Facts of the Case

The Revenue filed appeals under Section 260A challenging the ITAT order dated 13 May 2019. The dispute pertained to whether the income earned by Microsoft Corporation from licensing of software in India constituted “royalty” taxable under Section 9(1)(vi) of the Income Tax Act read with Article 12 of the Indo-US DTAA.

The Revenue argued that Microsoft’s distribution model involved making multiple copies of software, which indicated transfer of copyright.

However, the Tribunal had held that such income was not taxable as royalty in India, leading to the present appeal before the Delhi High Court.

Issues Involved

  1. Whether payments received for licensing of software amount to “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961.
  2. Whether distribution of software involving multiple copies constitutes transfer of copyright.
  3. Whether such payments are taxable in India under the Indo-US DTAA (Article 12).

 Petitioner’s Arguments (Revenue)


  • The ITAT erred in holding that software licensing is not royalty.
  • The distribution model involved reproduction of software, implying transfer of copyright rights.
  • Therefore, payments should be taxed as royalty under Section 9(1)(vi).

Respondent’s Arguments (Microsoft Corporation)

  • The transactions merely granted a non-exclusive, non-transferable license to use software.
  • No rights under Section 14 of the Copyright Act were transferred.
  • The payments were for use of copyrighted article, not copyright itself.
  • Hence, it does not qualify as royalty under the Act or DTAA.

 Court Findings / Judgment


  • The Court held that the issue is no longer res integra due to the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT (2021).
  • The Supreme Court clarified that:
    • Payments for software use under EULA/distribution agreements do not amount to royalty.
    • No transfer of copyright occurs in such transactions.
    • Such payments are not taxable in India, and no TDS obligation arises under Section 195.
  • The High Court also relied on its own decisions in similar matters (EY Global Services cases).
  • Since the issue was already settled in favour of the assessee:
  • No substantial question of law arose

    • Distinction between “copyright” and “copyrighted article” is crucial.
    • Licensing of software:
      • Does not transfer ownership or copyright rights
      • Only grants limited usage rights
    • Even amendments to Section 9(1)(vi) cannot override beneficial provisions of DTAA.
    • Supreme Court ruling applies broadly across all categories of software transactions.

    Sections Involved

    • Section 9(1)(vi) – Royalty income
    • Section 195 – TDS on payments to non-residents
    • Section 260A – Appeal to High Court
    • Section 90(2) – DTAA override principle
    • Article 12 (Indo-US DTAA) – Taxation of royalties

    Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:1963-DB/MMH19052022ITA9402019_183549.pdf     

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