Amount received under a computer software distribution agreement and not “royalty” if no right of transfer is permitted. Copyright: Delhi High Court


the Delhi High Court ruled that an amount received under a distribution agreement in respect of computer software did not constitute a “royalty” under the Income Tax Act 1961, if the agreement does not create a right to transfer copyright therein.

The panel, comprising Judges Manmohan and Sudhir Kumar Jain, observed that, given the Supreme Court’s decision in the case of Engineering Analysis Center of Excellence Private Limited v Commissioner of Income Tax (2021)said question was no longer res integra.

The ITAT had ruled that Microsoft’s software product license by assessee Gracemac Corporation in India was not taxable as a royalty under Section 9(1)(vi) of the Tax Act 1961. income tax, read with the Indo-American agreement on the avoidance of double taxation. (DTAA). The Revenue Service had brought an appeal under Section 260A of the Act to the High Court against the ITAT order.

Solicitor for the Revenue Department in the High Court argued that the distribution model adopted by Gracemac Corporation involved making multiple copies of the software and involved a transfer of copyright, therefore the consideration received by Gracemac Corporation was taxable as a royalty under the law.

Section 9(1)(vi) of the Income Tax Act 1961 provides that income from royalties payable by a resident shall be deemed to be due or arise in India except where the royalty is payable in respect of any right, property or information for the purposes of any business or profession carried on by such person outside India. Explanation 4 of Section 9(1)(vi) provides that the transfer of rights in respect of any right, property or information includes the transfer of rights to use computer software (including the grant of a license), regardless of the means by which this right was transferred.

The High Court observed that the Supreme Court in the case of Engineering Analysis Center of Excellence Private Limited v Commissioner of Income Tax (2021) held that where an amount was paid by a resident to a non-resident software manufacturer or distributor under a distribution agreement for the resale or use of computer software, the amount so received did not constitute a royalty payment, therefore a TDS was not required to be deducted from the same under Section 195 of the Act. The High Court also relied on its judgment in the case EYGBS (India) Private Limited v Joint Commissioner of Income Tax (2021)where the High Court on Similar Facts had ruled that where an agreement permitted the end user to access and use the licensed software to which the licensee had no exclusive right, no copyright was created and , therefore, the payment received could not qualify as a “royalty” under the Income Tax Act.

The High Court held that since the question of law raised in the appeal had been finally decided in favor of Gracemac Corporation by the Supreme Court in the case of Center of Excellence in Engineering Analysis Pvt. substantive question of law has been raised in this appeal.

The High Court therefore dismissed the appeal.

Case title: Commissioner of Income Tax (International Tax)-2 Versus Gracemac Corporation

Quote: 2022 LiveLaw (Deleted) 184

Tax attorney: Mr. Sanjay Kumar, Lawyer

Advice from the assessee: Mr. Nageshwar Rao and Ms. Deepika Agarwal, lawyers

Click here to read/download the order


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