Facts of the Case

The Revenue challenged the order passed by the Income Tax Appellate Tribunal (ITAT) for multiple assessment years wherein the Tribunal held that the consideration received by Aspect Software Inc. for supply of software products along with software licenses did not amount to royalty under Article 12 of the India-USA DTAA.

The Revenue contended that the software supplied was customized and therefore the payments attracted royalty taxation under Section 9(1)(vi). The Tribunal relied upon judicial precedents including Ericsson AB and Infrasoft Ltd., holding that the software constituted a copyrighted article and not transfer of copyright itself.

 Issues Involved

1. Whether payment received for supply of customized software amounts to “Royalty”?

Whether the software transaction falls within Article 12 of India-USA DTAA read with Section 9(1)(vi).

2. Whether interest under Section 234B is leviable on the non-resident assessee?

Whether the assessee was liable for advance tax and consequential interest.

 Petitioner’s Arguments (Revenue)

  • The Revenue argued that supply of customized software amounted to licensing of intellectual property.
  • It was contended that software payments constituted royalty under the Income Tax Act and DTAA.
  • Revenue asserted that the ITAT erred in treating software receipts as business income.
  • It was also argued that Section 234B interest was applicable on the assessee.

 Respondent’s Arguments (Assessee)

  • The assessee argued that there was no transfer of copyright rights.
  • The software was supplied as a copyrighted article, not copyright itself.
  • Consideration received was for sale of goods/software product.
  • In absence of PE in India, such receipts could not be taxed as business profits.
  • Section 234B was not applicable because withholding tax obligations were on payer.

 Court Findings

Issue No. 1 – Royalty Characterization

The Delhi High Court upheld the ITAT’s findings and reiterated that mere supply of software, even if customized, does not amount to royalty where there is no transfer of copyright rights.

The Court relied upon:

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

The Court held that software supplied remained a copyrighted article.

Issue No. 2 – Section 234B Liability

The Court followed its earlier decision in GE Packaged Power Inc. and held that Section 234B interest was not leviable where tax deduction obligation was on payer.

 Court Order / Final Decision

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

Held:
 Software supply receipts are not royalty
 Taxable as business income subject to PE
 Section 234B interest not leviable

The decision was in favour of the assessee and against the Revenue.

 Important Clarification

This judgment reinforces the distinction between:

Transfer of Copyright
vs
Transfer of Copyrighted Article

Only transfer of copyright rights attracts royalty taxation. Mere sale/license enabling use of software without granting copyright rights does not amount to royalty.

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.