Facts of the Case

The Revenue filed appeals under Section 260A of the Income Tax Act challenging the order of the Income Tax Appellate Tribunal (ITAT). The dispute pertained to taxability of income earned by non-resident entities (Alcatel Lucent group companies) from supply of software embedded in hardware equipment to customers in India.

The Revenue contended that such receipts should be treated as “royalty” under the Income Tax Act as well as the India-France Double Taxation Avoidance Agreement (DTAA). Additionally, the issue of levy of interest under Section 234B on such non-resident entities was raised.

Issues Involved

  1. Whether income from supply of software embedded in hardware amounts to “royalty” under Section 9(1)(vi) and Article 12 of DTAA?
  2. Whether interest under Section 234B is leviable where tax is deductible at source under Section 195?

Petitioner’s Arguments (Revenue)

  • The Revenue argued that software supplied along with hardware constitutes royalty as it involves use of intellectual property.
  • It was contended that such payments fall within the ambit of Section 9(1)(vi) and Article 12 of DTAA.
  • Further, it was argued that non-resident entities are liable to pay advance tax and consequently interest under Section 234B should be levied.

Respondent’s Arguments (Assessee)

  • The assessee contended that supply of software embedded in hardware is a sale of copyrighted article and not transfer of copyright.
  • Hence, such income cannot be treated as royalty.
  • It was also argued that where tax is deductible at source under Section 195, the liability to pay advance tax does not arise, and therefore interest under Section 234B is not applicable.

Court Findings / Judgment

  • The Delhi High Court held that the issue of taxability of software is squarely covered by the Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, wherein it was held that such payments do not constitute royalty.
  • On the issue of interest under Section 234B, the Court relied on its earlier judgment in DIT v. GE Packaged Power Inc., holding that no interest is leviable where tax is deductible at source.
  • The Court concluded that no substantial question of law arises in the present appeals.
  • Accordingly, all appeals filed by the Revenue were dismissed.

Important Clarifications

  • Supply of software embedded in hardware does not automatically qualify as royalty.
  • Non-residents are not liable for interest under Section 234B where tax is deductible under Section 195.
  • Judicial precedents from the Supreme Court are binding and decisive in such matters.

Sections Involved

  • Section 9(1)(vi) – Income Tax Act, 1961
  • Section 195 – Withholding Tax
  • Section 234B – Interest for Default in Payment of Advance Tax
  • Section 260A – Appeal to High Court
  • Article 12 – India-France DTAA

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:2232-DB/MMH29072021ITA1452020_125640.pdf

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