Engineering Analysis Centre Of Excellence Private Limited V. The Commission Of Income Tax And Anr: Raising More Questions Than Answering

The Supreme Court in “Engineering Analysis Centre of Excellence Private Limited v. The Commission of Income Tax and Anr.”[1] dealt with the classification of the payments under the distribution agreements or the end-user license agreements (EULA). The moot question before the Court was that can these payments amount to the royalty as provided under Section 9(i)(vi) of the Income Tax Act, 1961 and can be taxable in India for foreign residents.

RoyaltyThe Court took into consideration the various provisions of the Copyright Act, 1957 and recognized the concept that a copyright in the work is different from a copy of the copyrighted work. The Court held that the reproduction and the use are two distinct things i.e. when someone gives the right to reproduce then it may amount to the transfer or the license[2] but it is not the right to use. The Court concluded by holding that a license as stated in EULA is a “sale of a physical object which contains an embedded computer programme”.

ANALYSIS

According to my analysis the judgment raises engrossing questions and ironies as well. The very first question is what is the purpose that EULA is going to serve? The EULAs that are considered in the judgment allow the right to use of the software in a limited way and prohibit the end-users from making the copies or the software’s reproduction in any manner. The former part does not come under the exercise of the copyright. The latter part is unnecessary due to the fact that the end-users who make the copies of the software can be sued for infringement under the Copyright Act.[3] The question at issue that remains unanswered is that do the copyright owners in the software need a EULA in respect to their rights? A simple declaration that declares that this is not a license to copyright is sufficient one or not was not even considered by the Court.

Secondly, the contractual restriction in the EULA that prevents the infringement can also give birth to the cause of action for the breach of the contract that is independent from the statutory right of the infringement. If we assume that this right is of some importance then the source of the right can be pertinent to appreciate. The decision of the Supreme Court that transaction is a sale of the goods and the EULA is an exercise of the good’s owner’s right to sell the said goods, when viewed from the lens of the complete contractual or sale of goods elevates a new question again that is it possible for an owner in the sale transaction to put up the conditions that digress form such title transfer. The title transfer is a requisite for the sale which includes the complete transfer of all the benefits of the ownership over what has been sold. The title transfer cannot be done half way. In cases where the copies that are made violate other laws such as the Copyright Act etc. then the remedy for such a violation lies there. The pertinent question that arises after the decision is that is it even logical to term something as a sale when there are restrictions imposed on the incident as well as on the benefits of the ownership. The question that remains unanswered is whether it is a sale, a lease or hiring. It can be inferred from the judgment that the rights of the parties qua the specific sold copy will be governed by the Sale of the Goods Act or the Contract Act.

Thirdly, the product can be covered either by the patents or by the copyrights. The word use is dealt by the Patent Act[4] so a EULA that gives the permission to use a software product will be a license under the Patent Act. The question did not come up in regard to this but it implies that the tax authorities can map the patents with the future software cases. This statement sounds a bit hypothetical but no one knows what the future has in store in relation to this question.

Fourthly, in today’s world most of the softwares are available directly by the copyright owner through online sales. Even these are sold under the EULA which carries the similar concept i.e. the software can be used in one or more than one machine and prohibits the user to make the copies. An end user by the mere act of downloading is creating the software’s copy in his machine. A copy of the software would only be considered as the lawful copy which is downloaded under the EULA[5] and the sale of the copy through the download will be termed as an exercise of the copyright. Hence, in my view the conclusion will be very different in these cases then.

Even if the copyright owner sells the digital copy to the distributor who further sells it to an end user then too it will still be regarded as an exercise of the copyright because the distributor is allowing the end-use to make his own copy on his hard drive.

Hence, the judgment raises many interesting questions and ironies that still need the intervention of the Apex Court.

CONCLUSION

The judgment settled a long-running contentious issue over how payments made by Indian customers to non-resident suppliers for the use or resale of computer software should be characterised, providing much-needed tax certainty on the issue, but also raised many interesting questions and ironies that poses a lot of questions which need clarity and intervention of the Apex Court like what purpose that EULA is going to serve, and many other questions as discussed in the analysis.

Author: Sukrati Gupta – student of SVKM’s NMIMS Kirit P Mehta School of Law (Mumbai), in case of any queries please contact/write back to us via email chhavi@khuranaandkhurana.com or at IIPRD.

References:

[1] LL 2021 SC 124.

[2] Section 30 of the Copyright Act, 1957.

[3] Section 14 r/w Section 51 of the Copyright Act, 1957.

[4] Section 48 of the Patents Act, 1970.

[5] Section 14(1)(b) of the Copyright Act, 1957.

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