to which they are available with the licensees as the
G books are purchased from the exclusive licensees who have limited
rights and not from the owner. In these circumstances, the question
of exhaustion of rights of owner in the copyright does not arise at
all.”
130. Thus, since copies of the low-priced editions could not be
H said to be “copies already in circulation” in the foreign territories that
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 463
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

they were resold in, the learned Single Judge concluded that the principle A
of exhaustion would not apply. On the other hand, in the facts of the
appeals before us, the distributors resell shrink-wrapped copies of the
computer programmes that are already put in circulation by foreign, non-
resident suppliers/manufacturers, since they have been sold and imported
into India via distribution agreements, and are thus not hit by section
B
14(a)(ii) of the Copyright Act. This is made clear by the explanation to
section 14 of the Copyright Act, which states as follows:
“Explanation.—For the purposes of this section, a copy which
has been sold once shall be deemed to be a copy already in
circulation.”
C
131. In UsedSoft GmbH v. Oracle International Corp. (Case
C-128/11) [“UsedSoft v. Oracle (ECJ)”], the European Court of
Justice [“ECJ”] was concerned with Article 4 of Directive 2001/29/EC
of the European Parliament and of the Council of 22 May 2001 on the
harmonisation of certain aspects of copyright and related rights in the
information society [“EC Directive 2001/29”], which provides as D
follows:
“Article 4
Distribution right
1. Member States shall provide for authors, in respect of the
E
original of their works or of copies thereof, the exclusive right to
authorise or prohibit any form of distribution to the public by sale
or otherwise.
2. The distribution right shall not be exhausted within the
Community in respect of the original or copies of the work, except
where the first sale or other transfer of ownership in the Community F
of that object is made by the rightholder or with his consent.”
132. Coming to Article 4(2) of EC Directive 2001/29, the ECJ
posed a question, thus:
“35. By its second question, which should be addressed first, the G
referring court essentially seeks to know whether and under what
conditions the downloading from the internet of a copy of a
computer program, authorised by the copyright holder, can give
rise to exhaustion of the right of distribution of that copy in the
European Union within the meaning of Article 4(2) of Directive
2009/24. H
464 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 36. It should be recalled that under Article 4(2) of Directive 2009/
24 the first sale in the European Union of a copy of a computer
program by the rightholder or with his consent exhausts the
distribution right within the European Union of that copy.
37. According to the order for reference, the copyright holder
B itself, in this case Oracle, makes available to its customers in the
European Union who wish to use its computer program a copy of
that program which can be downloaded from its website.
38. To determine whether, in a situation such as that at issue in
the main proceedings, the copyright holder’s distribution right is
C exhausted, it must be ascertained, first, whether the contractual
relationship between the rightholder and its customer, within which
the downloading of a copy of the program in question has taken
place, may be regarded as a ‘first sale … of a copy of a program’
within the meaning of Article 4(2) of Directive 2009/24.”

D 133. Concluding that the transfer of a copy of a computer
programme, accompanied by the conclusion of an EULA constituted a
“first sale… of a copy of a program” within the meaning of Article 4(2)
of EC Directive 2001/29 (see paragraph 48), the ECJ then went on to
describe the principle of exhaustion as follows:

E “70. An original acquirer who resells a tangible or intangible copy
of a computer program for which the copyright holder’s right of
distribution is exhausted in accordance with Article 4(2) of
Directive 2009/24 must, in order to avoid infringing the exclusive
right of reproduction of a computer program which belongs to its
author, laid down in Article 4(1)(a) of Directive 2009/24, make his
F own copy unusable at the time of its resale. In a situation such as
that mentioned in the preceding paragraph, the customer of the
copyright holder will continue to use the copy of the program
installed on his server and will not thus make it unusable.
71. Moreover, even if an acquirer of additional user rights for the
G computer program concerned did not carry out a new installation
— and hence a new reproduction — of the program on a server
belonging to him, the effect of the exhaustion of the distribution
right under Article 4(2) of Directive 2009/24 would in any event
not extend to such user rights. In such a case the acquisition of
additional user rights does not relate to the copy for which the
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 465
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

distribution right was exhausted at the time of that transaction. A
On the contrary, it is intended solely to make it possible to extend
the number of users of the copy which the acquirer of additional
rights has himself already installed on his server.
72. On the basis of all the foregoing, the answer to Question 2 is
that Article 4(2) of Directive 2009/24 must be interpreted as B
meaning that the right of distribution of a copy of a computer
program is exhausted if the copyright holder who has authorised,
even free of charge, the downloading of that copy from the internet
onto a data carrier has also conferred, in return for payment of a
fee intended to enable him to obtain a remuneration corresponding
to the economic value of the copy of the work of which he is the C
proprietor, a right to use that copy for an unlimited period.”
134. The ECJ concluded that the copyright owner exhausts his
distribution right in copies of a computer programme upon making the
first sale, provided that the copy is made unusable by the first acquirer,
as follows: D

“78. Admittedly, as stated in paragraph 70 above, the original
acquirer of a tangible or intangible copy of a computer program
for which the copyright holder’s distribution right is exhausted in
accordance with Article 4(2) of Directive 2009/24 who resells
that copy must, in order to avoid infringing that rightholder’s E
exclusive right of reproduction of his computer program under
Article 4(1)(a) of Directive 2009/24, make the copy downloaded
onto his computer unusable at the time of its resale.
79. As Oracle rightly observes, ascertaining whether such a copy
has been made unusable may prove difficult. However, a copyright F
holder who distributes copies of a computer program on a material
medium such as a CD ROM or DVD is faced with the same
problem, since it is only with great difficulty that he can make
sure that the original acquirer has not made copies of the program
which he will continue to use after selling his material medium. To G
solve that problem, it is permissible for the distributor — whether
‘classic’ or ‘digital’ — to make use of technical protective
measures such as product keys.
80. Since the copyright holder cannot object to the resale of a
copy of a computer program for which that rightholder’s distribution
H
466 SUPREME COURT REPORTS [2021] 2 S.C.R.

