Facts of the Case

The present appeal was filed by the Revenue challenging the order dated 31 January 2022 passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2017–18.

The dispute arose regarding the taxability of income earned by the respondent, M/s Nagravision S.A., from the supply of Conditional Access System (CAS) and middleware products to Indian customers.

The ITAT held that such income did not qualify as “royalty” under the Income Tax Act, 1961 and the India–Switzerland Double Taxation Avoidance Agreement (DTAA), relying on earlier decisions in the assessee’s own case and the Supreme Court ruling in Engineering Analysis Centre for Excellence Pvt. Ltd. vs. CIT.

Issues Involved

  1. Whether income arising from supply of CAS and middleware products to Indian customers constitutes “royalty” under:
    • Section 9(1)(vi) of the Income Tax Act, 1961
    • Article 12(3) of the India–Switzerland DTAA
  2. Whether the ITAT was justified in following the Supreme Court judgment in Engineering Analysis Centre for Excellence Pvt. Ltd.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in holding that the income from supply of software products (CAS and middleware) is not taxable as royalty.
  • Such income falls within the ambit of Section 9(1)(vi) of the Act and Article 12(3) of the DTAA.
  • The Revenue contended that it has not accepted the Supreme Court ruling in Engineering Analysis and has filed a review petition before the Apex Court.

Respondent’s Arguments (Assessee)

  • The issue is squarely covered by:
    • ITAT’s own earlier decision in assessee’s case (AY 2016–17)
    • Supreme Court judgment in Engineering Analysis Centre for Excellence Pvt. Ltd. vs. CIT
  • The supply of software products does not amount to transfer of copyright, and hence cannot be classified as royalty.

Court’s Findings / Order

  • The Delhi High Court observed that the issue raised in the present appeal is fully covered by the Supreme Court decision in Engineering Analysis Centre for Excellence Pvt. Ltd. vs. CIT.
  • The Court noted that although a review petition against the said judgment is pending, no stay has been granted by the Supreme Court.
  • Relying on precedents such as:
    • Kunhayammed vs. State of Kerala
    • Shree Chamundi Mopeds Ltd. vs. Church of South India Trust Association
      the Court held that the binding nature of the Supreme Court judgment continues.

Final Order

  • No substantial question of law arises.
  • The appeal filed by the Revenue was dismissed.

Important Clarification

  • Mere pendency of a review petition does not dilute or stay the binding effect of a Supreme Court judgment.
  • Supply of software (without transfer of copyright) does not constitute royalty under:
    • Section 9(1)(vi)
    • Relevant DTAA provisions

Sections Involved

  • Section 9(1)(vi) – Income Tax Act, 1961 (Royalty)
  • Article 12(3) – India–Switzerland DTAA

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:3800-DB/MMH21092022ITA3482022_184933.pdf

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