CIT (IT) v. Gracemac Corporation Golf View Corporate (2024)

💾 CIT (IT) v. Gracemac Corporation Golf View Corporate – Supreme Court Affirms: Software Licensing Payments Not Taxable as Royalty under India–USA DTAA (2024)

📘 Background

The long-standing debate on whether payments for software licensing or resale of computer software to Indian distributors constitute “royalty” under Section 9(1)(vi) of the Income-tax Act, 1961, and Article 12 of the India–USA DTAA, has now been conclusively settled.

In CIT (IT) v. Gracemac Corporation Golf View Corporate [(2024) 301 Taxman 172 / 468 ITR 1 (SC)], the Supreme Court dismissed the Revenue’s SLP, thereby upholding the Delhi High Court’s ruling that such payments are not taxable as royalty in India.

This case reinforces the Supreme Court’s landmark judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471 (SC), confirming that software licence payments for resale or use do not amount to royalty, and hence no tax is deductible at source under Section 195.

⚙️ Facts of the Case

• Assessee: Gracemac Corporation Golf View Corporate, a US-based software company, part of the Microsoft group.
• Assessment Years: 2005–06, 2007–08.
• Business Model:
  • The assessee owned copyrights in various software programs developed and distributed globally.
  • It granted non-exclusive licences to Indian distributors and resellers (including Microsoft India Pvt. Ltd.) to market and distribute software in India.
  • The distributors sold the software to end-users under End User Licence Agreements (EULAs) that allowed use of the software but not the underlying copyright.
• Revenue’s Contention:
  • Payments made by Indian distributors constituted “royalty” under Section 9(1)(vi) of the Act and Article 12 of the India–USA DTAA.
  • The transactions involved the use or right to use copyright, and thus were taxable in India.
• Assessee’s Argument:
  • The software was sold as copyrighted articles, not the copyright itself.
  • There was no transfer of any rights enumerated in Section 14 of the Copyright Act, 1957.
  • Hence, payments were business income, not taxable in India in absence of a Permanent Establishment (PE).

❓ Key Issue

Whether payments made by Indian distributors for the purchase or licensing of software products from the US-based company amounted to royalty under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India–USA DTAA, thereby attracting taxability in India.

📑 Relevant Legal Framework

🔹 Section 9(1)(vi) – Royalty

Deems income to accrue or arise in India if it is payable for the use or right to use any copyright, patent, or similar property.

🔹 Article 12(3) – India–USA DTAA

Defines “royalties” as payments for the use of, or right to use, any copyright of a literary, artistic, or scientific work.

🔹 Section 195

Mandates tax deduction at source on payments to non-residents only if such income is chargeable to tax in India.

🔹 Copyright Act, 1957 (S. 14)

Distinguishes between the use of a copyrighted article and the use of copyright itself.

⚖️ Findings of the Delhi High Court

In CIT (IT) v. Gracemac Corporation Golf View Corporate [(2022) 287 Taxman 197 / 456 ITR 124 (Delhi)], the Court ruled in favour of the assessee, applying the Supreme Court’s reasoning in Engineering Analysis (2021).

Key Observations:

1. Nature of Right Transferred:
   • Indian distributors obtained only the right to use the software, not to exploit the copyright itself.
   • There was no right to reproduce, modify, distribute, or create derivative works, which are exclusive rights under Section 14 of the Copyright Act.
2. Characterization of Payment:
   • The payments were for purchase of copyrighted articles, not for use of copyright.
   • Hence, such payments could not be categorized as royalty under Section 9(1)(vi) or Article 12 of the DTAA.
3. No PE in India:
   • The assessee had no Permanent Establishment in India; therefore, the income could not be taxed as business income under Article 7 of the DTAA.
4. Amendments to Section 9(1)(vi) Irrelevant:
   • The 2012 retrospective amendments to expand the definition of “royalty” under domestic law cannot override the DTAA.
   • Under Section 90(2), the DTAA prevails if more beneficial to the taxpayer.
5. Non-Applicability of TDS:
   • As the payments were not taxable in India, the Indian payers were not liable to deduct tax under Section 195.

⚖️ Supreme Court’s Decision (2024)

The Supreme Court, in CIT (IT) v. Gracemac Corporation Golf View Corporate [(2024) 301 Taxman 172 / 468 ITR 1 (SC)], dismissed the Revenue’s SLP, thereby affirming the Delhi High Court’s ruling.

Key Highlights:

• The Court found no merit in the Revenue’s appeal.
• Reiterated that payments for software licences do not constitute royalty, as per Engineering Analysis (2021).
• Confirmed that Article 12 of the India–USA DTAA applies and the payments are not taxable in India.
• Thus, no withholding obligation under Section 195 arises.

✅ Held

• Software licence payments made by Indian distributors to the US-based assessee do not constitute royalty.
• Revenue from software resale/use is not taxable in India.
• DTAA protections apply; domestic amendments cannot expand tax liability.
• No obligation to deduct tax at source under Section 195.
• Supreme Court dismissed Revenue’s SLP, thereby giving judicial finality to the issue.

💡 Key Takeaways

1. Software Licensing ≠ Royalty:
   • Payments for off-the-shelf or distributed software are for copyrighted articles, not use of copyright.
2. DTAA Prevails:
   • Article 12 (India–USA DTAA) overrides retrospective domestic amendments expanding “royalty”.
3. No TDS Obligation:
   • Since income is not chargeable to tax, Section 195 does not apply.
4. Reaffirmation of Engineering Analysis (2021):
   • Strengthens jurisprudence on non-taxability of software payments.
5. Certainty for Tech Sector:
   • Provides clarity for cross-border technology licensing and distribution models, encouraging ease of doing business.

🌐 Why This Case Matters

The Gracemac Corporation decision represents another milestone in the evolution of India’s digital economy taxation.
By reaffirming Engineering Analysis (2021), the Supreme Court has solidified that foreign software suppliers and licensors are not taxable in India merely because they license or sell software to Indian clients.

This decision reinforces the principle that India’s tax regime must align with international norms and treat software transactions based on their true commercial substance.

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