A right is exhausted under Article 4(2) of Directive 2009/24, it must
be concluded that a second acquirer of that copy and any
subsequent acquirer are ‘lawful acquirers’ of it within the meaning
of Article 5(1) of Directive 2009/24.
81. Consequently, in the event of a resale of the copy of the
B computer program by the first acquirer, the new acquirer will be
able, in accordance with Article 5(1) of Directive 2009/24, to
download onto his computer the copy sold to him by the first
acquirer. Such a download must be regarded as a reproduction of
a computer program that is necessary to enable the new acquirer
to use the program in accordance with its intended purpose.”
C
135. The learned Additional Solicitor General, however, strongly
relied upon the decision of the United States Court of Appeals for the
Ninth Circuit in Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir.
2010), wherein it dealt with the doctrine of first sale/principle of
exhaustion. The facts of the case were set out as follows:
D
“A. Autodesk’s Release 14 software and licensing practices
The material facts are not in dispute. Autodesk makes computer-
aided design software used by architects, engineers, and
manufacturers. It has more than nine million customers. It first
E released its Auto CAD software in 1982. It holds registered
copyrights in all versions of the software including the discontinued
Release 14 version, which is at issue in this case. It provided
Release 14 to customers on CD-ROMs.
Since at least 1986, Autodesk has offered Auto CAD to customers
F pursuant to an accompanying software license agreement
(“SLA”), which customers must accept before installing the
software. A customer who does not accept the SLA can return
the software for a full refund. Autodesk offers SLAs with different
terms for commercial, educational institution[s], and student users.
G The commercial license, which is the most expensive, imposes
the fewest restrictions on users and allows them software upgrades
at discounted prices.
The SLA for Release 14 first recites that Autodesk retains title to
all copies. Second, it states that the customer has a nonexclusive
H and nontransferable license to use Release 14. Third, it imposes
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 467
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

transfer restrictions, prohibiting customers from renting, leasing, A
or transferring the software without Autodesk’s prior consent and
from electronically or physically transferring the software out of
the Western Hemisphere. Fourth, it imposes significant use
restrictions:
YOU MAY NOT: (1) modify, translate, reverse engineer, B
decompile, or disassemble the Software … (3) remove any
proprietary notices, labels, or marks from the Software or
Documentation; (4) use the Software outside of the Western
Hemisphere; (5) utilize any computer software or hardware
designed to defeat any hardware copy-protection device, should
the software you have licensed be equipped with such C
protection; or (6) use the Software for commercial or other
revenue- generating purposes if the Software has been licensed
or labeled for educational use only.
Fifth, the SLA provides for license termination if the user copies
the software without authorization or does not comply with the D
SLA’s restrictions. Finally, the SLA provides that if the software
is an upgrade of a previous version:
[Y]ou must destroy the software previously licensed to you,
including any copies resident on your hard disk drive $ within
sixty (60) days of the purchase of the license to use the upgrade E
or update$ Autodesk reserves the right to require you to show
satisfactory proof that previous copies of the software have
been destroyed.
Autodesk takes measures to enforce these license requirements.
It assigns a serial number to each copy of AutoCAD and tracks F
registered licensees. It requires customers to input “activation
codes” within one month after installation to continue using the
software.1 The customer obtains the code by providing the
product’s serial number to Autodesk. Autodesk issues the activation
code after confirming that the serial number is authentic, the copy G
is not registered to a different customer, and the product has not
been upgraded. Once a customer has an activation code, he or
she may use it to activate the software on additional computers
without notifying Autodesk.”’
(pages 1104-1105)
H
468 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 136. The Court noted that the application of the doctrine turned
on the following question:
“This case requires us to decide whether Autodesk sold Release
14 copies to its customers or licensed the copies to its customers.
If CTA owned its copies of Release 14, then both its sales to
B Vernor and Vernor’s subsequent sales were non-infringing under
the first sale doctrine. However, if Autodesk only licensed CTA
to use copies of Release 14, then CTA’s and Vernor’s sales of
those copies are not protected by the first sale doctrine and would
therefore infringe Autodesk’s exclusive distribution right.”
C (page 1107)
(emphasis supplied)
137. On these facts, the doctrine of first sale/principle of
exhaustion, as applicable in USA, was set out as follows:

D “A. The first sale doctrine
The Supreme Court articulated the first sale doctrine in 1908,
holding that a copyright owner’s exclusive distribution right is
exhausted after the owner’s first sale of a particular copy of the
copyrighted work. See Bobbs-Merrill Co. v. Straus, 210 U.S.
339, 350-51 (1908). In Bobbs-Merrill, the plaintiff-copyright
E
owner sold its book with a printed notice announcing that any
retailer who sold the book for less than one dollar was responsible
for copyright infringement. (Id. at 341). Plaintiff sought injunctive
relief against defendants- booksellers who failed to comply with
the price restriction. (Id. at 341-42). The Supreme Court rejected
F the plaintiff’s claim, holding that its exclusive distribution right
applied only to first sales of copies of the work. (Id. at 350-51).
The distribution right did not permit [the] plaintiff to dictate that
subsequent sales of the work below a particular price were
infringing. Id. The Court noted that its decision solely applied to
the rights of a copyright owner that distributed its work without a
G
license agreement. (Id. at 350) (“There is no claim in this case of
contract limitation, nor license agreement controlling the subsequent
sales of the book.”).
Congress codified the first sale doctrine the following year. See
17 U.S.C. § 41 (1909). In its current form, it allows the “owner of
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 469
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

a particular copy” of a copyrighted work to sell or dispose of his A
copy without the copyright owner’s authorization. (Id. § 109(a)
(enacted 1976)). The first sale doctrine does not apply to a person
who possesses a copy of the copyrighted work without owning it,
such as a licensee. See id. § 109(d); cf. Quality King Distribs.,
Inc. v. L’Anza Research Int’l Inc., 523 U.S. 135, 146-47 (1998)
B
(“[T]he first sale doctrine would not provide a defense to $ any
non-owner such as a bailee, a licensee, a consignee, or one whose
possession of the copy was unlawful.”).”
(pages 1107-1108)
138. Given the restrictions specifically imposed by the software C
licence agreement in the facts of the case, the Court held that the
copyright owner retained the title to the copies of the software, and thus
the resale of such copies violated the distribution right of the copyright
owner, as follows:
“B. Analysis D
We hold today that a software user is a licensee rather than an
owner of a copy where the copyright owner (1) specifies that the
user is granted a license; (2) significantly restricts the user’s ability
to transfer the software; and (3) imposes notable use restrictions.12
Applying our holding to Autodesk’s SLA, we conclude that CTA E
was a licensee rather than an owner of copies of Release 14 and
thus was not entitled to invoke the first sale doctrine or the essential
step defense.
Autodesk retained title to the software and imposed significant
transfer restrictions: it stated that the license is non-transferable, F
the software could not be transferred or leased without Autodesk’s
written consent, and the software could not be transferred outside
the Western Hemisphere. The SLA also imposed use restrictions
against the use of the software outside the Western Hemisphere
and against modifying, translating, or reverse-engineering the
software, removing any proprietary marks from the software or G
documentation, or defeating any copy protection device.
Furthermore, the SLA provided for termination of the license upon
the licensee’s unauthorized copying or failure to comply with other
license restrictions. Thus, because Autodesk reserved title to
Release 14 copies and imposed significant transfer and use
H
470 SUPREME COURT REPORTS [2021] 2 S.C.R.

