Facts of the Case

The Revenue filed multiple connected appeals against various entities of Alcatel Lucent. The dispute arose from the Tribunal’s findings that payments received from Indian customers for supply of software (embedded in hardware or otherwise) do not qualify as royalty under the Income Tax Act and the India-France DTAA.

Additionally, the Tribunal held that where payments are subject to tax deduction at source under Section 195, interest under Section 234B cannot be imposed on the non-resident assessee.

Issues Involved

  1. Whether income from supply of software (embedded or otherwise) amounts to 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 when tax is deductible at source under Section 195?

Petitioner’s Arguments (Revenue)

  • The Revenue contended that payments received for software should be classified as royalty, thereby attracting tax in India.
  • It was argued that the Tribunal erred in interpreting the nature of software transactions.
  • The Revenue also submitted that interest under Section 234B should be applicable for failure to pay advance tax.

Respondent’s Arguments (Assessee – Alcatel Lucent Entities)

  • The assessee argued that supply of software, whether embedded or standalone, does not result in transfer of copyright and therefore cannot be treated as royalty.
  • It was further contended that once tax is deductible at source under Section 195, the liability to pay advance tax does not arise, and consequently, no interest under Section 234B is leviable.

Court’s Findings / Judgment

The Delhi High Court dismissed the Revenue’s appeals and held:

  • The issue of software payments being treated as royalty is already settled against the Revenue by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT.
  • The question relating to levy of interest under Section 234B is also covered against the Revenue by the Delhi High Court ruling in DIT v. GE Packaged Power Inc.
  • Therefore, no substantial question of law arises, and the appeals were dismissed.

Important Clarifications by the Court

  • Payments for software embedded in hardware do not automatically qualify as royalty.
  • Where tax is deductible at source under Section 195, non-resident assessees are not liable for interest under Section 234B.
  • The judgment reinforces binding precedents and limits unnecessary litigation on settled issues.

Sections Involved

  • Section 9(1)(vi) – Royalty
  • Section 195 – TDS on payments to non-residents
  • Section 234B – Interest for default in payment of advance tax
  • Section 260A – Appeal to High Court

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

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