Facts of the Case

The present appeals were filed by the Revenue under Section 260A of the Income Tax Act, 1961 against the orders of the Income Tax Appellate Tribunal. The core issue pertained to the taxability of income arising from the supply of software embedded in hardware equipment or otherwise supplied to customers in India by foreign entities such as Alcatel Lucent France and its associated entities.

Additionally, the Revenue challenged the Tribunal’s findings regarding the non-applicability of interest under Section 234B in cases where tax was allegedly deductible at source under Section 195.

Issues Involved

  1. Whether income from supply of software embedded in hardware or otherwise supplied to Indian customers constitutes “royalty” under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA?
  2. Whether interest under Section 234B is leviable where payments are subject to withholding tax under Section 195?

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the consideration received for software supplied along with hardware equipment or otherwise amounted to “royalty” under the provisions of Section 9(1)(vi) as well as the DTAA.
  • It was further argued that where tax was deductible at source under Section 195, failure to pay advance tax would attract interest liability under Section 234B.

Respondent’s Arguments (Assessee)

  • The Respondent entities did not appear; however, their position as upheld by the Tribunal was that such software transactions did not constitute royalty.
  • It was also held that where tax is deductible at source, the liability to pay advance tax and consequently interest under Section 234B does not arise.

Court Findings / Order

  • The Delhi High Court held that both issues raised by the Revenue were already covered against it by binding judicial precedents.
  1. On Software Royalty Issue
    The Court relied on the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT [2021] 432 ITR 471 (SC), holding that such software payments do not constitute royalty.
  2. On Interest under Section 234B
    The Court followed its earlier decision in DIT v. GE Packaged Power Inc. [2015] 373 ITR 65 (Del), holding that where tax is deductible at source under Section 195, no interest under Section 234B is leviable.
  • Consequently, the Court held that no substantial question of law arises in the present appeals and dismissed the batch of appeals.

Important Clarification

  • Software supplied (embedded or standalone) to Indian customers by foreign entities does not automatically qualify as royalty.
  • Where tax is deductible at source under Section 195, the non-resident is not liable to pay advance tax, and therefore interest under Section 234B is not applicable.
  • The judgment reinforces the binding nature of the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd.

Sections Involved

  • Section 9(1)(vi), Income Tax Act, 1961
  • Section 195, Income Tax Act, 1961
  • Section 234B, Income Tax Act, 1961
  • Section 260A, Income Tax Act, 1961
  • 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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