A restrictions, we conclude that its customers are licensees of their
copies of Release 14 rather than owners.
CTA was a licensee rather than an “owner of a particular copy”
of Release 14, and it was not entitled to resell its Release 14
copies to Vernor under the first sale doctrine. 17 U.S.C. § 109(a).
B Therefore, Vernor did not receive title to the copies from CTA
and accordingly could not pass ownership on to others. Both CTA’s
and Vernor’s sales infringed Autodesk’s exclusive right to distribute
copies of its work. Id. § 106(3).”
(pages 1111-1112)
C 139. As a result, given the conditions of the software licence
agreement in the facts before it, the Court held that the doctrine of first
sale would not apply, as Autodesk, the copyright owner, did not part with
title to the copies of the software. On the other hand, as has been held in
paragraph 52 of this judgment, the EULAs and distribution agreements
D that the appeals before us are concerned with, do not grant a licence in
terms of section 30 of the Copyright Act, but do in fact convey title to
the material object embedded with a copy of the computer software to
the distributors/end-users.
140. A conspectus of the aforesaid authorities would show that
E the doctrine of first sale/principle of exhaustion is dependent, in the first
place, upon legislation which either recognises or refuses to recognise
the doctrine (thereby continuing to vest distribution rights in the copyright
owner, even beyond the first sale of the copyrighted work). Thus, for
example, prior to the amendment of section 14(d)(ii) in 2012, dealing
with a cinematograph film, the distribution right to sell or give on hire or
F offer for sale or hire, any copy of the film, would continue to vest in the
copyright owner, “regardless of whether such copy ha[d] been sold
or given on hire on earlier occasion”, which manifested the legislative
intent against the application of the doctrine of first sale/principle of
exhaustion. Post 2012, however, the balance between the copyright
G owner’s distribution right and the right of the purchaser to further resale,
was tilted in favour of the latter, the words “regardless of whether such
copy has been sold or given on hire on earlier occasion” being deleted
by the amendment. Likewise, when it comes to section 14(a)(ii) of the
Copyright Act, the distribution right subsists with the owner of copyright
to issue copies of the work to the public, to the extent such copies are
H not copies already in circulation, thereby manifesting a legislative intent
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 471
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

to apply the doctrine of first sale/principle of exhaustion, as has been A
found by the High Court of Delhi in Warner Bros. (supra).
141. Like section 14(d)(ii) of the Copyright Act, section 14(b)(ii),
has, after the 1999 Amendment, with effect from 15.01.2000, also deleted
the words “regardless of whether such copy has been sold or given on
hire on earlier occasions’’, thereby making it clear that the same tilt that B
had been made in section 14(d)(ii) of the Copyright Act vide the
amendment in 2012 in favour of the purchaser, is also to be found post
the 1999 Amendment, in section 14(b)(ii) of the Copyright Act.
142. The language of section 14(b)(ii) of the Copyright Act makes
it clear that it is the exclusive right of the owner to sell or to give on C
commercial rental or offer for sale or for commercial rental “any copy
of the computer programme”. Thus, a distributor who purchases
computer software in material form and resells it to an end-user cannot
be said to be within the scope of the aforesaid provision. The sale or
commercial rental spoken of in section 14(b)(ii) of the Copyright Act is
of “any copy of a computer programme”, making it clear that the section D
would only apply to the making of copies of the computer programme
and then selling them, i.e., reproduction of the same for sale or commercial
rental.
143. The object of section 14(b)(ii) of the Copyright Act, in the
context of a computer program, is to interdict reproduction of the said E
computer programme and consequent transfer of the reproduced
computer programme to subsequent acquirers/end-users. By way of
contrast, once a book is sold, on further resale of the same book, the
purchaser loses the material book altogether, as such purchaser has, for
consideration, parted with the book once and for all. This may not be so F
in the case of a computer programme, which is why the ECJ in UsedSoft
v. Oracle (ECJ) (supra) held that unless a further resale of a computer
software stored on a floppy disc/CD is accompanied by the destruction
of the said software on the computer of the reseller/first acquirer, the
copyright owner’s rights would be easily infringed by mere reproduction
thereof. This is also recognised in section 65A of the Copyright Act G
which punishes the circumvention of technological protection measures,
such as encryption codes, product keys etc. designed to ensure that the
first acquirer’s copy is made unusable. Thus, once it is understood that
the object of section 14(b)(ii) of the Copyright Act is not to interdict the
sale of computer software that is “licensed” to be sold by a distributor, H
472 SUPREME COURT REPORTS [2021] 2 S.C.R.

A but that it is to prevent copies of computer software once sold being
reproduced and then transferred by way of sale or otherwise, it becomes
clear that any sale by the author of a computer software to a distributor
for onward sale to an end-user, cannot possibly be hit by the said provision.
Further, as has rightly been pointed out by Shri S. Ganesh, learned Senior
Advocate appearing on behalf of Sonata Information Technology Ltd. in
B
C.A. Nos. 8737- 8941/2018, the distributor cannot use the computer
software at all and has to pass on the said software, as shrink-wrapped
by the owner, to the end-user for a consideration, the distributor’s profit
margin being that of an intermediary who merely resells the same product
to the end-user.
C 144. For all these reasons, we cannot accede to the argument
made by the learned Additional Solicitor General that the distribution of
copyrighted computer software, on the facts of the appeals before us,
would constitute the grant of an interest in copyright under section 14(b)(ii)
of the Copyright Act, thus necessitating the deduction of tax at source
D under section 195 of the Income Tax Act.
INTERPRETATION OF TREATIES, OECD
COMMENTARY AND THE REVENUE’S OWN
UNDERSTANDING
145. The DTAAs that have been entered into by India with other
E Contracting States have to be interpreted liberally with a view to implement
the true intention of the parties. This Court, in Azadi Bachao Andolan
(supra) put it thus:
“98. In John N. Gladden v. Her Majesty the Queen [85 DTC
5188 at p. 5190] the principle of liberal interpretation of tax treaties
F was reiterated by the Federal Court, which observed:
“Contrary to an ordinary taxing statute a tax treaty or
convention must be given a liberal interpretation with a view to
implementing the true intentions of the parties. A literal or
legalistic interpretation must be avoided when the basic object
G of the treaty might be defeated or frustrated insofar as the
particular item under consideration is concerned.””
“Interpretation of treaties
130. The principles adopted in interpretation of treaties are not
the same as those in interpretation of a statutory legislation. While
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 473
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

commenting on the interpretation of a treaty imported into a A
municipal law, Francis Bennion observes:
“With indirect enactment, instead of the substantive legislation
taking the well-known form of an Act of Parliament, it has the
form of a treaty. In other words, the form and language found
suitable for embodying an international agreement become, at B
the stroke of a pen, also the form and language of a municipal
legislative instrument. It is rather like saying that, by Act of
Parliament, a woman shall be a man. Inconveniences may
ensue. One inconvenience is that the interpreter is likely to be
required to cope with disorganised composition instead of
precision drafting. The drafting of treaties is notoriously sloppy C
usually for a very good reason. To get agreement, politic
uncertainty is called for.
… The interpretation of a treaty imported into municipal law
by indirect enactment was described by Lord Wilberforce as
being ‘unconstrained by technical rules of English law, or by D
English legal precedent, but conducted on broad principles of
general acceptation. This echoes the optimistic dictum of Lord
Widgery, C.J. that the words ‘are to be given their general
meaning, general to lawyer and layman alike … the meaning
of the diplomat rather than the lawyer’.” [Francis Bennion: E
Statutory Interpretation, p. 461 [Butterworths, 1992 (2nd
Edn.)].]
131. An important principle which needs to be kept in mind in the
interpretation of the provisions of an international treaty, including
one for double taxation relief, is that treaties are negotiated and F
entered into at a political level and have several considerations as
their bases. Commenting on this aspect of the matter, David R.
Davis in Principles of International Double Taxation Relief [
David R. Davis: Principles of International Double Taxation Relief,
p. 4 (London, Sweet & Maxwell, 1985).], points out that the main
function of a Double Taxation Avoidance Treaty should be seen G
in the context of aiding commercial relations between treaty
partners and as being essentially a bargain between two treaty
countries as to the division of tax revenues between them in respect
of income falling to be taxed in both jurisdictions. It is observed
(vide paragraph 1.06): H
474 SUPREME COURT REPORTS [2021] 2 S.C.R.

