The Delhi High Court recently dismissed a revenue appeal concerning the taxability of software licensing income under Section 260A of the Income Tax Act, 1961. The matter related to Assessment Year 2010-11, where the assessee, a company engaged in designing and providing wireless broadband solutions across the USA and parts of Africa, had licensed its off-the-shelf software to Zylog Systems (India) Ltd. The Revenue had sought to classify the license fee as “royalty” and bring it under the ambit of Section 9(1)(vi) of the Act read with Article 12 of the India–New Zealand Double Taxation Avoidance Agreement (DTAA).

The Assessing Officer concluded that income of ₹19.24 crores from the licensed software was taxable as royalty. However, the assessee argued that the transaction merely allowed the use of copyrighted material and not the copyright itself, and hence could not be treated as royalty. The Commissioner of Income Tax (Appeals) relied on the Delhi High Court’s earlier decision in DIT v. Infrasoft Ltd., holding that consideration received from software licensing is not taxable as royalty, as no copyright is transferred, only a limited right to use copyrighted material. The Commissioner further noted that retrospective amendments brought by the Finance Act, 2012, could not override treaty provisions under the DTAA.

The Revenue appealed to the Income Tax Appellate Tribunal (ITAT), contending that the decision in Infrasoft was not applicable to the present facts. The ITAT, however, dismissed the appeal by relying on the landmark Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, which had settled the issue by holding that payments made by Indian distributors or end-users to non-resident software suppliers for the use of software through End User License Agreements (EULAs) or distribution agreements do not constitute royalty. The Supreme Court clarified that such payments do not grant any right to use the copyright itself, and therefore no income arises in India for taxation. Consequently, no obligation to deduct tax at source under Section 195 of the Act arises in such cases.

The High Court, while considering the Revenue’s appeal, noted that the Revenue did not dispute the applicability of the Supreme Court’s judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. to the present case. Since the Supreme Court had already conclusively settled the issue, the Court held that no substantial question of law arose for consideration. Accordingly, the appeal was dismissed in favour of the assessee and against the Revenue.

This judgment reaffirms the legal position that software licensing arrangements, where only limited rights to use copyrighted software are granted, cannot be taxed as royalty under Indian tax law or applicable DTAAs. The decision underscores the binding effect of the Supreme Court’s ruling in Engineering Analysis on all similar disputes, ensuring consistency and clarity in tax treatment of cross-border software transactions.