Facts of the Case

The Revenue preferred appeals under Section 260A of the Income-tax Act, 1961 against the order of the Income Tax Appellate Tribunal (ITAT) for multiple assessment years concerning the taxability of payments received by Aspect Software Inc., a non-resident entity, for supply of customized software to Indian customers. The core dispute pertained to whether such receipts were taxable as “royalty” under Article 12 of the Indo-US Double Taxation Avoidance Agreement (DTAA) read with Section 9(1)(vi) of the Act, and whether interest under Section 234B was leviable. The ITAT had held in favour of the assessee, following earlier judicial precedents.

 Issues Involved

  1. Whether payment received for supply of customized software amounts to royalty under Article 12(3)/(4) of the Indo-US DTAA read with Section 9(1)(vi) of the Income-tax Act, 1961?
  2. Whether interest under Section 234B of the Income-tax Act, 1961 is leviable on a non-resident assessee in such circumstances?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue contended that the consideration received from Indian customers for supply/licensing of software constituted royalty.
  • It was argued that the software license involved rights in copyright and therefore attracted taxability under Article 12 of the Indo-US DTAA.
  • The Revenue further argued that interest under Section 234B was leviable for default in payment of advance tax.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee contended that the transaction was merely for sale of copyrighted articles and not transfer of copyright rights.
  • It was argued that the software was supplied as part of a product and did not confer any copyright exploitation rights upon the end users.
  • Reliance was placed on the judgments in Ericsson A.B. and Infrasoft Ltd., wherein similar payments were held not to constitute royalty.
  • Regarding Section 234B, it was argued that where tax was deductible at source, advance tax liability could not be imposed on the non-resident.

 Court Findings

The Delhi High Court observed that the issue was squarely covered by its earlier decision in Commissioner of Income Tax (International Taxation)-2 vs ZTE Corporation, wherein identical questions had been decided in favour of the assessee.

The Court reaffirmed that:

  • Supply of software enabling operation of hardware does not amount to transfer of copyright.
  • Mere licensing terminology or separate invoicing does not alter the real character of the transaction.
  • Payment for software in such circumstances constitutes consideration for purchase of copyrighted articles and not royalty.

On Section 234B, the Court followed Director of Income Tax vs GE Packaged Power Inc. and held that interest under Section 234B was not leviable where tax deduction obligations rested upon the payer.

 Court Order / Final Decision

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

Held:

  • Payment for supply of customized software does not constitute royalty under Article 12 of the Indo-US DTAA read with Section 9(1)(vi) of the Income-tax Act.
  • Interest under Section 234B was not leviable on the non-resident assessee in the facts of the case.

 Important Clarification

This judgment reiterates the distinction between:

  • Transfer of copyright rights (taxable as royalty), and
  • Transfer of copyrighted articles (business receipts).

The Court clarified that merely granting a software license for use without transferring copyright ownership or exploitation rights does not attract royalty taxation. Further, where withholding tax mechanism applies, Section 234B interest cannot be fastened upon the non-resident recipient.

 Sections Involved

  • Section 260A – Appeal to High Court
  • Section 9(1)(vi) – Royalty Income
  • Section 234B – Interest for Default in Payment of Advance Tax
  • Article 12 of Indo-US 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

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