Facts of the Case

The respondent/assessee, Cognyte Technologies Israel Ltd., a company incorporated in Israel, received consideration from Indian customers, including Wipro Ltd., for the sale of software during Assessment Year 2011–12.

The Assessing Officer proposed to treat such consideration as “royalty”, invoking:

  • Section 9(1)(vi) of the Income Tax Act, 1961
  • Article 12(3) of the India–Israel Double Taxation Avoidance Agreement (DTAA)

The Income Tax Appellate Tribunal (ITAT), however, held that the sale involved off-the-shelf software and did not result in transfer of copyright, and thus could not be taxed as royalty.

Aggrieved, the Revenue filed an appeal before the High Court.

Issues Involved

  1. Whether consideration received for sale of off-the-shelf software qualifies as royalty under:
    • Section 9(1)(vi) of the Income Tax Act, 1961
    • Article 12(3) of the India–Israel DTAA
  2. Whether such income is taxable in India in absence of transfer of copyright.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that:
    • The total consideration received (₹37.74 crores approx.) should be treated as royalty income.
    • The transaction involved custom-built software, thereby attracting royalty provisions.
    • Reliance was placed on DTAA provisions and domestic law to tax such receipts.

Respondent’s Arguments (Assessee)

  • The assessee maintained that:
    • The software sold was standard/off-the-shelf software, not customized.
    • There was no transfer of copyright, only a limited license for use.
    • Hence, the consideration cannot be characterized as royalty.
    • The issue is already settled by the Supreme Court in
      Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT.

Court Findings / Order

The Delhi High Court held:

  • The Tribunal correctly concluded that:
    • There was no transfer of copyright in the sale of off-the-shelf software.
    • Therefore, consideration received cannot be treated as royalty.
  • The Court relied on the binding precedent of the Supreme Court in Engineering Analysis.
  • The Revenue failed to establish:
    • That the software was custom-built, or
    • That relevant arguments were raised before lower authorities.
  • Consequently:
    • No substantial question of law arose
    • The appeal filed by the Revenue was dismissed

Important Clarifications

  • Sale of off-the-shelf software amounts to sale of copyrighted article, not transfer of copyright.
  • Mere licensing for use does not constitute royalty.
  • New arguments not raised before lower authorities cannot be introduced at appellate stage.
  • Pendency of review petition in Supreme Court does not dilute binding precedent.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/60808082023ITA4332023_173237.pdf

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