Engineering Analysis Centre – Supreme Court of India finds that consideration for software paid by Indian resellers was not royalties for Canadian (and other) Treaty purposes

The OECD Commentary on the royalty article (Art. 12) states inter alia that “where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software),” such payments generally “would be dealt with as business profits in accordance with Article 7” rather than as royalties under Art. 12 – and that this would be so “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).”

Nariman J considered a multitude of appeals, principally involving consideration paid to non-residents (who were respective Treaty residents in 18 different countries including Canada) by: Indian end-users for the purchase of software (for example, a non-exclusive licence to use Samsung software on the end-user’s Samsung mobile device, with a prohibition against making the software available to any other person); or Indian (or non-Indian) distributors for resale to Indian end-users or other Indian distributors.

Although India (as an OECD non-member) had expressed a reservation, regarding the above and other germane Commentary passages, “that some of the payments referred to may constitute royalties,” Nariman J nonetheless found that Indian assessees could:

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 the absence of judgments of municipal courts clarifying the same, or in the event of conflicting municipal decisions.

Accordingly, none of the numerous payments in issue were subject to Indian withholding tax.

Neal Armstrong. Summary of Engineering Analysis Centre of Excellence Private Limited v. The Commissioner of Income Tax & Anr., Civil Appeal Nos. 8733-8734 of 2018, 2 March 2021(Supreme Court of India) under Treaties – Income Tax Conventions – Art. 12.