Facts of the Case

The present appeals were filed by the Revenue against a common order dated 15.02.2019 passed by the Income Tax Appellate Tribunal concerning Assessment Years 2013-14 and 2015-16. The dispute involved the taxability of payments received by ZTE Corporation, a non-resident entity, in relation to supply of software along with hardware.

The Revenue challenged the Tribunal’s findings primarily on the issue of whether such payments constituted “royalty” under the Income Tax Act, 1961 and the Indo-China Double Taxation Avoidance Agreement (DTAA). 

Issues Involved

  1. Whether payments received for supply of software are taxable as “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961 read with Article 12(3) of the Indo-China DTAA.
  2. Whether interest under Section 234B is leviable on a non-resident assessee.
  3. Whether the ITAT’s interpretation of law in light of Explanations 5 & 6 to Section 9(1)(vi) is legally sustainable.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that payments received by ZTE Corporation for software constituted royalty under Section 9(1)(vi).
  • It was argued that the ITAT erred in interpreting Article 12(3) of the DTAA.
  • The Revenue further submitted that the assessee was liable to pay interest under Section 234B.

Respondent’s Arguments (Assessee – ZTE Corporation)

  • The assessee argued that the supply of software was integral to the hardware and constituted sale of goods, not royalty.
  • It was submitted that mere licensing or invoicing structure does not determine the nature of the transaction.
  • The assessee relied on earlier Delhi High Court decisions, including its own case, to contend that such payments are not taxable as royalty.

Court’s Findings / Order

  • The Delhi High Court observed that the issue was already covered by its earlier judgment in Commissioner of Income Tax, International Taxation vs ZTE Corporation (2017) 392 ITR 18 (Delhi).
  • The Court reiterated that:
    • Software supplied along with hardware, enabling its use, does not amount to royalty, but is in the nature of sale of goods.
    • Separate invoicing or nomenclature (license fee) does not alter the true nature of the transaction.
  • The Court also held that:
    • Liability under Section 234B is not applicable in such cases, following precedent.
  • Since no new question of law arose, the Court dismissed the appeals filed by the Revenue.

Important Clarifications

  • Supply of software embedded with hardware is treated as sale of goods, not royalty.
  • Interpretation of DTAA prevails where beneficial to the assessee.
  • Nomenclature of payment is irrelevant; substance of transaction is decisive.
  • Reaffirmation of consistency in judicial precedents—no fresh issue = no interference.

Sections Involved

  • Section 9(1)(vi) – Income deemed to accrue or arise in India (Royalty)
  • Section 234B – Interest for default in payment of advance tax
  • Article 12(3) – Indo-China DTAA (Royalty definition)

 Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:7420-DB/VSA18102019ITA9112019_165827.pdf

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