A “The benefits and detriments of a double tax treaty will probably
only be truly reciprocal where the flow of trade and investment
between treaty partners is generally in balance. Where this is
not the case, the benefits of the treaty may be weighed more
in favour of one treaty partner than the other, even though the
provisions of the treaty are expressed in reciprocal terms. This
B has been identified as occurring in relation to tax treaties
between developed and developing countries, where the flow
of trade and investment is largely one-way.
Because treaty negotiations are largely a bargaining process
with each side seeking concessions from the other, the final
C agreement will often represent a number of compromises, and
it may be uncertain as to whether a full and sufficient quid
pro quo is obtained by both sides.”
And, finally, in paragraph 1.08:
“Apart from the allocation of tax between the treaty partners,
D tax treaties can also help to resolve problems and can obtain
benefits which cannot be achieved unilaterally.””
146. Further, the House of Lords in Ostime (Inspector of Taxes)
v. Australian Mutual Provident Society, [1959] AC 259 by a
judgment dated 16.07.1959 remarked upon, what it termed the
“international tax language” of bilateral taxation agreements, as follows:
E
“Bilateral agreements for regulating some of the problems of
double taxation began, at any rate so far as the United Kingdom
was concerned, in 1946. The form employed, which, for obvious
reasons, employs similar forms and similar language in all
agreements, is derived, I believe, from a set of model clauses
F proposed by the financial commission of the League of Nations.
The aim is to provide by treaty for the tax claims of two
governments, both legitimately interested in taxing a particular
source of income either by resigning to one of the two the whole
claim or else by prescribing the basis on which the tax claim is to
be shared between them. For our purpose it is convenient to note
G
that the language employed in this agreement is what may be
called international tax language and that such categories as
“enterprise,” “commercial or industrial profits” and “permanent
establishment” have no exact counterpart in the taxing code of
the United Kingdom.”
H (page 480)
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 475
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

147. All the DTAAs with which we are concerned, have, as their A
starting point, either the OECD Model Tax Convention on Income and
Capital [“OECD Model Tax Convention”] and/or the United Nations
Model Double Taxation Convention between Developed and Developing
Countries [“UN Model Convention”] insofar as the taxation of royalty
for parting with copyright is concerned.
B
148. The OECD Model Tax Convention speaks of the importance
of the OECD Commentary, as follows:
“2. It has long been recognised among the member countries of
the Organisation for Economic Co-operation and Development
that it is desirable to clarify, standardise, and confirm the fiscal
situation of taxpayers who are engaged in commercial, industrial, C
financial, or any other activities in other countries through the
application by all countries of common solutions to identical cases
of double taxation. These countries have also long recognised the
need to improve administrative co-operation in tax matters, notably
through exchange of information and assistance in collection of D
taxes, for the purpose of preventing tax evasion and avoidance.
3. These are the main purposes of the OECD Model Tax
Convention on Income and on Capital, which provides a means of
settling on a uniform basis the most common problems that arise
in the field of international juridical double taxation. As
recommended by the Council of OECD, member countries, when E
concluding or revising bilateral conventions, should conform to
this Model Convention as interpreted by the Commentaries thereon
and having regard to the reservations contained therein and their
tax authorities should follow these Commentaries, as modified
from time to time and subject to their observations thereon, when F
applying and interpreting the provisions of their bilateral tax
conventions that are based on the Model Convention.”
“29.2 Similarly, taxpayers make extensive use of the
Commentaries in conducting their businesses and planning their
business transactions and investments. The Commentaries are of
particular importance in countries that do not have a procedure G
for obtaining an advance ruling on tax matters from the tax
administration as the Commentaries may be the only available
source of interpretation in that case.”
(OECD Model Tax Convention 2017 - Condensed Version)
(emphasis supplied) H
476 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 149. The OECD Model Tax Convention, in Article 12 thereof,
defines the term “royalties” as follows:
“Article 12
ROYALTIES
B xxx xxx xxx
2. The term “royalties” as used in this Article means payments of
any kind received as a consideration for the use of, or the right to
use, any copyright of literary, artistic or scientific work including
cinematograph films, any patent, trade mark, design or model,
C plan, secret formula or process, or for information concerning
industrial, commercial or scientific experience.”
150. When the definition of “royalties” is seen in all the DTAAs
that we are concerned with, it is found that “royalties” is defined in a
manner either identical with or similar to the definition contained in Article
D 12 of the OECD Model Tax Convention. This being the case, the OECD
Commentary on the provisions of the OECD Model Tax Convention
then becomes relevant. The OECD Commentary has been referred to
and relied upon in several earlier judgments. See:
i. Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1
at pages 42-43;
E
ii. Formula One World Championship Ltd. v. CIT, (2017)
15 SCC 602 at pages 629-630; and
iii. CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294 at
pages 322-323.
F 151. The importance of the OECD Commentary, when it comes
to DTAAs, was also underscored by the High Court of Australia in
Thiel v. Federal Commissioner of Taxation, High Court of
Australia, [1990] 94 ALR 647, which put it thus:
“Article 31 of the Vienna Convention provides that a treaty is to
G be interpreted “in good faith in accordance with the ordinary
meaning to be given to the terms of the treaty in their context and
in the light of its object and purpose’’. The context includes, in
addition to the text, any instrument which was made by one or
more parties in connection with the conclusion of the treaty and
H accepted by the other parties as an instrument related to the treaty.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 477
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

