Engineering Analysis Centre of Excellence Pvt Ltd v. CIT

Holding

Payments for shrink-wrapped software licenses by Indian end-users to foreign software providers are not royalty under the relevant tax treaty, but business income, and not taxable in India in the absence of a PE.

Facts

Indian companies imported standardized software from foreign providers and made payments. The Indian Revenue treated the payments as royalty subject to withholding.

Reasoning

Justice Nariman held that end-user license arrangements transferred a right to use the copyrighted article rather than the copyright itself, and therefore did not fall within the treaty's royalty definition. The decision substantially limits royalty characterization for cross-border software payments.