DCIT vs. Black Duck Software Inc. on Royalty Income Dispute – Assessment Year 2015-16

DCIT vs. Black Duck Software Inc., Noida: Royalty Income Dispute

Case Number: ITA 6253/DEL/2019

Appellant: DCIT, Circle-1(1)(2), International Taxation, New Delhi

Respondent: Black Duck Software Inc., Noida

Assessment Year: 2015-16

Date of Filing: 2019-07-23

Order Date: 2022-07-14

Type of Order: Final Tribunal Order

Introduction

This case involves the DCIT, Circle-1(1)(2), International Taxation, New Delhi, filing an appeal against Black Duck Software Inc., a company based in Noida, concerning the classification of payments received from the sale of software licenses as royalty income under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA). The dispute pertains to the assessment year 2015-16.

Background and Grounds of Appeal

Black Duck Software Inc. is registered in the State of Delaware, USA, and is a leading provider of products and services that ensure compliance and secure use of open-source software in multi-source development at an enterprise scale. The company provides its customers with a non-exclusive, non-transferable license for its software, which customers subscribe to for a specified period according to the agreement terms.

In the assessment year 2015-16, Black Duck Software Inc. received payments of ₹2.93 crores from Infosys Ltd., ₹1.08 crores from Wipro Ltd., and ₹5.76 lakhs from Lyra Infosystems Pvt. Ltd. During the scrutiny assessment proceedings, the Assessing Officer (AO) examined the Master License and Subscription License Agreement and questioned whether these payments should be taxed as royalty income.

The AO was not convinced by the company’s argument that the payments were for a copyrighted article (the software itself) and not for the copyright, and thus should not be classified as royalty. Following the logic of earlier assessment years, the AO concluded that the payments constituted royalty income under both the Income Tax Act and Article 12 of the India-USA DTAA.

Arguments Presented

Black Duck Software Inc. challenged the AO’s conclusion before the Commissioner of Income Tax (Appeals) [CIT(A)], drawing attention to a previous ruling by the Income Tax Appellate Tribunal (ITAT) in the company’s favor for the assessment year 2012-13. The CIT(A) considered the previous ITAT ruling, which held that the payments for software licenses did not constitute royalty income, and supported the respondent’s claim.

The CIT(A) found that the software provided by Black Duck Software Inc. was licensed under strict terms, which did not grant customers any rights to the software beyond its use as a tool. The customers had no rights to modify, distribute, or exploit the software’s copyright, meaning the payments were not for the use of or right to use a copyright. Therefore, the CIT(A) ruled that these payments should not be taxed as royalty income under the DTAA or the Income Tax Act.

Tribunal’s Analysis and Judgment

The ITAT Delhi Bench ‘D’, comprising Accountant Member Shri N.K. Billaiya and Judicial Member Shri N.K. Choudhry, heard the appeals filed by the DCIT. Despite the absence of the respondent’s representative, the tribunal considered the matter based on the submissions and legal precedents presented by the department’s representative.

The key points discussed by the tribunal include:

1. Definition of Royalty under the DTAA

The tribunal emphasized the definition of royalty under Article 12(3) of the India-USA DTAA, which requires that payments classified as royalties must involve the transfer of rights to a copyright. In this case, the payments made by Indian companies to Black Duck Software Inc. were for the use of the software itself, not for the rights to the software’s underlying copyright.

2. Supreme Court Ruling in Engineering Analysis Center of Excellence Pvt. Ltd.

The tribunal referenced the landmark Supreme Court judgment in Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT (2021) 432 ITR 471, where the Court held that payments for software licenses do not constitute royalty under the DTAA. The Supreme Court ruled that such payments are for the purchase of copyrighted articles (software) and do not involve the transfer of any copyright.

This ruling was decisive in the tribunal’s decision to dismiss the Revenue’s appeal, as the facts of this case were similar to those considered by the Supreme Court.

3. Impact of Domestic Law Amendments

The tribunal noted that amendments to domestic law, such as those in Section 9(1)(vi) of the Income Tax Act, could not override the provisions of the DTAA unless they are more beneficial to the taxpayer. Since the DTAA provisions were more beneficial to Black Duck Software Inc., the tribunal ruled that the payments could not be taxed as royalty income under Indian law.

Conclusion

After thoroughly examining the case, the tribunal concluded that the payments received by Black Duck Software Inc. from its Indian customers for software licenses did not qualify as royalty income under the India-USA DTAA or the Income Tax Act. The tribunal ruled that these payments were for the purchase of copyrighted articles, not for the use of copyright, and therefore could not be taxed as royalty income.

The tribunal’s decision to dismiss the Revenue’s appeals was based on the principles established by the Supreme Court in the Engineering Analysis Center of Excellence Pvt. Ltd. case, ensuring consistency in the interpretation of international tax treaties.

Order Pronounced in the Open Court on 14/07/2022.

Signed by:

(N.K. Choudhry) Judicial Member

(N.K. Billaiya) Accountant Member

Date: 14/07/2022

Assistant Registrar, ITAT, Delhi

DCIT vs. Black Duck Software Inc. on Royalty Income Dispute – Assessment Year 2015-16