Payment received by EY in the UK for providing access to computer software to Indian member firms does not constitute taxable royalties: Delhi HC

While quashing the order of the Authority of Advance Ruling (AAR), the Delhi High Court held that the sum received by EY in the UK for providing access to computer software to Indian Member firms does not amount to Royalty, which is taxed.

EY Global Services Ltd., the petitioner, is a limited liability corporation that provides technology and other support services, as well as software licences, to member firms of the EY network in various locations across the world. The Ernst & Young brand is used by all member firms, including EYGSL (UK) (EY). The Petitioner – EYGSL (UK) – has contracts with numerous third-party providers for the purchase of various software. It has also agreed to provide support services and/or deliverables to EY member firms under a contract.

The EYGBS (India) Private Limited [hence the “EYGBS (India)] is an Indian firm that provides back-office support and data processing services. It has entered into an agreement with EYGSL (UK) under which it receives the “Right to Benefit from EYGSL Deliverables and/or Services” (UK). The contested ruling refers to the specific services listed in the Services Schedule annexed to the Memorandum of Understanding and provided by EYGSL (UK) under the Service Agreement and the MOU established between itself and the EYGBS (India).

In this case, the EYGBS (India) merely receives the right to use the software procured by the EYGSL (UK) from third-party vendors under the terms of the Service Agreement and the MOU. As a result, the consideration paid for the use of the same cannot be considered royalty, as the Supreme Court held in the Engineering Analysis Centre case. The rights obtained by the EYGSL (UK) from third-party software manufacturers are irrelevant in determining the same. The Agreement between the EYGSL (UK) and the EYGBS is significant (India). Because it does not confer any right to transfer the copyright in the software, it does not fall within the purview of the term “royalty,” as determined by the Supreme Court in the Engineering Analysis Centre case.

The division bench of Justice Navin Chawla and Justice Manmohan held that the payment received by EYGSL (UK) for providing access to computer software to its EY Network member firms located in India, namely EYGBS (India), does not amount to royalty liable to be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA.

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