The dispute in ITA No. 715/DEL/2020 between the Deputy Commissioner of Income Tax, Circle-1(1)(1), International Taxation, New Delhi, and Alcatel Lucent International, France, revolves around the tax treatment of payments received from software embedded in hardware for the assessment years 2015-16 and 2016-17.
Alcatel Lucent International, a prominent telecommunication equipment manufacturer, contends that its software, when sold embedded in hardware to Indian customers, does not constitute ‘royalty’ under both the India-France Double Taxation Avoidance Agreement (DTAA) and the Income Tax Act, 1961. The Income Tax Department, however, argued these payments were royalty, thus taxable in India.
The Income Tax Appellate Tribunal examined the legal framework and prior judicial precedents, including rulings from the Delhi High Court and the Supreme Court that had previously addressed similar disputes. Ultimately, the Tribunal upheld the CIT(A)’s decision that such software payments do not qualify as royalties, emphasizing the integrated nature of the software with the hardware and its classification as a sale of goods rather than a transfer of any copyright.
This ruling has significant implications for multinational companies operating in the tech sector, impacting how software embedded in hardware is treated under tax law. It provides clarity on the application of DTAAs and domestic tax laws to software sales, ensuring consistent tax treatment aligned with international standards.
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