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 13 May 2019 for Assessment Years 1997–98 and 1999–2000.

The dispute centered on whether payments received by Microsoft Corporation for licensing its software products in India constituted “royalty” and were thus taxable in India under Section 9(1)(vi) of the Act read with Article 12 of the Indo-US DTAA.

The ITAT had ruled in favor of Microsoft, holding that such payments were not taxable as royalty in India.

Issues Involved

  1. Whether payments received for licensing of software products amount to “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961.
  2. Whether distribution of software involving making multiple copies constitutes transfer of copyright.
  3. Whether such payments are taxable in India under the Indo-US DTAA.
  4. Whether TDS under Section 195 is applicable on such payments.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the ITAT erred in holding that software licensing income was not taxable as royalty.
  • It was argued that the distribution model involved replication of software, indicating transfer of copyright.
  • Therefore, payments received by Microsoft should be treated as royalty under Section 9(1)(vi) and taxed accordingly 

Respondent’s Arguments (Assessee – Microsoft Corporation)

  • The assessee argued that the transactions merely granted a limited right to use software and did not transfer any copyright.
  • It relied on judicial precedents, especially the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT.
  • It was submitted that payments for use of software without transfer of copyright do not qualify as royalty.

Court’s Findings / Judgment

  • The issue is no longer res integra as it has been conclusively decided by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT.
  • The Supreme Court clarified that:
    • Payments made for use or resale of software under End User License Agreements (EULAs) do not amount to royalty.
    • There is no transfer of copyright, only a limited right to use the software.
    • Hence, such payments are not taxable in India and no TDS obligation arises under Section 195.
  • The High Court also relied on its own earlier judgments in similar matters involving EY entities.
  • Since the legal issue was already settled in favor of the assessee, no substantial question of law arose.

 Court Order

  • The appeals filed by the Revenue were dismissed.
  • The decision of the ITAT in favor of Microsoft Corporation was upheld.

Important Clarifications

  • Distinction between copyright and copyrighted article is crucial.
  • Mere use or resale of software does not amount to transfer of copyright.
  • DTAA provisions override domestic law if more beneficial to the assessee.
  • Amendments to Section 9(1)(vi) cannot override DTAA protections.
  • EULAs do not grant proprietary rights, hence payments are not royalty. 

Sections Involved

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

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

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