Facts of the Case

The present appeals were filed by the Revenue against the assessee, ZTE Corporation, before the Delhi High Court. The central issue arose from the taxability of payments made in relation to software supplied along with telecom hardware.

The Revenue challenged the findings of the Income Tax Appellate Tribunal (ITAT), particularly concerning the characterization of such payments under the Income Tax Act, 1961 and the Indo-China Double Taxation Avoidance Agreement (DTAA).

At the outset, it was fairly conceded by the Revenue that the issues raised in the present appeals were already covered by the earlier decision of the Delhi High Court in Commissioner of Income Tax, International Taxation v. ZTE Corporation (2017) 392 ITR 80 (Delhi).

Issues Involved

  1. Whether payments received for software supplied along with hardware constitute “royalty” under:
    • Section 9(1)(vi) of the Income Tax Act, 1961
    • Article 12(3) of the Indo-China DTAA
  2. Whether interest under Section 234B of the Income Tax Act is chargeable on the assessee.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the ITAT erred in interpreting Article 12(3) of the DTAA read with Explanations 5 & 6 to Section 9(1)(vi).
  • It was argued that payments for software should be treated as “royalty”.
  • The Revenue also challenged the interpretation regarding levy of interest under Section 234B.

Respondent’s Arguments (Assessee – ZTE Corporation)

  • The assessee contended that the issue was already settled in its favour by earlier decisions of the Delhi High Court.
  • It was argued that software supplied along with hardware is integral to the functioning of the equipment and constitutes sale of goods, not royalty.
  • The assessee further submitted that no liability under Section 234B arises in such cases.

Court’s Findings / Order

The Delhi High Court held:

  • The issue is squarely covered by its earlier judgment in ZTE Corporation (2017).
  • Software supplied with hardware is essential for its functioning and constitutes sale of goods, not royalty.
  • Mere separate invoicing or licensing terminology does not alter the true nature of the transaction.
  • Updates or ancillary services do not convert the transaction into royalty.

Regarding interest under Section 234B:

  • The issue was covered by the decision in GE Packaging, and was decided in favour of the assessee and against the Revenue.

Accordingly, the Court dismissed all the appeals filed by the Revenue.

Important Clarifications

  • Substance of the transaction prevails over nomenclature (license vs sale).
  • Software embedded or supplied with hardware for operational purposes is treated as goods, not royalty.
  • DTAA provisions override domestic law where beneficial.
  • Interest under Section 234B is not leviable where tax is deductible at source.

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)
  • Explanations 5 & 6 to Section 9(1)(vi)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:7419-DB/VSA26082019ITA7632019_165604.pdf

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