2015 (5) TMI 431 - HC - Income Tax

Income from supply of software embedded in the hardware equipment or otherwise to customers in India - Does not amounts to royalty under Section 9(1)(vi) of the Income Tax Act and under Article 13(3) of the Double Taxation Avoidance Agreement (DTTA) between India and France, Canada, Germany, China etc. as per Tribunal - Held that - Tribunal relied on ruling of this Court in Director of Income Tax V. Ericsson A.B. 2011 (12) TMI 91 - Delhi High Court wherein held that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof. On these facts, it would be useful to refer to the judgment of the Supreme Court in TATA Consultancy Services Vs. State of Andhra Pradesh (2004 (11) TMI 11 - Supreme Court ), wherein held that software which is incorporated on a media would be goods and,therefore, liable to sales tax. Thus A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty. - Decided in favour of assessee.

Summary

Issues:
1. Whether income from supply of software embedded in hardware to customers amounts to royalty under Section 9(1)(vi) of the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA).
2. Whether the consideration of supply of embedded software constitutes royalty.
3. Whether the software supplied with hardware is an integral part of the system.
4. Whether the payment made for acquiring software is considered royalty.

Analysis:
1. The Revenue claimed to be aggrieved by the Income Tax Appellate Tribunal's order, arguing that income from supplying software embedded in hardware to customers in India constitutes royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA with various countries. The Tribunal and CIT(Appeals) held that the supply of embedded software did not amount to royalty, and thus, Section 9(1)(vi) and Article 13(3) of the DTAA were not applicable.

2. The Court referred to a previous ruling in Director of Income Tax v. Ericsson A.B., where it was held that the software supplied with hardware did not constitute royalty. The Court emphasized that the software was an integral part of the GSM mobile telephone system and could not be used independently. Citing the Supreme Court's judgment in TATA Consultancy Services v. State of Andhra Pradesh, the Court reiterated that software incorporated on a media is considered goods and not royalty.

3. The Court further highlighted that the software supplied with hardware was tangible property, and the payment made for acquiring such property could not be categorized as royalty. The Court also referenced another judgment in Director of Income Tax v. M/s. Nokia Networks to support the position that the supply of software with hardware does not amount to royalty.

4. Considering the settled legal position and precedents, the Court concluded that no substantial question of law arose in the case. Therefore, the appeal was dismissed, affirming that the payment for acquiring software embedded in hardware does not constitute royalty under the Income Tax Act or the DTAA.