Facts of the Case

The case pertains to taxation of income received by the assessee, a Singapore-based entity, from the sale/supply of off-the-shelf software to various customers in India. During scrutiny assessment, the Assessing Officer treated the consideration received as “royalty” and made an addition of approximately ₹114 crore.

The assessee contended that it had not transferred any copyright in the software but merely supplied copyrighted articles (software products). The Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee, holding that such receipts do not qualify as royalty.

Issues Involved

  1. Whether consideration received from sale/supply of software constitutes “royalty” under Article 12(3) of the India–Singapore DTAA.
  2. Whether absence of transfer of copyright excludes such payments from royalty taxation.

Petitioner’s (Revenue’s) Arguments

  • The Revenue argued that payments received for software supply should be taxed as royalty income.
  • It was contended that the ITAT erred in holding that such receipts fall outside the definition of royalty under the DTAA.
  • The Revenue sought interference with the ITAT order, raising a substantial question of law before the High Court.

Respondent’s (Assessee’s) Arguments

  • The assessee submitted that it did not transfer any copyright rights, but only supplied software products.
  • Payments were for purchase of copyrighted articles and not for use of copyright.
  • Reliance was placed on the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified that such payments are not royalty.

Court’s Findings / Order

  • The Delhi High Court upheld the ITAT’s findings and ruled in favour of the assessee.
  • It was observed that:
    • No copyright was transferred by the assessee.
    • The transaction involved sale of software products, not licensing of copyright.
  • The Court relied on the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. to affirm that such receipts do not constitute royalty.
  • The Court held that no substantial question of law arises, and therefore dismissed the Revenue’s appeal.

Important Clarification

  • Payments for off-the-shelf software, where no copyright is transferred, cannot be treated as royalty under DTAA.
  • Distinction between:
    • Copyright rights (taxable as royalty)
    • Copyrighted articles (not royalty)
  • Reinforces binding precedent of Supreme Court in cross-border software taxation matters.

Sections Involved

  • Section 9(1)(vi), Income-tax Act, 1961 (Royalty)
  • Article 12(3), India–Singapore DTAA
  • Judicial Precedent: Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT (432 ITR 471)

 

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/60821122023ITA8022023_010827.pdf

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