Facts of the Case

The Revenue filed appeals under Section 260A challenging the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Years 2005-06 and 2007-08. The dispute concerned whether payments received by Gracemac Corporation for licensing Microsoft software in India constituted “royalty” taxable in India.

The ITAT held that such payments were not taxable as royalty, leading the Revenue to challenge the decision before the Delhi High Court.

Issues Involved

  1. Whether licensing of software by a non-resident to Indian entities constitutes “royalty” under Section 9(1)(vi) of the Income Tax Act.
  2. Whether distribution and reproduction of software amount to transfer of copyright.
  3. Applicability of India-USA DTAA in determining taxability of software payments.

Petitioner’s (Revenue’s) Arguments

  • The ITAT erred in holding that software licensing is not royalty.
  • The distribution model involved making multiple copies of software, indicating transfer of copyright.
  • Therefore, payments should be taxed as royalty under Section 9(1)(vi) read with Article 12 of DTAA.

Respondent’s (Assessee’s) Arguments

  • The transaction only grants a non-exclusive license to use software and does not transfer any copyright.
  • Payments are for use of copyrighted articles, not for use of copyright itself.
  • The issue is already settled by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT.

Court’s 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:
    • Payments for software use under EULAs do not amount to royalty.
    • No transfer of copyright occurs when only usage rights are granted.
    • Such payments are not taxable in India and do not attract TDS under Section 195.
  • The High Court also relied on its earlier ruling in EY Global Services Ltd. vs. ACIT, reiterating that mere access to software without transfer of copyright does not constitute royalty.
  • The Court rejected Revenue’s arguments regarding:
    • Applicability limitation of Supreme Court judgment
    • Amendment to Section 9(1)(vi)
  • It held that:
    • DTAA provisions prevail if more beneficial to the assessee.
    • No substantial question of law arises.

Court Order

  • Appeals filed by the Revenue were dismissed.
  • The issue was decided in favour of the assessee.

Important Clarifications

  • Distinction between copyright and copyrighted article reaffirmed.
  • Licensing of software under EULA does not transfer ownership or copyright rights.
  • DTAA overrides domestic law where beneficial.
  • Supreme Court ruling applies broadly, not limited to specific categories of cases.

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

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