Facts of the Case

The present matter concerns appeals filed by the Revenue against the orders of the Income Tax Appellate Tribunal for Assessment Years 2013–14 and 2015–16. The dispute revolved around the taxability of payments received by ZTE Corporation, particularly whether such payments constituted “royalty” under the Income Tax Act, 1961 and the Indo-China Double Taxation Avoidance Agreement (DTAA).

The High Court noted that identical issues had already been adjudicated in earlier decisions involving the same assessee, including prior rulings of the Court.

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 DTAA.
  2. Whether interest under Section 234B is leviable in such cases.
  3. Whether the ITAT’s interpretation of the DTAA and statutory provisions was legally sustainable.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that payments received for software should be characterized as royalty, especially in light of Explanations 5 & 6 to Section 9(1)(vi).
  • It was argued that such payments involved use or right to use intellectual property or equipment.
  • The Revenue also raised the issue of applicability of interest under Section 234B.

Respondent’s Arguments (Assessee – ZTE Corporation)

  • The assessee submitted that the payments were for supply of software embedded with hardware, which constituted sale of goods and not royalty.
  • It was argued that mere licensing terminology or separate invoicing does not alter the true nature of the transaction.
  • The assessee relied on earlier judicial precedents, including prior rulings in its own case and similar judgments like Ericsson.

Court’s Findings / Order

  • The Delhi High Court held that the issues raised were already covered by earlier judgments, including Commissioner of Income Tax v. ZTE Corporation (2017).
  • The Court reaffirmed that:
    • Supply of software enabling use of hardware does not constitute royalty.
    • The nature of the transaction is sale of goods, not licensing of intellectual property.
    • Separate invoicing or updates to software do not change the character of the transaction.
  • On Section 234B, the Court held that the issue is covered by precedent (GE Packaging case), and interest is not applicable in such circumstances.
  • Since no new substantial question of law arose, the Court dismissed the Revenue’s appeals.

Important Clarifications

  • The judgment reinforces that substance over form determines taxability.
  • Even if agreements use licensing terminology, the actual nature of transaction is decisive.
  • Amendments to Section 9(1)(vi) do not override DTAA provisions where applicable.
  • The ruling strengthens consistency in interpretation of software taxation under international tax law.

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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