Facts of the Case

The Revenue preferred appeals under Section 260A of the Income Tax Act challenging the order of the Income Tax Appellate Tribunal (ITAT), whereby the Tribunal held that the consideration received by Aspect Software Inc. from Indian customers for supply/licensing of customized software was not taxable as “royalty.”

The Revenue contended that the software licensing arrangement involved transfer of rights in copyright and therefore attracted royalty taxation under the Income Tax Act and the Indo-US DTAA.

The ITAT relied upon earlier judicial precedents, particularly Ericsson AB and Infrasoft Ltd., and held that the transaction involved mere transfer of copyrighted articles and not copyright rights. Aggrieved by this finding, the Revenue approached the Delhi High Court.

 Issues Involved

  1. Whether payment received for supply of customized software constitutes Royalty under Article 12 of the Indo-US DTAA read with Section 9(1)(vi) of the Income Tax Act?
  2. Whether the assessee was liable to pay interest under Section 234B of the Income Tax Act?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue argued that software supplied by the assessee involved licensing of intellectual property rights.
  • It was submitted that consideration paid by Indian customers amounted to royalty under Article 12(3)/(4) of the DTAA.
  • Revenue contended that the ITAT erred in not treating such receipts as royalty income taxable in India.
  • Revenue also challenged the ITAT’s findings regarding non-applicability of Section 234B interest.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee argued that software transactions were merely sale of copyrighted articles and not transfer of copyright.
  • It was submitted that customers only obtained a limited right to use the software and no exploitation rights in copyright were transferred.
  • Reliance was placed on Delhi High Court judgments in Ericsson AB and Infrasoft Ltd.
  • It was contended that receipts constituted business income and could be taxed in India only if there existed a Permanent Establishment (PE).
  • Regarding Section 234B, the assessee argued that no advance tax liability arose where tax was deductible at source.

 Court Findings / Court Order

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

Findings on Royalty Issue

The Court held that:

  • Supply of customized software does not amount to transfer of copyright rights.
  • It constitutes sale of copyrighted articles.
  • Consideration received cannot be classified as royalty under Article 12 of the Indo-US DTAA or Section 9(1)(vi).
  • The issue was squarely covered by the Court’s earlier decisions in Ericsson AB, Infrasoft Ltd., and ZTE Corporation.

Findings on Section 234B

The Court held that:

  • Interest under Section 234B was not leviable in the present case.
  • The issue stood covered by the judgment in GE Packaged Power Inc.

Accordingly, both questions were answered in favour of the assessee and against the Revenue.

 Important Clarification

This judgment reaffirms the distinction between:

  • Transfer of copyright rights (Royalty)
    and
  • Transfer of copyrighted articles (Business Income)

The Court clarified that mere software licensing for end-use, without transfer of underlying copyright rights, does not constitute royalty. This principle is significant in cross-border software taxation matters.

 Sections Involved

  • Section 9(1)(vi), Income Tax Act, 1961
  • Section 234B, Income Tax Act, 1961
  • Section 260A, Income Tax Act, 1961
  • Article 12, Indo-US 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

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