Delhi HC Dismisses Revenue Appeal on Software Royalty Taxability

The assessee, involved in designing and providing fully tailored off-the-shelf wireless broadband solutions, sold off-the-shelf IMS software under non-exclusive licence rights to an Indian company during AY 2010-11. The Assessing Officer treated receipts of Rs. 19,24,80,000/- from the licensed IMS software as taxable under Section 9(1)(vi) of the Income-tax Act read with Article 12 of the India–New Zealand DTAA, and raised TDS issues under Section 195.

The CIT(A) relied on precedent (including Director of Income Tax v. Infrasoft Ltd., Nokia Networks and Ericsson) and held that what was transferred was the right to use a copyrighted article (not rights in copyright), and that retrospective Finance Act, 2012 amendments could not be read into the DTAA in absence of corresponding treaty change. The Tribunal, by order dated 17.02.2022, followed the SC’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd. and dismissed the Revenue’s appeal. The High Court thereafter condoned the delay of 1080 days in re-filing the appeal and proceeded to dismiss the Revenue’s challenge.

Issue Raised: Whether consideration received for granting a non-exclusive licence to use off-the-shelf software is taxable as “royalty” under Section 9(1)(vi) of the Income-tax Act read with Article 12 of the India–New Zealand DTAA, thereby attracting withholding under Section 195, and whether any substantial question of law arises under Section 260A.

High Court’s Decision: The Court held that the Tribunal correctly applied the Supreme Court’s ruling in Engineering Analysis, which states that amounts paid by resident Indian end-users/distributors to non-resident software manufacturers/suppliers for the resale/use of computer software under EULAs/distribution agreements are not “royalty” and do not give rise to income taxable in India; consequently, no obligation to deduct tax under Section 195 arose. Counsel for Revenue did not contest the applicability of the Supreme Court judgment. Finding no substantial question of law, the appeal was dismissed in favour of the respondent. The condonation application (delay of 1080 days) was allowed for reasons stated in the application.

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