Facts of the Case

The petitioner, Openwave Mobility Inc., a tax resident of the United States, filed a writ petition challenging the denial of a certificate under Section 197 of the Income Tax Act for deduction of tax at a nil rate.

The petitioner entered into a Software License Agreement dated 20.02.2017 with Reliance Jio Infocomm Limited (RJIL), granting a non-exclusive and non-transferable license to use software in India.

The petitioner contended that:

  • It is a non-resident under the Act.
  • It has no permanent establishment (PE) or business connection in India.
  • The license granted does not transfer copyright but merely allows usage.
  • Therefore, the income received is not taxable in India.

Issues Involved

  1. Whether the petitioner is entitled to a nil withholding tax certificate under Section 197?
  2. Whether software license fees received by a non-resident constitute royalty or business income?
  3. Whether such income is taxable in India in the absence of a Permanent Establishment (PE)?
  4. Whether the Assessing Officer failed to consider binding precedents and DRP findings?

Petitioner’s Arguments

  • The petitioner argued that the license agreement only permits use of software without transfer of copyright, hence it cannot be treated as royalty.
  • Relied on the Dispute Resolution Panel (DRP) order dated 17.05.2022, which held that such receipts should be treated as business income.
  • Placed reliance on the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT, which clarified that software licensing in such cases does not amount to royalty.
  • Since there is no PE in India, the income is not taxable under Article 7 of the DTAA.

 Respondent’s Arguments

  • The Revenue contended that the impugned order was passed in accordance with law.
  • However, it fairly conceded that the Assessing Officer must consider:
    • The DRP findings
    • The Supreme Court judgment in Engineering Analysis case

 Court’s Findings / Order

  • The impugned order dated 29.04.2022 was set aside.
  • The matter was remanded back to the concerned authority for fresh consideration.
  • The authority must:
    • Consider the DRP order dated 17.05.2022
    • Apply the ratio of Engineering Analysis judgment
  • The petitioner must be given an opportunity of hearing.
  • The decision must be rendered expeditiously within a specified timeline.

Important Clarifications by the Court

  • Even if formal notice was not issued earlier, the Revenue is not absolved from filing a counter-affidavit.
  • The authority must apply judicial precedents and quasi-judicial findings while deciding Section 197 applications.
  • Software licensing transactions must be analyzed in light of copyright transfer vs mere usage rights.
  • In absence of PE, business income of non-residents is not taxable in India under DTAA.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/59009012023CW136592022_202451.pdf

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