Facts of the Case

  • The case pertains to Assessment Year 2012–13.
  • The respondent/assessee, a company incorporated in Israel, received consideration from Indian entities, including Wipro Ltd., for the sale of software.
  • The Assessing Officer (AO) treated the amount received (₹48,86,72,586/-) as royalty income.
  • The AO invoked:
    • Section 9(1)(vi) of the Income Tax Act, 1961, and
    • Article 12(3) of the India-Israel Double Tax Avoidance Agreement (DTAA).
  • The Income Tax Appellate Tribunal (ITAT) held that the sale involved “off-the-shelf software” and did not constitute royalty.
  • The Revenue filed an appeal before the Delhi High Court challenging the ITAT’s decision.

Issues Involved

  1. Whether consideration received for sale of 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 sale of off-the-shelf software involves transfer of copyright or merely sale of copyrighted article.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that:
    • Payments received for software amounted to royalty income.
    • The software supplied may be custom-built, thus attracting royalty provisions.
    • The agreement with Wipro Ltd. included elements such as training services, indicating a broader licensing arrangement.

Respondent’s Arguments (Assessee)

  • The assessee argued that:
    • The transaction involved sale of standard/off-the-shelf software.
    • There was no transfer of copyright, only a sale of copyrighted product.
    • Therefore, the payment cannot be classified as royalty under Indian tax law or DTAA.

Court Order / Findings

  • The Delhi High Court upheld the ITAT’s ruling and held:
    • The software sold was off-the-shelf, not involving transfer of copyright.
    • Hence, the consideration does not qualify as royalty.
    • The Tribunal correctly relied on the Supreme Court judgment in:
      • Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT
    • No substantial question of law arose for consideration.
  • The appeal filed by the Revenue was dismissed.

Important Clarification by the Court

  • Even though a review petition against the Supreme Court judgment in Engineering Analysis was pending:
    • The High Court held that binding precedent must still be followed.
  • The Court refused to entertain new arguments (like training services or custom software) not raised before lower authorities.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/60808082023ITA4342023_173336.pdf

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