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 core issue pertained to 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 does not qualify as “royalty” under the Income Tax Act, 1961, relying on earlier decisions in the assessee’s own case as well as the Supreme Court ruling in Engineering Analysis Centre for Excellence Pvt. Ltd.

Issues Involved

  1. Whether income derived from supply of software products (CAS and middleware) to Indian customers constitutes “royalty”.
  2. Whether such income is taxable under:
    • Section 9(1)(vi) of the Income Tax Act, 1961
    • Article 12(3) of the India–Switzerland DTAA

Petitioner’s Arguments (Revenue)

  • The ITAT erred in concluding that income from supply of CAS and middleware products is not “royalty”.
  • Such payments fall within the definition of royalty under Section 9(1)(vi) of the Act.
  • The same should also be taxable under Article 12(3) of the India-Swiss DTAA.
  • The Revenue further submitted that it has not accepted the Supreme Court judgment in Engineering Analysis and has filed a review petition.

Respondent’s Arguments (Assessee)

  • The issue is squarely covered by:
    • ITAT’s decision in assessee’s own case for AY 2016–17
    • Supreme Court ruling in Engineering Analysis Centre for Excellence Pvt. Ltd. vs. CIT
  • The supply of software does not amount to transfer of copyright but merely sale of copyrighted articles.
  • Therefore, such receipts cannot be classified as royalty.

Court’s Findings / Order

  • The Delhi High Court held that the issue is fully covered by the Supreme Court judgment in Engineering Analysis.
  • It was noted that although a review petition is pending, there is no stay on the operation of the Supreme Court judgment.
  • Reliance was also placed on precedents including:
    • Kunhayammed & Others vs. State of Kerala
    • Shree Chamundi Mopeds Ltd. vs. Church of South India Trust Association
  • Accordingly, the Court held:
    • No substantial question of law arises
    • The appeal filed by the Revenue is dismissed

Important Clarification

  • Pending review petitions do not dilute or stay the binding nature of a Supreme Court judgment unless expressly stayed.
  • Software supply transactions, where no copyright is transferred, cannot be treated as royalty.
  • The ruling reinforces the legal position settled in Engineering Analysis.

Sections Involved

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