# ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED v. THE COMMISSIONER OF INCOME TAX & ANR

- **Citation:** [2021] 2 S.C.R. 321
- **Court:** Supreme Court of India
- **Decided:** 2021-03-02
- **Case number:** Civil Appeal Nos. 8733-8734 of 2018
- **Bench:** R. F. Nariman, Hemant Gupta, B. R. Gavai
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/engineering-analysis-centre-of-excellence-private-limited-v-the-commissioner-of-34837
- **Pages:** 172

## Headnote

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 nonresident 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.
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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
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
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
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
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
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
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 - Mean

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[2021] 2 S.C.R. 321
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 nonresident 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.
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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
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
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
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
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
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
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
that "copyright" means the "exclusive right", subject to the
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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
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.
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 enduser 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)
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
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
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
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
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
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"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
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 -
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
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
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.
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
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
total income of a person who is a non-resident, includes all income
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from whatever source derived, which accrues or arises or is
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
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
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
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
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
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
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
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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
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
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
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
made if the nonresident assessee is liable to pay tax under the
provisions of the Income Tax Act in the first place. [Para 31][364E-F]
PILCOM v. CIT, West Bengal VII, 2020 SCC Online
SC 426 - held inapplicable.
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
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
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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 14(b) specifically
speaks of two sets of acts - the seven acts enumerated in subclause (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
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 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,
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
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
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
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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
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
"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
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. [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
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]
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
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clarified by CBDT 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. [Paras 42, 43] [376-A-C, G-H]
8. A reading of the distribution agreement would show that
what is granted to the distributor is only a non-exclusive, nontransferable 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 enduser. 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
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 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
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
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
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
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THE COMMISSIONER OF INCOME TAX
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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
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
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
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,
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.
10. DEFINITION OF ROYALTY IN THE DTAAs VIS-ÀVIS 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
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
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which would not amount to income of the recipient chargeable
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
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
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
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,
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]
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
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
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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
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]
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
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
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
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
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 -
approved.
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12. When, under a non-exclusive licence, an end-user gets
the right to use computer software in the form of a CD, the enduser 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
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 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
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,
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
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
SCR 79 - relied on
Director of Income Tax v. Ericsson A.B., (2012) 343
ITR 470; Director of Income Tax v. Nokia Networks
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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.
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
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
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,
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
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
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
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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 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,
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
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]
Copinger and Skone James on Compyright (14th
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;
UseSoft GmbH v. Oracle International Corp. (Case C128/11) - 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
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
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,
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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
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
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,
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
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
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
of the said computer programme and consequent transfer of the
reproduced computer programme to subsequent acquirers/endusers. 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
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the book once and for all. This may not be so in the case of 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
otherwise, it becomes clear that any sale by the author of a
computer software to a distributor for onward sale to an enduser, 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
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
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
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]
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
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)
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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
contained in any of the DTAAs in these appeals, in accordance
with its position.