Facts of the Case

  • The assessee, M/s CSG International Ltd., was incorporated in the United Kingdom and engaged in software-related services.
  • For AY 2003–04, it declared income including fees for technical services.
  • The assessee entered into agreements with Indian entities such as Bharti, Ericsson, and Motorola for licensing software.
  • Two types of agreements existed:
    • Limited, non-exclusive, non-transferable license with restricted sub-licensing rights
    • Direct usage licenses without sub-licensing
  • The Assessing Officer treated payments for software as royalty, alleging transfer of copyright rights. 

Issues Involved

  1. Whether payments received for supply of software constitute “royalty” under the Income Tax Act and DTAA.
  2. Whether granting a limited license to use software amounts to transfer of copyright.
  3. Applicability of Supreme Court ruling in software taxation matters.

Petitioner’s (Revenue’s) Arguments

  • The Revenue contended that payments received were for granting rights in software, amounting to royalty.
  • It was argued that the license enabled use of process embedded in software, thus falling within royalty definition.

Respondent’s (Assessee’s) Arguments

  • The assessee argued that only a limited right to use software was granted, without transfer of copyright.
  • The transaction involved sale of copyrighted article, not copyright itself.
  • Relied on Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT to assert that such payments are not royalty.

Court’s Findings / Order

  • The Tribunal had correctly applied the Supreme Court judgment in Engineering Analysis.
  • The High Court observed:
    • A non-exclusive, non-transferable license does not grant rights in copyright.
    • Distinction exists between right to use software and right to reproduce software.
    • Sale of shrink-wrapped/off-the-shelf software does not amount to royalty.
  • It was admitted that what was sold was copyrighted software, not copyright itself.
  • The Court held that such payments are not taxable as royalty under India-UK DTAA.
  • No substantial question of law arose; hence, the appeal was dismissed.

Important Clarifications

  • Licensing of software for use, without transfer of copyright rights, does not constitute royalty.
  • The ruling reinforces the principle laid down in Engineering Analysis.
  • Payments for shrink-wrapped software are treated as purchase of goods, not royalty income.
  • DTAA provisions override domestic law where beneficial to the assessee.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS29082023ITA4872023_124637.pdf

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