Facts of the Case

The present appeals were filed by the Revenue under Section 260A of the Income Tax Act, 1961 challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 13th May 2019 for Assessment Years 1997-98 and 1999-2000.

The dispute centered on whether the income earned by Microsoft Corporation from licensing of software products in India constituted “royalty” under Section 9(1)(vi) of the Income Tax Act read with Article 12 of the India–USA DTAA.

The Revenue contended that the distribution model involved reproduction of software, thereby implying transfer of copyright. 

Issues Involved

  1. Whether consideration received by a non-resident for licensing of computer software in India constitutes “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961.
  2. Whether such payments are taxable in India under Article 12 of the India–USA DTAA.
  3. Whether software distribution involving multiple copies amounts to transfer of copyright. 

Petitioner’s Arguments (Revenue)

  • The ITAT erred in holding that software licensing income is not taxable as royalty.
  • The distribution model involved making multiple copies of software, indicating transfer of copyright rights.
  • Therefore, payments received should be classified as royalty under Section 9(1)(vi) and taxed in India. 

Respondent’s Arguments (Microsoft Corporation)

  • The licensing agreements merely granted limited rights to use software, without transferring any copyright.
  • The transactions involved sale of copyrighted articles, not transfer of copyright itself.
  • The issue is already settled by the Supreme Court in favor of the assessee.

 Court’s Findings / Order

  • The issue is no longer res integra and is conclusively covered by the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT (2021).
  • The Supreme Court clarified that payments for use/resale of software through EULAs or distribution agreements do not amount to royalty.
  • Such payments do not give rise to taxable income in India and no TDS obligation arises under Section 195.
  • The High Court also relied on its earlier rulings in similar matters (EY Global Services cases).
  • Since the legal issue stood settled, no substantial question of law arose.   

Important Clarification

  • A non-exclusive license allowing use of software does not amount to transfer of copyright.
  • There is a clear distinction between:
    • Copyright (ownership rights under Section 14 of the Copyright Act), and
    • Copyrighted article (product containing embedded software).
  • DTAA provisions prevail where more beneficial to the assessee under Section 90(2) of the Act.

 Sections Involved


  • Section 9(1)(vi), Income Tax Act, 1961 (Royalty)
  • Section 195, Income Tax Act, 1961 (TDS on payments to non-residents)
  • Section 260A, Income Tax Act, 1961 (Appeals to High Court)
  • Section 90(2), Income Tax Act, 1961 (DTAA override)
  • Article 12, India–USA DTAA

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