Facts of the Case

The present appeals (ITA 763/2019, 769/2019, and 771/2019) were filed by the Revenue before the Delhi High Court against ZTE Corporation. The dispute revolved around the taxability of payments received by the respondent for supply of software in connection with hardware.

The Revenue contended that such payments should be treated as “royalty” under the provisions of the Income Tax Act, 1961, and the Indo-China Double Taxation Avoidance Agreement (DTAA). However, it was acknowledged during proceedings that the issues raised were already covered by a prior decision of the same Court in Commissioner of Income Tax, International Taxation vs ZTE Corporation (2017) 392 ITR 80 (Delhi).

Issues Involved

  1. Whether payments received for supply of software 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 leviable on the assessee.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that payments received for software should be categorized as “royalty” under Section 9(1)(vi), read with Explanations 5 and 6.
  • It was contended that the ITAT erred in interpreting Article 12(3) of the DTAA.
  • The Revenue further argued that interest under Section 234B was applicable in the facts of the case.

Respondent’s Arguments (Assessee - ZTE Corporation)

  • The assessee contended that the software supplied was integral to the hardware and constituted sale of goods rather than royalty.
  • It was argued that the nature of the transaction was not licensing but outright sale of software embedded in hardware.
  • The assessee relied on earlier judicial precedents, including its own case decided by the Delhi High Court, to assert that such payments are not taxable as royalty.

Court’s Findings / Order

  • The Court observed that the issues raised in the present appeals were squarely covered by its earlier judgment in ZTE Corporation (2017).
  • It reiterated that:
    • Supply of software enabling hardware use does not amount to royalty.
    • Mere separate invoicing or nomenclature (license fee, etc.) does not determine the true nature of the transaction.
    • The transaction is in the nature of sale of goods (software), not royalty.
  • On Section 234B:
    • The Court held that the issue of levy of interest is covered by precedent (GE Packaging case).
    • It ruled against the Revenue and in favour of the assessee.
  • Accordingly, the Court dismissed all the appeals filed by the Revenue.

Important Clarification

  • Payments for software supplied along with hardware cannot automatically be treated as royalty.
  • The substance of the transaction prevails over its form or nomenclature.
  • DTAA provisions (Indo-China DTAA in this case) play a crucial role in determining taxability.
  • Interest under Section 234B is not applicable where tax is not liable to be deducted at source.

Sections Involved

  • Section 9(1)(vi) of the Income Tax Act, 1961 (Royalty)
  • Section 234B of the Income Tax Act, 1961 (Interest for default in payment of advance tax)
  • Article 12(3) of Indo-China Double Taxation Avoidance Agreement (DTAA)

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


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