For my part, I do not see why the OECD model convention and A
commentaries should not be regarded as having been made in
connection with and accepted by the parties to a bilateral treaty
subsequently concluded in accordance with the framework of the
model. However, some doubts have been expressed about the
applicability, as a matter of language, of Art. 31 to the
B
commentaries in the case of a bilateral treaty such as a double
taxation agreement: see Jones et al., “The Interpretation of Tax
Treaties with Particular Reference to Article 3(2) of the OECD
Model-II’’, (1984) British Tax Review 90 at p. 92.
I turn, therefore, to Art. 32 of the Vienna Convention which allows
recourse to be had to supplementary means of interpretation, C
including the preparatory work of the treaty and the circumstances
of its conclusion, in order to confirm the meaning resulting from
the application of Art. 31, or to determine the meaning when the
interpretation according to Art. 31 leaves the meaning ambiguous
or obscure or leads to a result which is manifestly absurd or D
unreasonable. Whilst the model convention and commentaries may
not strictly amount to work preparatory to the double taxation
agreement between Australia and Switzerland, they are documents
which form the basis for the conclusion of bilateral double taxation
agreements of the kind in question and, as with treaties in pari
materia, provide a guide to the current usage of terms by the E
parties. They are, therefore, a supplementary means of
interpretation to which recourse may be had under Art. 32 of the
Vienna Convention.”47
(Concurring Opinion of Dawson J., pages 653-654)
F
“The Agreement is a treaty and is to be interpreted in accordance
with the rules of interpretation recognised by international lawyers:
Shipping Corporation of India Ltd. v. Gamlen Chemical Co.
(A/Asia) Pty. Ltd. (1980) 147 C.L.R. 142 at p. 159. Those rules
have now been codified by the Vienna Convention on the Law of
Treaties to which Australia, but not Switzerland, is a party. G

47
This Court, in Ram Jethmalani v. Union of India, (2011) 8 SCC 1, noted that
though India is not a party to the Vienna Convention on the Law of Treaties, the
principles of international law and the principle of interpretation contained in Article
31 thereof provide broad guidelines to interpret treaties in the Indian context also. (See
paragraph 69).
H
478 SUPREME COURT REPORTS [2021] 2 S.C.R.

A Nevertheless, because the interpretation provisions of the Vienna
Convention reflect the customary rules for the interpretation of
treaties, it is proper to have regard to the terms of the Convention
in interpreting the Agreement, even though Switzerland is not a
party to that Convention: Fothergill v. Monarch Airlines Ltd.
(1981) A.C. 251 at pp. 276, 282, 290; Commonwealth v. Tasmania
B
(the Tasmanian Dam case) (1983) 158 C.L.R. 1 at p. 222; Golder
case (1975) 57 I.L.R. 201 at pp. 213-214. Article 31 of the
Convention requires a treaty to be interpreted in accordance with
the ordinary meaning to be given to its terms “in their context and
in the light of its object and purpose’’. The context includes the
C preamble and annexes to the treaty: Art. 31(2). Recourse may
also be had to “supplementary means of interpretation, including
the preparatory work of the treaty and the circumstances of its
conclusion’’ to confirm the meaning resulting from the application
of Art. 31 or to determine the meaning of the treaty when
interpretation according to Art. 31 leaves its meaning obscure or
D
ambiguous or leads to a result which is manifestly absurd or
unreasonable: Art. 32.
The Agreement is one “for the avoidance of double taxation with
respect to taxes on income’’. Accordingly, it is necessary to
interpret the words of the Agreement with that particular purpose
E in mind. Moreover, the term “enterprise’’ in Art. 3 and 7 of the
Agreement is ambiguous because, on the one hand, it can mean a
project or activity undertaken and, on the other hand, it can mean
a framework for making and carrying out decisions in respect of
activities and projects. Consequently, it is proper to have regard
F to any “supplementary means of interpretation’’ in interpreting
the Agreement. In this case, the “supplementary means of
interpretation’’ are the 1977 OECD Model Convention for the
Avoidance of Double Taxation with respect to Taxes on Income
and on Capital, which was the model for the Agreement, and a
commentary issued by the OECD in relation to that model
G convention. But before referring to those two documents, it is
necessary to describe the Agreement in more detail.”
(Concurring Opinion of McHugh J., pages 658-659)
152. The OECD Commentary on royalty payments under Article
H 12 is instructive, and states as follows :
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 479
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

“12. Whether payments received as consideration for computer A
software may be classified as royalties poses difficult problems
but is a matter of considerable importance in view of the rapid
development of computer technology in recent years and the extent
of transfers of such technology across national borders. In 1992,
the Commentary was amended to describe the principles by which
B
such classification should be made. Paragraphs 12 to 17 were
further amended in 2000 to refine the analysis by which business
profits are distinguished from royalties in computer software
transactions. In most cases, the revised analysis will not result in
a different outcome.
12.1 Software may be described as a program, or series of C
programs, containing instructions for a computer required either
for the operational processes of the computer itself (operational
software) or for the accomplishment of other tasks (application
software). It can be transferred through a variety of media, for
example in writing or electronically, on a magnetic tape or disk, or D
on a laser disk or CD-Rom. It may be standardised with a wide
range of applications or be tailor-made for single users. It can be
transferred as an integral part of computer hardware or in an
independent form available for use on a variety of hardware.
12.2 The character of payments received in transactions involving E
the transfer of computer software depends on the nature of the
rights that the transferee acquires under the particular arrangement
regarding the use and exploitation of the program. The rights in
computer programs are a form of intellectual property. Research
into the practices of OECD member countries has established
that all but one protect rights in computer programs either explicitly F
or implicitly under copyright law. Although the term “computer
software” is commonly used to describe both the program — in
which the intellectual property rights (copyright) subsist — and
the medium on which it is embodied, the copyright law of most
OECD member countries recognises a distinction between the G
copyright in the program and software which incorporates a copy
of the copyrighted program. Transfers of rights in relation to
software occur in many different ways ranging from the alienation
of the entire rights in the copyright in a program to the sale of a
product which is subject to restrictions on the use to which it is
put. The consideration paid can also take numerous forms. These H
480 SUPREME COURT REPORTS [2021] 2 S.C.R.

A factors may make it difficult to determine where the boundary
lies between software payments that are properly to be regarded
as royalties and other types of payment. The difficulty of
determination is compounded by the ease of reproduction of
computer software, and by the fact that acquisition of software
frequently entails the making of a copy by the acquirer in order to
B
make possible the operation of the software.
13. The transferee’s rights will in most cases consist of partial
rights or complete rights in the underlying copyright (see paragraphs
13.1 and 15 below), or they may be (or be equivalent to) partial or
complete rights in a copy of the program (the “program copy”),
C whether or not such copy is embodied in a material medium or
provided electronically (see paragraphs 14 to 14.2 below). In
unusual cases, the transaction may represent a transfer of “know-
how” or secret formula (paragraph 14.3).
13.1 Payments made for the acquisition of partial rights in the
D copyright (without the transferor fully alienating the copyright
rights) will represent a royalty where the consideration is for
granting of rights to use the program in a manner that would,
without such license, constitute an infringement of copyright.
Examples of such arrangements include licenses to reproduce
and distribute to the public software incorporating the copyrighted
E
program, or to modify and publicly display the program. In these
circumstances, the payments are for the right to use the copyright
in the program (i.e. to exploit the rights that would otherwise be
the sole prerogative of the copyright holder). It should be noted
that where a software payment is properly to be regarded as a
F royalty there may be difficulties in applying the copyright provisions
of the Article to software payments since paragraph 2 requires
that software be classified as a literary, artistic or scientific work.
None of these categories seems entirely apt. The copyright laws
of many countries deal with this problem by specifically classifying
software as a literary or scientific work. For other countries
G
treatment as a scientific work might be the most realistic approach.
Countries for which it is not possible to attach software to any of
those categories might be justified in adopting in their bilateral
treaties an amended version of paragraph 2 which either omits all
references to the nature of the copyrights or refers specifically to
H software.
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 481
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

