Facts of the Case

The present appeal was filed by the Revenue before the Delhi High Court against the order of the Income Tax Appellate Tribunal dated 11.01.2023 for Assessment Year 2015–16.

The respondent-assessee, Kony Inc., had entered into End User Licence Agreements (EULA) with customers and received:

  • ₹7.27 crore towards software licence fees
  • ₹1.23 crore towards Annual Maintenance Charges (AMC)

The Assessing Officer (AO):

  • Treated licence fees as Royalty under Section 9(1)(vi) of the Income Tax Act, 1961 and Article 12(3) of the India–USA DTAA
  • Treated AMC receipts as Fees for Technical Services (FTS)/Fees for Included Services (FIS) under Section 9(1)(vii) and Article 12(4) of DTAA

The ITAT deleted both additions, leading to the present appeal.

Issues Involved

  1. Whether consideration received under EULA for use of software constitutes Royalty under Section 9(1)(vi) and Article 12 of India–USA DTAA?
  2. Whether Annual Maintenance Charges (AMC) are taxable as FTS/FIS under Section 9(1)(vii) and Article 12 of DTAA?

Petitioner’s (Revenue) Arguments

  • The licence granted to customers amounted to transfer of rights in software, thereby constituting royalty income.
  • AMC services were ancillary and subsidiary to software usage, hence taxable as FTS/FIS.
  • The ITAT erred in ignoring statutory provisions and DTAA interpretation.

Respondent’s (Assessee) Arguments

  • The licence granted was non-exclusive and non-transferable, with no transfer of copyright.
  • Customers were not given access to source code; only limited usage rights were granted.
  • AMC services did not “make available” any technical knowledge or skill, hence not taxable as FTS/FIS under DTAA.

Court’s Findings / Order

1. Software Licence Not Royalty

  • The issue is squarely covered by the Supreme Court judgment in
    Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT
  • No copyright was transferred to customers; only limited usage rights were granted.
  • Therefore, receipts cannot be treated as Royalty under Section 9(1)(vi) or DTAA.

2. AMC Charges Not FTS/FIS

  • Since licence fee is not royalty, AMC cannot be treated as ancillary or subsidiary.
  • The “make available” condition under Article 12(4)(b) was not satisfied.
  • No technical knowledge, skill, or know-how was transferred to customers.

3. No Substantial Question of Law

  • The Court held that no substantial question of law arises.
  • Appeal was dismissed.

 

Important Clarifications

  • Mere use of software under EULA does not amount to transfer of copyright.
  • Payments for software usage are not royalty if rights are restricted.
  • AMC/support services are not FTS/FIS unless they “make available” technical knowledge.
  • DTAA provisions override domestic law where beneficial.

Sections & Legal Provisions Involved

  • Section 9(1)(vi) – Royalty
  • Section 9(1)(vii) – Fees for Technical Services
  • Article 12(3) – Royalty (India–USA DTAA)
  • Article 12(4) – Fees for Included Services (FIS)
  • Concept of “Make Available” under DTAA

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS30112023ITA6692023_112421.pdf

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