Facts of the Case

The Revenue preferred multiple appeals under Section 260A of the Income Tax Act challenging the order of the Income Tax Appellate Tribunal (ITAT) concerning various assessment years. The principal controversy revolved around whether payments received by Aspect Software Inc. for supply of customized software to Indian customers were taxable in India as royalty under the Income Tax Act and the India-US DTAA.

The ITAT had held that such receipts did not amount to royalty and were in the nature of business receipts. Aggrieved by this finding, the Revenue approached the Delhi High Court.

 Issues Involved

1. Royalty Issue

Whether consideration received for supply of customized software amounts to royalty under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-US DTAA?

2. Interest under Section 234B

Whether the assessee was liable to pay interest under Section 234B of the Income Tax Act?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue contended that supply of customized software involved transfer of rights in intellectual property.
  • It was argued that the payments received by the assessee were in the nature of royalty and taxable in India.
  • The Revenue also challenged the ITAT’s interpretation of Section 234B regarding levy of interest.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee submitted that the software supplied constituted a copyrighted article and not transfer of copyright.
  • It was argued that there was no grant of rights enabling exploitation of copyright.
  • Therefore, consideration received could not be characterized as royalty under the DTAA or the Act.
  • The assessee relied on earlier Delhi High Court precedents including Ericsson AB and Infrasoft Ltd.

 Court Findings / Observations

On Royalty Issue

The Delhi High Court observed that the issue stood covered by 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 reaffirmed that where software is supplied as a product and there is no transfer of copyright rights, the payment is merely for purchase of a copyrighted article and not royalty.

The Court held that separate invoicing or licensing terminology does not alter the true character of the transaction.

 Court Order / Final Decision

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

The Court held:

Payment for customized software is not royalty where there is no transfer of copyright rights.
 Such receipts are business income, taxable subject to existence of Permanent Establishment (PE).
 Interest under Section 234B was not leviable in the present circumstances.

 Important Clarification

This judgment reiterates the legal distinction between:

  • Transfer of copyright (Royalty)
    and
  • Transfer of copyrighted article (Business income)

Merely licensing software for end-use without granting exploitation rights does not convert the transaction into royalty.

This decision strengthens the judicial principle laid down in Ericsson AB and Infrasoft Ltd.

Sections Involved

  • Section 260A, Income Tax Act, 1961
  • Section 9(1)(vi), Income Tax Act, 1961
  • Section 234B, Income Tax Act, 1961
  • Article 12(3)/(4), India-USA Double Taxation Avoidance Agreement (DTAA)

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.