14. In other types of transactions, the rights acquired in relation A
to the copyright are limited to those necessary to enable the user
to operate the program, for example, where the transferee is
granted limited rights to reproduce the program. This would be
the common situation in transactions for the acquisition of a program
copy. The rights transferred in these cases are specific to the
B
nature of computer programs. They allow the user to copy the
program, for example onto the user’s computer hard drive or for
archival purposes. In this context, it is important to note that the
protection afforded in relation to computer programs under
copyright law may differ from country to country. In some
countries the act of copying the program onto the hard drive or C
random access memory of a computer would, without a license,
constitute a breach of copyright. However, the copyright laws of
many countries automatically grant this right to the owner of
software which incorporates a computer program. Regardless of
whether this right is granted under law or under a license
D
agreement with the copyright holder, copying the program onto
the computer’s hard drive or random access memory or making
an archival copy is an essential step in utilising the program.
Therefore, rights in relation to these acts of copying, where they
do no more than enable the effective operation of the program by
the user, should be disregarded in analysing the character of the E
transaction for tax purposes. Payments in these types of
transactions would be dealt with as commercial income in
accordance with Article 7.
14.1 The method of transferring the computer program to the
transferee is not relevant. For example, it does not matter whether F
the transferee acquires a computer disk containing a copy of the
program or directly receives a copy on the hard disk of her
computer via a modem connection. It is also of no relevance that
there may be restrictions on the use to which the transferee can
put the software.
G
14.2 The ease of reproducing computer programs has resulted in
distribution arrangements in which the transferee obtains rights to
make multiple copies of the program for operation only within its
own business. Such arrangements are commonly referred to as
“site licences”, “enterprise licenses”, or “network licences”.
H
482 SUPREME COURT REPORTS [2021] 2 S.C.R.

A Although these arrangements permit the making of multiple copies
of the program, such rights are generally limited to those necessary
for the purpose of enabling the operation of the program on the
licensee’s computers or network, and reproduction for any other
purpose is not permitted under the license. Payments under such
arrangements will in most cases be dealt with as business profits
B
in accordance with Article 7.
14.3 Another type of transaction involving the transfer of
computer software is the more unusual case where a software
house or computer programmer agrees to supply information about
the ideas and principles underlying the program, such as logic,
C algorithms or programming languages or techniques. In these cases,
the payments may be characterised as royalties to the extent that
they represent consideration for the use of, or the right to use,
secret formulas or for information concerning industrial,
commercial or scientific experience which cannot be separately
D copyrighted. This contrasts with the ordinary case in which a
program copy is acquired for operation by the end user.
14.4 Arrangements between a software copyright holder and a
distribution intermediary frequently will grant to the distribution
intermediary the right to distribute copies of the program without
E the right to reproduce that program. In these transactions, the
rights acquired in relation to the copyright are limited to those
necessary for the commercial intermediary to distribute copies of
the software program. In such transactions, distributors are paying
only for the acquisition of the software copies and not to exploit
any right in the software copyrights. Thus, in a transaction where
F a distributor makes payments to acquire and distribute software
copies (without the right to reproduce the software), the rights in
relation to these acts of distribution should be disregarded in
analysing the character of the transaction for tax purposes.
Payments in these types of transactions would be dealt with as
G business profits in accordance with Article 7. This would be the
case regardless of whether the copies being distributed are
delivered on tangible media or are distributed electronically
(without the distributor having the right to reproduce the software),
or whether the software is subject to minor customisation for the
purposes of its installation.
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 483
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

15. Where consideration is paid for the transfer of the full A
ownership of the rights in the copyright, the payment cannot
represent a royalty and the provisions of the Article are not
applicable. Difficulties can arise where there is a transfer of rights
involving:
— exclusive right of use of the copyright during a specific B
period or in a limited geographical area;
— additional consideration related to usage;
— consideration in the form of a substantial lump sum payment.
16. Each case will depend on its particular facts but in general if
the payment is in consideration for the transfer of rights that C
constitute a distinct and specific property (which is more likely in
the case of geographically-limited than time limited rights), such
payments are likely to be business profits within Article 7 or a
capital gain within Article 13 rather than royalties within Article
12. That follows from the fact that where the ownership of rights
has been alienated, the consideration cannot be for the use of the D
rights. The essential character of the transaction as an alienation
cannot be altered by the form of the consideration, the payment
of the consideration in instalments or, in the view of most countries,
by the fact that the payments are related to a contingency.
17. Software payments may be made under mixed contracts. E
Examples of such contracts include sales of computer hardware
with built-in software and concessions of the right to use software
combined with the provision of services. The methods set out in
paragraph 11 above for dealing with similar problems in relation
to patent royalties and know-how are equally applicable to
F
computer software. Where necessary the total amount of the
consideration payable under a contract should be broken down on
the basis of the information contained in the contract or by means
of a reasonable apportionment with the appropriate tax treatment
being applied to each apportioned part.”
(emphasis supplied) G
153. However, the learned Additional Solicitor General has taken
us through the positions taken by India (in the capacity of an OECD
non-member) with regard to Article 12 of the OECD Model Tax
Convention and the OECD Commentary, first in 2008, reiterated in 2014
and 2017, as follows: H
484 SUPREME COURT REPORTS [2021] 2 S.C.R.

A “4.1 India reserves the right to: tax royalties and fees for technical
services at source; define these, particularly by reference to its
domestic law; define the source of such payments, which may
extend beyond the source defined in paragraph 5 of Article 11,
and modify paragraphs 3 and 4 accordingly.”
B “17. India reserves its position on the interpretations provided in
paragraphs 8.2, 10.1, 10.2, 14, 14.1, 14.2, 14.4, 15, 16 and 17.3; it
is of the view that some of the payments referred to may constitute
royalties”
(Positions on Article 12, OECD Commentary 2014)
C 154. From these positions taken, which use the language “reserves
the right to” and “is of the view that some of the payments referred to
may constitute royalties”, it is not at all clear as to what exactly the
nature of these positions are. This may be contrasted with the categorical
language used by India in its positions taken with respect to other aspects
D (“India does not agree to”), as follows:
“18. India does not agree with the interpretation that information
concerning industrial, commercial or scientific experience is
confined to only previous experience.”
“20. India does not agree with the interpretation in paragraph 9.1
E of the Commentary on Article 12 according to which a payment
for transponder leasing will not constitute royalty. This notion is
contrary to the Indian position that income from transponder leasing
constitutes an equipment royalty taxable both under India’s
domestic law and its treaties with many countries. It is also contrary
F to India’s position that a payment for the use of a transponder is a
payment for the use of a process resulting in a royalty under Article
12. India also does not agree with the conclusion included in the
paragraph concerning undersea cables and pipelines as it considers
that undersea cables and pipelines are industrial, commercial or
scientific equipment and that payments made for their use constitute
G equipment royalties.
21. India does not agree with the interpretation in paragraph 9.2
of the Commentary on Article 12. It considers that a roaming call
constitutes the use of a process. Accordingly, the payment made
for the use of that process constitutes a royalty for the purposes
H of Article 12. It is also the position of India that a payment for a
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 485
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

