Facts of the Case

The Revenue filed appeals under Section 260A challenging the order of the Income Tax Appellate Tribunal (ITAT) for multiple assessment years. The dispute arose regarding payments received by Aspect Software Inc., a non-resident company, for supply of customized software to Indian customers.

The Revenue contended that such payments were taxable in India as royalty under the Income Tax Act and the Indo-US DTAA. The ITAT had held that the payments were not royalty and constituted business income, taxable in India only if there existed a Permanent Establishment (PE).

The Revenue challenged the ITAT’s findings before the Delhi High Court.

 Issues Involved

  1. Whether payment for supply of customized software constitutes “Royalty” under Section 9(1)(vi) of the Income Tax Act and Article 12 of the Indo-US DTAA?
  2. Whether interest under Section 234B is leviable on a non-resident assessee where tax was deductible at source?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue argued that the supply of customized software involved grant of rights in software and therefore amounted to royalty.
  • It was contended that software licensing gave the user rights over intellectual property, attracting tax liability under Article 12 of the DTAA.
  • The Revenue further argued that interest under Section 234B was chargeable for non-payment of advance tax.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee argued that it merely supplied copyrighted articles and did not transfer any copyright rights.
  • The software was sold as a product and not as intellectual property rights.
  • Reliance was placed on earlier Delhi High Court decisions holding that software payments are not royalty where no copyright rights are transferred.
  • It was also argued that Section 234B interest was not leviable since tax withholding obligation was on the payer.

 Court Findings / Court Order

The Delhi High Court dismissed the Revenue’s appeals and upheld the ITAT’s order.

On Royalty Issue

The Court held that payment for supply of customized software does not amount to royalty where there is no transfer of copyright rights and only copyrighted articles are supplied.

The Court followed its earlier judgments in:

  • Director of Income Tax vs Ericsson AB
  • Director of Income Tax vs Infrasoft Ltd.
  • Commissioner of Income Tax (International Taxation)-2 vs ZTE Corporation

The Court reaffirmed that software embedded in or supplied with products remains sale of goods and not licensing of copyright.

On Section 234B Issue

The Court held that interest under Section 234B was not leviable on the non-resident assessee where tax deduction at source obligation was on the payer.

The Court followed its earlier ruling in Director of Income Tax vs GE Packaged Power Inc.

Accordingly, both issues were decided in favour of the assessee and against the Revenue.

 Important Clarification

  • Mere supply of software does not automatically become royalty.
  • Distinction between copyrighted article and copyright rights remains crucial.
  • Software sale without transfer of exploitation rights is business income, not royalty.
  • Non-residents cannot be burdened with Section 234B interest where TDS mechanism applies.

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8755-DB/SMD25042017ITA42017_162718.pdf

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