Income earned from Supply of software embedded in hardware is not royalty
Case Citation: CIT vs. Alcatel Lucent Canada, Delhi HC, IT Appeal No.-119 to 157 of 2015, Date of Pronouncement: Feb 27,2015
Brief of the case:
The Hon’ble Delhi High Court in the case of Alcatel Lucent Canada held that the income earned from the supply of hardware equipment where the embedded software facilitates the functioning of the equipment cannot be taxed as royalty payments for use of software because there could not be any independent use of such software.
Facts of the case:
- The assessee is a France based company engaged in manufacturing, trading and supply of equipments and services for GSM Cellular Radio Telephones Systems.
- The assessee had supplied software embedded in hardware equipments to its customers in India. Such software embodied process which was required to control and manage specific set of activities involved in the business of its customers.
- The AO reopened the assessment to tax the consideration received by assessee as royalty under Sec 9(1) (vi) of the Act.
- The CIT(A) as well as tribunal held that supply of embedded software to the Indian customers not amount to royalty as per sec 9(1)(vii) and thus, not taxable in India.
Contention of the Revenue:
- Software licensed by the assessee contain the process which is required to control and manage the specific set of activities involved in the business use of its customers. Software also made available the process to its customers, who used it to carry out their business activities.
- Therefore, the consideration for supply of software amounted to royalty under Section 9(1) (vi) of the Act.
Contention of the Assessee:
- It has supplied tangible property (hardware equipment in which software embedded) and the payment made by the cellular operator for acquiring such property cannot be regarded as a payment by way of royalty.
- Therefore, the income earned is not in nature of royalty and at the best it is general business income which cannot be taxed as assessee has no PE in India.
Held by Hon’ble Delhi High Court:
- 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 telecommunication services to its customers. The embedded ‘software facilitates the functioning of the hardware and is an integral part thereof.
- The court relied on the judgement of Hon’ble Supreme court in the case of Tata Consultancy Services vs. State of Andhra Pradesh wherein it was held by the Apex court that software which is incorporated on a media would be goods and,therefore, liable to sales tax.
- By applying the ratio of this judgment the supply of embedded software is a pure sale on which no royalty can be earned by the assessee company.
Full Text of the Judgement