roaming call constitutes a royalty since it is a payment for the use A
of industrial, commercial or scientific equipment.
22. India does not agree with the interpretation in paragraph 9.3
of the Commentary on Article 12. It considers that a payment for
spectrum license constitutes a royalty taxable both under India’s
domestic law and its treaties with many countries.” B
(Positions on Article 12, OECD Commentary 2014)
155. In Director of Income Tax v. New Skies Satellite BV,
(2016) 382 ITR 114 [“New Skies Satellite”], a Division Bench of
the High Court of Delhi correctly observed that mere positions taken
with respect to the OECD Commentary do not alter the DTAA’s C
provisions, unless it is actually amended by way of bilateral re-negotiation.
This was put thus:
“68. On a final note, India’s change in position to the OECD
Commentary cannot be a fact that influences the interpretation of
the words defining royalty as they stand today. The only manner
in which such change in position can be relevant is if such change D
is incorporated into the agreement itself and not otherwise. A
change in executive position cannot bring about a unilateral
legislative amendment into a treaty concluded between two
sovereign states. It is fallacious to assume that any change made
to domestic law to rectify a situation of mistaken interpretation E
can spontaneously further their case in an international treaty.
Therefore, mere amendment to Section 9(1)(vi) cannot result in a
change. It is imperative that such amendment is brought about
in the agreement as well. Any attempt short of this, even if it is
evidence of the State’s discomfort at letting data broadcast
revenues slip by, will be insufficient to persuade this Court to hold F
that such amendments are applicable to the DTAAs.”
(emphasis in original)
156. It is significant to note that after India took such positions
qua the OECD Commentary, no bilateral amendment was made by India
and the other Contracting States to change the definition of royalties G
contained in any of the DTAAs that we are concerned with in these
appeals, in accordance with its position. As a matter of fact, DTAAs
that were amended subsequently, such as the Convention between the
Republic of India and the Kingdom of Morocco for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with respect to H
486 SUPREME COURT REPORTS [2021] 2 S.C.R.

A Taxes On Income,48 [“India-Morocco DTAA”], which was amended
on 22.10.2019,49 incorporated a definition of royalties, not very different
from the definition contained in the OECD Model Tax Convention, as
follows:
“The term “royalties” as used in this Article means:
B (a) payments of any kind received as a consideration for the use
of, or the right to use, any copyright of a literary, artistic or scientific
work, including cinematograph films or recordings on any means
of reproduction for use for radio or television broadcasting, any
patent, trade mark, design or model, plan, computer software
C programme, secret formula or process, or for information
concerning industrial, commercial or scientific experience; and
(b) payments of any kind received as consideration for the use of,
or the right to use, any industrial, commercial or scientific
equipment”
D (Article 12.3)
157. Similarly, though the India-Singapore DTAA came into force
on 08.08.1994, it has been amended several times, including on
01.09.2011,50 and 23.03.2017.51 However, the definition of “royalties”
has been retained without any changes. Likewise, the Convention between
E the Government of the Republic of India and the Government of Mauritius
for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income and Capital Gains and for the
Encouragement of Mutual Trade and Investment,52 [“India-Mauritius
DTAA”] was entered into on 06.12.1983, and was amended subsequently
on 10.08.2016,53 without making any change to the definition of
F
“royalties”.
158. It is thus clear that the OECD Commentary on Article 12 of
the OECD Model Tax Convention, incorporated in the DTAAs in the
cases before us, will continue to have persuasive value as to the
interpretation of the term “royalties” contained therein.
G
48
Notification : No. GSR 245(E), dated 15-3-2000.
49
Amended by Notification No. S.O. 3789(E) [No.84/2019/F.No.503/09/2009-FTD-
II], Dated 22-10-2019.
50
Notification No. S.O. 2031(E).
51
Notification No. S.O. 935(E).
52
Notification No. GSR 920(E).
H 53
Notification No. S.O. 2680(E) (No.68/2016 (F.No.500/3/2012-FTD-II).
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 487
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

159. Viewed from another angle, persons who pay TDS and/or A
assessees in the nations governed by a DTAA have a right to know
exactly where they stand in respect of the treaty provisions that govern
them. Such persons and/or assessees can thus place reliance upon the
OECD Commentary for provisions of the OECD Model Tax Convention,
which are used without any substantial change by bilateral DTAAs, in
B
the absence of judgments of municipal courts clarifying the same, or in
the event of conflicting municipal decisions. From this point of view also,
the OECD Commentary is significant, as the Contracting States to which
the persons deducting tax/assessees belong, can conclude business
transactions on the basis that they are to be taxed either on income by
way of royalties for parting with copyright, or income derived from licence C
agreements which is then taxed as business profits depending on the
existence of a PE in the Contracting State.
160. The learned Additional Solicitor General, however, relied upon
the HPC Report 2003 and the E-Commerce Report 2016. The HPC
Report 2003, noting the various characterisation issues in relation to e- D
commerce payments, recommended as follows:
“...The Committee also recommends that a clear position on each
category of transactions should be taken by the Central Board of
Direct Taxes (“CBDT”). This will ensure uniformity of approach
among all the assessing officers. Since new categories of E
transactions are likely to emerge at a fast pace with advances in
technology, it is also recommended that the CBDT should closely
monitor the developments and issue guidelines to the assessing
officers on new emerging categories of transactions as a continuing
process. The monitoring should be through an expert advisory
F
body on which the tax administration, the profession and the
concerned industry is represented.”
(pages 146-147)
161. The E-Commerce Report 2016 proposed an equalization
levy to be chargeable on specified digital services (see paragraph 11.2) G
and noted that its recommendation to impose a withholding tax on digital
transactions would require an express inclusion in tax treaties in order to
be feasible, as follows:
“108. After taking cognizance of these observations, the
Committee considers that the option of “withholding tax” offers a H
488 SUPREME COURT REPORTS [2021] 2 S.C.R.

