Facts of the Case

The Respondent-Assessee, a UK-based company, was engaged in development and distribution of software products. It sold software in India either through distributors or directly to customers on a principal-to-principal basis, with transactions concluded outside India (offshore supply).

For AY 2010–11 and AY 2013–14, assessment proceedings were initiated, and the Assessing Officer treated receipts from sale of software as ‘royalty’ under Section 9(1)(vi) read with Article 13 of the India-UK DTAA and taxed the same at 10%.

The Dispute Resolution Panel upheld the Assessing Officer’s view. However, the ITAT allowed the assessee’s appeal, holding that such receipts were not royalty. The Revenue filed appeals before the High Court.

Issues Involved

  1. Whether receipts from sale of software constitute royalty under Article 13 of India-UK DTAA?
  2. Whether Explanation 4 to Section 9(1)(vi) applies to DTAA interpretation?
  3. Whether sale/licensing of software amounts to transfer of copyright under the Copyright Act?
  4. Whether end-user licensing results in royalty income 

Petitioner’s (Revenue) Arguments

  • The ITAT erred in holding that software receipts are not royalty.
  • Explanation 4 to Section 9(1)(vi) clarifies legislative intent and should apply to DTAA.
  • Sale or licensing of software involves use of copyright under Section 14(b)(ii) of the Copyright Act.
  • Payments arise due to end-user usage of software, thereby constituting royalty.

Respondent’s (Assessee) Arguments

  • Transactions involve sale of copyrighted articles, not transfer of copyright.
  • Software was sold as a product, not licensed for exploitation of copyright.
  • DTAA provisions prevail over domestic law where beneficial.
  • No royalty arises under Article 13 of India-UK DTAA.

Court’s Findings / Order

  • The Court upheld ITAT’s decision and dismissed Revenue’s appeals.
  • It relied on precedents including:
    • Principal CIT vs M. Tech India Pvt. Ltd.
    • Director of Income Tax vs Infrasoft Ltd.
    • Director of Income Tax vs New Skies Satellite BV
  • The Court clarified:
    • Payment for purchase of software products is not royalty, but consideration for sale of goods.
    • There is a distinction between transfer of copyright and sale of copyrighted article.
    • DTAA provisions override domestic law where beneficial to the assessee.
    • Amendments to Section 9(1)(vi) cannot be applied retrospectively to DTAA without corresponding treaty amendment.
  • Accordingly, no substantial question of law arose, and appeals were dismissed.

Important Clarifications

  • Sale of software as a product ≠ Royalty
  • DTAA override principle under Section 90(2) reaffirmed
  • Retrospective amendments in domestic law do not automatically amend treaty provisions
  • Distinction between copyright vs copyrighted article is crucial 

Sections Involved

  • Section 9(1)(vi) – Royalty Income
  • Section 260A – Appeal to High Court
  • Section 144C – DRP Proceedings
  • Section 147/148 – Reassessment
  • Section 143(3) – Assessment
  • Article 13 – India-UK DTAA (Royalty)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2020:DHC:3385-DB/SVN24112020ITA13882018_171149.pdf

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