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) for Assessment Years 2005-06 and 2007-08. The dispute centered around whether payments received by the respondent, Gracemac Corporation, for licensing Microsoft software in India constituted “royalty” taxable in India.

The Revenue contended that the distribution model involved replication of software and thereby amounted to transfer of copyright.

Issues Involved

  1. Whether consideration received for licensing of software products amounts to “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 distribution of software involves transfer of copyright or merely sale/use of copyrighted article.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in holding that software licensing income is not royalty.
  • The distribution arrangement involved making multiple copies of software, indicating transfer of copyright.
  • Hence, payments should be taxable in India as royalty under the Act and DTAA.

Respondent’s Arguments (Assessee)

  • The transaction only granted a non-exclusive license to use software, without transferring any copyright.
  • Payments were for use of copyrighted articles, not for use of copyright itself.
  • Relied on the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT (2021).

Court’s Findings / Order

  • The issue is no longer res integra in light of the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd..
  • Payments made for purchase/resale/use of software through EULAs do not constitute royalty.
  • No transfer of copyright occurs when only a right to use software is granted.
  • Such payments do not give rise to taxable income in India, and no TDS is required under Section 195.
  • Since the issue is already settled in favour of the assessee, no substantial question of law arises.
  • Accordingly, appeals filed by the Revenue were dismissed.

Important Clarification

  • Distinction between “copyright” and “copyrighted article” reaffirmed.
  • A non-exclusive license under an End User License Agreement (EULA) does not transfer copyright.
  • Provisions of DTAA override domestic law where more beneficial to the assessee.
  • Amendments to Section 9(1)(vi) cannot override treaty provisions if adverse to the taxpayer.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:851-DB/MMH07032022ITA322022_194658.pdf

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