A practical way of allocating partial taxing rights in respect of income
from digital economy, which shares attributes that may be similar
to royalty or fee for technical services, and which can be complied
in respect of B2B transactions by the process of withholding.
However, such a tax on income would be feasible only if it is
included in the tax treaties, which take precedence over Indian
B
domestic laws, unless it is designed as a tax on the gross payment.”
(emphasis supplied)
162. These reports also do not carry the matter much further as
they are recommendatory reports expressing the views of the committee
C members, which the Government of India may accept or reject. When it
comes to DTAA provisions, even if the position put forth in the
aforementioned reports were to be accepted, a DTAA would have to be
bilaterally amended before any such recommendation can become law
in force for the purposes of the Income Tax Act.
D 163. The learned Additional Solicitor General also sought to rely
on a decision of the Audiencia Nacional (Spanish National Court) in
Case No. 207019/1990 dated 28.02.1995 and a decision of the Tribunal
Supremo (Spanish Supreme Court) in Case No. 8066/1994 dated
02.10.1999. Quite apart from the fact that he only presented certain
extracts and not the entire judgment rendered in these cases, these
E
authorities have no relevance to the appeals before us, having been
decided on the basis of the taxation law of Spain.
164. The learned Additional Solicitor General then referred to the
judgment of this Court in Commissioner of Customs v. G.M. Exports,
(2016) 1 SCC 91, and in particular on the four propositions that were
F
culled out in the context of the levy of an anti-dumping duty in consonance
with the General Agreement on Tariffs and Trade (GATT), 1994, as
follows:
“23. A conspectus of the aforesaid authorities would lead to the
following conclusions:
G
(1) Article 51(c) of the Constitution of India is a directive
principle of State policy which states that the State shall
endeavour to foster respect for international law and treaty
obligations. As a result, rules of international law which are
not contrary to domestic law are followed by the courts in this
H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 489
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

country. This is a situation in which there is an international A
treaty to which India is not a signatory or general rules of
international law are made applicable. It is in this situation that
if there happens to be a conflict between domestic law and
international law, domestic law will prevail.
(2) In a situation where India is a signatory nation to an B
international treaty, and a statute is passed pursuant to the said
treaty, it is a legitimate aid to the construction of the provisions
of such statute that are vague or ambiguous to have recourse
to the terms of the treaty to resolve such ambiguity in favour
of a meaning that is consistent with the provisions of the treaty.
C
(3) In a situation where India is a signatory nation to an
international treaty, and a statute is made in furtherance of
such treaty, a purposive rather than a narrow literal construction
of such statute is preferred. The interpretation of such a statute
should be construed on broad principles of general acceptance
D
rather than earlier domestic precedents, being intended to carry
out treaty obligations, and not to be inconsistent with them.
(4) In a situation in which India is a signatory nation to an
international treaty, and a statute is made to enforce a treaty
obligation, and if there be any difference between the language
E
of such statute and a corresponding provision of the treaty, the
statutory language should be construed in the same sense as
that of the treaty. This is for the reason that in such cases
what is sought to be achieved by the international treaty is a
uniform international code of law which is to be applied by the
courts of all the signatory nations in a manner that leads to the F
same result in all the signatory nations.”
165. The conclusions in the aforestated paragraph have no direct
relevance to the facts at hand as the effect of section 90(2) of the Income
Tax Act, read with explanation 4 thereof, is to treat the DTAA provisions
as the law that must be followed by Indian courts, notwithstanding what G
may be contained in the Income Tax Act to the contrary, unless more
beneficial to the assessee.
For all these reasons therefore, these submissions of the learned
Additional Solicitor General are rejected.
H
490 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 166. At this juncture, it is also important to point out that vide
Circular No.10/2002 dated 09.10.2002, the Revenue, after referring to
section 195 of the Income Tax Act and deciding that a No Objection
Certificate from the Department would not be necessary if the person
making the remittance is to submit an undertaking along with the
certificate of an accountant to the Reserve Bank of India [“RBI”], has
B
itself made a distinction in the proforma of the certificate to be issued in
Annexure B to the aforesaid Circular, between remittances for royalties
(see Row No. 5) and remittances for supply of articles or computer
software (see Row No. 7), as follows:
ANNEXURE ‘B’
C
CERTIFICATE

1. Name and address of the beneficiary of the
remittance and the name of theforeign country to
which remittance isbeing made.
D 2. Amount of remittance is foreign currency
indicating the proposed date/month and bank
through whichremittance is being made.
3. Details of tax deducted at source, rate at which Foreign Indian
tax has been deducted and date of deduction.
Amount to be remitted ..... .....
E Tax deducted at source ..... ......
Actual Amount remitted ..... .....
Rate at which deducted ..... .....
Date of Deduction ...... .....
4. In case the remittance as indicated in
F (2) above is net of taxes, whether tax payable has
been grossed up? If so, computation thereof may
be indicated.
5. If the remittance is for royalties, fee for technical
services, interest, dividend, etc., the clause of the
relevant DTAA under which the remittance is
covered along with reasons and the rate at which
G tax is required to be deducted in terms of such
clause of the applicable DTAA.
6. In case that tax has been deducted at a rate lower
than the rate prescribed under the applicable
DTAA, the reasons thereof.

H
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT LTD v. 491
THE COMMISSIONER OF INCOME TAX [R.F. NARIMAN, J.]

7. In case remittance is for supply of articles or A
things (e.g., plant, machinery, equipment, etc.) or
computer software, please indicate :—
i. Whether there is any permanent establishment
in India through which the beneficiary of the
remittance is directly or indirectly carrying on
such activity of supply of articles or things?
B
ii. Whether such remittance is attributable to or
connected with suchpermanent establishment?
iii .If so, the amount of income comprised in
such remittance which isliable to tax.
iv. If not, the reasons in brief therefor.
8. In case remittance is on account ofbusiness C
income
please indicate :—
i. Whether such income is liable to taxin India?
ii. If so, the basis for arriving at the rateof deduction
of tax.
iii. If not, the reasons thereof. D
9. In case tax is not deducted at sourcefor any
other reason, details thereof.
(emphasis supplied)
167. The Revenue, therefore, when referring to “royalties” under
the DTAA, makes a distinction between such royalties, no doubt in the E
context of technical services, and remittances for supply of computer
software, which is then treated as business profits, taxable under the
relevant DTAA depending upon whether there is a PE through which
the assessee operates in India. This is one more circumstance to show
that the Revenue has itself appreciated the difference between the F
payment of royalty and the supply/use of computer software in the form
of goods, which is then treated as business income of the assessee taxable
in India if it has a PE in India.
CONCLUSION
168. Given the definition of royalties contained in Article 12 of the G
DTAAs mentioned in paragraph 41 of this judgment, it is clear that 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
H
492 SUPREME COURT REPORTS [2021] 2 S.C.R.

A 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 the assessees, have no application
in the facts of these cases.
169. Our answer to the question posed before us, is that the
B amounts paid by resident Indian end-users/distributors to non-resident
computer software manufacturers/suppliers, as consideration for the
resale/use of the computer software through EULAs/distribution
agreements, is not the payment of royalty for the use of copyright in the
computer software, and that the same does not give rise to any income
taxable in India, as a result of which the persons referred to in section
C 195 of the Income Tax Act were not liable to deduct any TDS under
section 195 of the Income Tax Act. The answer to this question will
apply to all four categories of cases enumerated by us in paragraph 4 of
this judgment.
170. The appeals from the impugned judgments of the High Court
D of Karnataka are allowed, and the aforesaid judgments are set aside.
The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside.
The appeals from the impugned judgments of the High Court of Delhi
are dismissed.

E Devika Gujral Appeals disposed of.

F

G

H