Facts of the Case

The present matter arose from two appeals filed by the Revenue before the Delhi High Court against the order of the Income Tax Appellate Tribunal (ITAT) concerning Assessment Years 2008-09 and 2010-11.

The central dispute pertained to the taxability of amounts received by the assessee, Net App B.V., from the sale of software and subscription services. The Revenue contended that such receipts were in the nature of “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961, read with Article 12 of the India–Netherlands Double Taxation Avoidance Agreement (DTAA).

A secondary issue involved the levy of interest under Section 234B of the Act.

 Issues Involved

  1. Whether consideration received by the assessee towards sale of software and subscription services constituted royalty under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA?
  2. Whether interest under Section 234B could be levied upon the non-resident assessee?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue argued that the receipts from software sales and subscription were taxable as royalty income.
  • It was contended that such payments fell within the scope of Explanation 2 to Section 9(1)(vi).
  • The Revenue further argued that interest under Section 234B was chargeable on account of tax liability arising in India.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee contended that the receipts from sale of software did not amount to royalty since there was no transfer of copyright, but merely sale/use of copyrighted articles.
  • It was submitted that the receipts were business income and not taxable in India in absence of a Permanent Establishment (PE).
  • On Section 234B, the assessee argued that where tax was deductible at source, liability for advance tax did not arise.

 Court Findings / Observations

The High Court observed that the issue regarding software payments being treated as royalty was already covered against the Revenue by its earlier decision in The Commissioner of Income Tax v. ZTE Corporation (2017) 392 ITR 80.

The Court upheld the Tribunal’s finding that the software receipts were not royalty in nature.

On the issue of Section 234B interest, the Court observed that the controversy was already settled by the judgment in Director of Income Tax v. GE Package Power Corporation Inc. (2015) 373 ITR 65, wherein it was held that where tax was deductible at source, the non-resident could not be saddled with advance tax liability and consequential interest under Section 234B.

 Court Order / Final Decision

The High Court held that both substantial questions of law were already settled against the Revenue. Accordingly, both appeals filed by the Revenue were dismissed.

 Important Clarification

  • Mere sale of software/subscription does not automatically constitute royalty unless there is transfer of rights in copyright.
  • For non-resident assessees, where tax deduction at source provisions apply, Section 234B interest cannot ordinarily be imposed.
  • The judgment reinforces judicial consistency on software taxation and withholding tax obligations.

 Sections Involved

  • Section 9(1)(vi) – Income deemed to accrue or arise in India (Royalty)
  • Section 234B – Interest for default in payment of advance tax
  • Article 12 of India–Netherlands DTAA – Royalty and Fees for Technical Services
  • TDS Provisions under Section 195 (Indirectly relevant) 

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:8950-DB/SRB23102017ITA8842017_124534.pdf

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