Facts of the Case

The Revenue filed multiple appeals under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal (ITAT) concerning various assessment years. The dispute pertained to payments received by Aspect Software Inc., a non-resident entity, for supply of customized software and software licenses to Indian customers.

The Revenue contended that such payments constituted royalty under the Income Tax Act and the Indo-US DTAA and were therefore taxable in India. The ITAT, however, relying upon earlier Delhi High Court judgments, held that the payments represented business receipts arising from sale of copyrighted articles and not royalty.

The Revenue challenged this finding before the Delhi High Court.

 Issues Involved

  1. Whether payment for supply of customized software amounts to “Royalty” under Article 12 of the Indo-US DTAA read with Section 9(1)(vi) of the Income Tax Act, 1961?
  2. Whether interest under Section 234B can be levied on a non-resident where tax is liable to be deducted at source by the payer?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue argued that software licensing payments amounted to royalty because the software was licensed and not sold outright.
  • It was contended that the software involved transfer of rights in intellectual property and therefore attracted taxation under Section 9(1)(vi).
  • The Revenue further contended that the assessee was liable to pay advance tax and consequential interest under Section 234B.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee contended that the transaction involved sale of a copyrighted article and not transfer of copyright.
  • It argued that the software was integral to the product and merely enabled functionality, without granting exploitation rights over the copyright.
  • The assessee relied upon Delhi High Court rulings in Ericsson AB and Infrasoft Ltd., where similar payments were held not to be royalty.
  • On Section 234B, it was argued that since tax was deductible at source, no liability for advance tax or interest could arise.

 Court Findings / Observations

The Delhi High Court observed that the issue was already settled by its earlier decisions 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 reiterated that where software is supplied to enable operation of hardware or software products without transfer of copyright rights, the payment is consideration for sale of a copyrighted article and not royalty.

The Court clarified that mere licensing terminology or separate invoicing does not alter the real character of the transaction.

On Section 234B, the Court followed its earlier precedent and held that no interest liability arises where withholding tax obligations are cast upon the payer.

 Court Order / Final Decision

The Delhi High Court dismissed the Revenue’s appeals and held:

  • Payment for supply of customized software does not constitute royalty under Article 12 of the Indo-US DTAA and Section 9(1)(vi).
  • Such receipts are taxable as business income, subject to existence of Permanent Establishment (PE) in India.
  • Interest under Section 234B is not leviable where tax is deductible at source.

 Important Clarifications

1. Software Payment ≠ Royalty (Automatic Rule Not Applicable)

Payment for software is not royalty merely because it is licensed. Substance of transaction is determinative.

2. Copyrighted Article vs Copyright Right

Sale of software copy does not amount to transfer of copyright.

3. DTAA Protection Prevails

Where treaty provisions are beneficial, they prevail over domestic law.

4. Section 234B Relief for Non-Residents

Where payer has withholding obligation, non-resident recipient cannot be saddled with advance tax interest liability.

 Sections Involved

  • Section 9(1)(vi), Income Tax Act, 1961 – Royalty Income
  • Section 234B, Income Tax Act, 1961 – Interest for Default in Advance Tax
  • Section 260A, Income Tax Act, 1961 – Appeal to High Court
  • Article 12, India-USA DTAA – Royalties and Fees for Included Services

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

 Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.