Dispute Over Royalty Income from Software License: DCIT vs Black Duck Software – ITA No. 6254/DEL/2019

Case Overview: DCIT vs Black Duck Software – ITA No. 6254/DEL/2019

Case Number: ITA 6254/DEL/2019

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

Respondent: Black Duck Software Inc., Noida

Assessment Year: 2016-17

Order Type: Final Tribunal Order

Date of Order: 14th July 2022

Case Filed On: 23rd July 2019

Bench: SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, and SHRI N.K. CHOUDHRY, JUDICIAL MEMBER

Introduction

This case concerns the appeal filed by the DCIT, Circle-1(1)(2), International Taxation, New Delhi against the order of CIT(A)-42, New Delhi, dated 13th May 2019. The primary issue in this appeal revolves around the taxability of payments received by the respondent, Black Duck Software Inc., Noida, under the provisions of Section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).

Background of the Case

Black Duck Software Inc. is a company registered in Delaware, USA, and is a leading provider of products and services for the management and compliance of open source software in enterprise-scale multi-source development. The company provides its customers with non-exclusive, non-transferable licenses for its software programs, with customers subscribing to these licenses for a specified period as per the agreement.

In the assessment year 2016-17, Black Duck Software received payments from Indian entities such as Infosys Ltd., Wipro Ltd., and Lyra Infosystems Pvt. Ltd. The payments were scrutinized by the Assessing Officer (AO) who, following precedents from previous assessment years, classified these receipts as ‘royalty’ under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-USA DTAA.

Contentions of the Revenue

The Revenue’s contention was based on the interpretation that the payments received by Black Duck Software for granting licenses to its software should be classified as ‘royalty income.’ The AO argued that since the licenses allowed the customers to use the software within their enterprises, these payments fell under the purview of royalty as defined under the Income Tax Act and the DTAA.

Assessee’s Defense

The assessee, Black Duck Software Inc., contested the AO’s classification. They argued that the software licenses provided were not for the use of any copyright but rather for the use of copyrighted articles, which is distinct from granting any rights over the copyright itself. The assessee further pointed out that similar cases in previous years had been ruled in their favor by the Tribunal and higher judicial authorities.

CIT(A) Ruling

The CIT(A) ruled in favor of the assessee, citing the Tribunal’s decisions in previous years and relevant judgments from the Delhi High Court. The CIT(A) held that the payments received by Black Duck Software did not fall under the definition of ‘royalty’ as per Article 12(3) of the India-USA DTAA and, therefore, could not be taxed under Section 9(1)(vi) of the Income Tax Act. The CIT(A) emphasized that the amendment in domestic law could not override the provisions of the DTAA.

Tribunal’s Decision

The ITAT Delhi ‘D’ Bench, comprising SHRI N.K. BILLAIYA and SHRI N.K. CHOUDHRY, upheld the CIT(A)’s decision. The Tribunal referred to the Supreme Court’s ruling in the case of Engineering Analysis Center of Excellence Pvt. Ltd. (2021) 432 ITR 471, which settled the debate on the taxability of software licenses under the DTAA.

In its judgment, the Tribunal noted that the Supreme Court had conclusively held that payments for the use of software through End User License Agreements (EULAs) or distribution agreements did not amount to royalty payments under Article 12 of the DTAA. The Tribunal observed that Black Duck Software’s case was analogous to the cases addressed by the Supreme Court, and therefore, the receipts could not be classified as royalty income taxable in India.

The Tribunal dismissed the Revenue’s appeal, directing the AO to delete the additions made under the classification of royalty.

Conclusion

The Tribunal’s decision in the case of DCIT vs Black Duck Software Inc. reaffirms the interpretation of royalty under the India-USA DTAA. The ruling emphasizes that software license payments, in the absence of transfer of copyright, do not constitute royalty income. This decision provides significant clarity for software companies operating across borders, particularly those dealing with non-exclusive, non-transferable licenses.

With this ruling, the dispute over the classification of software license payments as royalty under Indian tax law appears to be well-settled, aligning domestic tax provisions with international treaty obligations.

The order was pronounced in the open court on 14th July 2022.

Final Order: The appeal by the Revenue in ITA No. 6254/DEL/2019 is dismissed.

Bench: N.K. BILLAIYA (ACCOUNTANT MEMBER), N.K. CHOUDHRY (JUDICIAL MEMBER)

Dated: 14th July 2022

Dispute Over Royalty Income from Software License: DCIT vs Black Duck Software – ITA No. 6254/DEL/2019