Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 17.02.2022 passed by the Income Tax Appellate Tribunal, whereby the ITAT dismissed the Revenue’s appeal for Assessment Year 2010–11.

The respondent assessee, XIOCOM (NZ) Ltd., a non-resident company, was engaged in designing and providing tailored and off-the-shelf wireless broadband solutions in the USA and certain African countries. During the relevant year, the assessee sold off-the-shelf software to Zylog Systems (India) Ltd. through a non-exclusive licence to use the software in specified territories in India.

The Assessing Officer treated the consideration of ₹19,24,80,000 received for licensing of IMS software as royalty taxable in India under Section 9(1)(vi) of the Act read with Article 12 of the Indo-New Zealand Double Taxation Avoidance Agreement and held that tax ought to have been deducted under Section 195.

Issues Involved

Whether consideration received by a non-resident for supply of off-the-shelf software under a non-exclusive licence constitutes royalty under Section 9(1)(vi) of the Income-tax Act and Article 12 of the Indo-NZ DTAA, and whether such receipts give rise to a withholding obligation under Section 195.

 

 

Appellant’s Arguments

The Revenue contended that the licence granted to Zylog Systems (India) Ltd. amounted to use of copyright and therefore constituted royalty under the Act as well as the DTAA. It was argued that the Assessing Officer was correct in treating the receipts as taxable royalty income and in invoking Section 195 for failure to deduct tax at source.

Respondent’s Arguments

The assessee supported the orders of the CIT(A) and the ITAT, contending that what was transferred was only a right to use a copyrighted article and not any right in the copyright itself. Reliance was placed on binding precedent of the Delhi High Court in Director of Income Tax vs. Infrasoft Ltd. and subsequent decisions, as well as the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd.

Court Order / Findings

The Delhi High Court noted that the ITAT had dismissed the Revenue’s appeal by relying on the judgment of the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd., which conclusively settled the issue of taxability of payments for off-the-shelf software supplied under EULAs or distribution agreements.

The Court reproduced and relied upon paragraphs 168 and 169 of the Supreme Court judgment, which held that such payments do not constitute royalty for use of copyright, do not give rise to taxable income in India, and consequently do not attract withholding tax obligations under Section 195.

The Court observed that the CIT(A) had also relied on binding Delhi High Court precedent in Infrasoft Ltd. and Nokia Networks, and had correctly held that retrospective amendments to Section 9 could not be read into the DTAA in absence of corresponding treaty amendments.

The Revenue fairly did not dispute the applicability of the Supreme Court judgment in Engineering Analysis to the facts of the present case. The Court therefore held that no substantial question of law arose for consideration.

Important Clarification

The Court clarified that consideration received for supply of off-the-shelf software under a non-exclusive licence, without transfer of copyright or rights in copyright, cannot be characterised as royalty under domestic law or applicable DTAAs, and no obligation to deduct tax under Section 195 arises in such cases.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal and held that payments received by XIOCOM (NZ) Ltd. for licensing of off-the-shelf software were not taxable as royalty in India and did not attract withholding tax under Section 195, thereby deciding the matter in favour of the assessee and against the Revenue.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769679026_THECOMMISSIONEROFINCOMETAXINTERNATIONALTAXATION3VsXIOCOMNZLTD.pdf

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