Facts of the Case

The appellant, Director of Income Tax, challenged the assessment of Infrasoft Ltd., an international software development company, regarding taxability of amounts received from licensing civil engineering software “MX” to Indian clients. The company maintained a branch in India, providing installation, operational training, and support services. The Assessing Officer (AO) initially classified the receipts as royalty under Section 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of the Indo-US Double Taxation Avoidance Agreement (DTAA), taxing the total amount of Rs. 2,85,76,278/- at 20%.

The Assessee contended that:

  • The software was a good, not an intellectual property transfer.
  • The payments were for a copyrighted article, not for use of copyright.
  • Business in India through a Permanent Establishment (PE) meant taxability should follow Article 7 of DTAA, not royalty provisions.

Issues Involved

  1. Whether receipts for granting software licenses to Indian customers constitute royalty under Section 9(1)(vi) and Article 12 of the Indo-US DTAA.
  2. Whether the right to use software under licensing constitutes transfer of copyright or merely a copy of a copyrighted article.

Petitioner’s Arguments (Revenue)

  • The amounts received were in the nature of royalty.
  • Right to use the software under license agreements led to earning royalty income.
  • Payments qualify under Explanation 2 to Section 9(1)(vi) as consideration for transfer of intellectual property rights.
  • Relied on Samsung Electronics Co. Ltd. vs CIT (2012) 345 ITR 494 (AP) to argue that right to make copies for backup constitutes copyright use, hence royalty.

Respondent’s Arguments (Assessee)

  • Only the right to use the copyrighted material was transferred, not the copyright itself.
  • Limited license granted does not amount to royalty under ITA or DTAA.
  • CIT(A) and AO mischaracterized receipts; the actual transaction was transfer of copyrighted article, not copyright.
  • Reliance on precedents such as Motorola Inc., Samsung Electronics Ltd., TCS vs State of Andhra Pradesh to demonstrate distinction between copyright and copies of software.

Court Findings / Order

  • The ITAT distinguished CIT(A)’s approach, emphasizing that the Assessee retained copyright ownership.
  • The license granted Indian clients was limited and did not permit commercial exploitation beyond specific usage.
  • Software provided was standard software; minor customizations did not alter the license or create royalty income.
  • ITAT concluded that amounts received do not qualify as royalty either under the Income Tax Act or DTAA.
  • Matter remanded to AO to reframe assessment in line with ITAT’s conclusions.

Important Clarifications

  • Limited license to use copyrighted material is not royalty.
  • Distinction between copyright vs copy of copyrighted article is crucial in software licensing taxation.
  • OECD commentary and other foreign interpretations are not binding in India unless incorporated in domestic law.
  • Permanent Establishment in India affects taxation under Article 7 DTAA, not royalty provisions.

Sections Involved

  • Income Tax Act, 1961: Section 9(1)(vi), Section 44D, Section 115A
  • DTAA India-USA: Article 12 (Royalty), Article 7 (Business Profits)  

Link to download the order https://delhihighcourt.nic.in/app/case_number_pdf/2013:DHC:6018/SAS22112013ITA10342009.pdf 

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