CIT (IT) v. ZTE Corporation (2024)

📱 CIT (IT) vs. ZTE Corporation – Supreme Court on Non-Taxability of Software Embedded in Telecom Equipment under India–China DTAA (2024)

📌 Background

The taxation of payments for software embedded in imported equipment has been a recurring controversy under Section 9(1)(vi) of the Income-tax Act, 1961. The Revenue has often argued that such payments constitute “royalty”, while taxpayers contend that these are part of the sale of goods.

In CIT (IT) v. ZTE Corporation [(2024) 296 Taxman 571 (SC)], the Supreme Court dismissed the Revenue’s review petition, thereby affirming the Delhi High Court’s ruling (2021) that payments for software embedded in telecom equipment—such as mobile handsets and network systems—do not qualify as royalty either under Indian domestic law or the India–China DTAA.

The judgment reinforces the principle that where software is integrally embedded in hardware, the transaction is a sale of goods, not a licensing of copyright.

📂 Facts of the Case

1. Assessee: ZTE Corporation, a company incorporated in China.
2. Assessment Year: 2013–14.

Nature of Transaction: Sale of telecommunication equipment, including mobile                      handsets and network systems, to Indian telecom operators.

Revenue’s Position:

1. The payment for software embedded in the telecom equipment constituted royalty under Section 9(1)(vi) of the Act and Article 12 of the India–China DTAA.
2. The software, though integrated into the equipment, represented a separate intellectual property component licensed for use in India.

Assessee’s Stand:

1. The transaction was for the sale of goods, with the software being embedded and integral to the equipment’s functionality.
2. Indian customers did not obtain any rights over the copyright of the software — they only used the product as delivered.
3. Consequently, no income accrued or arose in India, and the transaction was not taxable under Indian law or the DTAA.

❓ Point of Dispute

Whether payments received by ZTE Corporation from Indian customers for telecom equipment (with embedded software) are taxable in India as royalty under Section 9(1)(vi) and Article 12 of the India–China DTAA.

📑 Submissions by the Assessee

1. Integrated Nature of Equipment: The software formed an inseparable part of the telecom hardware, supplied as a complete functional unit.
2. No Transfer of Copyright: Indian customers were never given the right to modify, duplicate, or distribute the software.
3. Nature of Payment: The consideration was entirely for the purchase of goods, not for the use or right to use any intellectual property.
4. Reliance on Judicial Precedent: The assessee cited the landmark Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (2021) 432 ITR 471 (SC), where the Supreme Court held that payment for use of copyrighted software does not constitute royalty.

📑 Submissions by the Revenue

1. The software embedded in the telecom equipment was licensed for use in India and therefore amounted to the use of copyright.
2. The equipment could not function without the software, and hence, the payment was partly attributable to technology use.
3. Accordingly, the Department argued that the consideration for such software qualified as royalty under Section 9(1)(vi) and Article 12.

⚖️ Legal Principles & Court’s Findings

1. Delhi High Court’s Findings (CIT (IT) v. ZTE Corporation, 2021)

The High Court rejected the Revenue’s argument, holding that:

1. The software and hardware were inseparable and sold as a composite product.
2. The software merely facilitated the functioning of the equipment and did not represent a separate license.
3. The transaction was therefore a contract for sale of goods, not a licensing arrangement.
4. The payment for such software did not constitute royalty under Section 9(1)(vi) or Article 12(3) of the India–China DTAA.

2. Supreme Court’s Observations

1. The SLP filed by the Revenue was dismissed in 2021 (282 Taxman 304 (SC)), affirming the High Court’s view.
2. Subsequently, the Revenue filed a review petition, which was again dismissed by the Supreme Court in 2024 (296 Taxman 571).
3. The Court held that no error apparent on record justified reopening the matter, and the Delhi High Court’s interpretation stood confirmed.

🏁 Held

✅ The payment for software embedded in telecom equipment constitutes part of the sale consideration for goods, not royalty.

✅ No transfer of copyright rights occurred — the customer merely purchased an operational device.

✅ The income did not accrue or arise in India, and hence, was not taxable under Section 9(1)(vi) or Article 12 of the India–China DTAA.

✅ Both the SLP and review petition filed by the Revenue were dismissed, making the High Court’s ruling final.

✅ Practical Impact on Taxpayers

1. Relief for hardware and electronics manufacturers: Foreign suppliers of equipment with embedded software (e.g., telecom, automotive, medical devices) can treat such sales as non-taxable in India.
2. Consistency with global practice: Aligns with international tax principles distinguishing copyrighted articles from copyright rights.
3. TDS implications: Indian companies purchasing such equipment are not required to deduct TDS under Section 195 for the software component.
4. Strengthens judicial certainty: Follows a consistent pattern of decisions in Engineering Analysis (2021), Microsoft Regional Sales (2024), MOL Corporation (2024), and Nagravision S.A. (2024).

🔑 Key Takeaways

1. Embedded software ≠ royalty: Payments for software integral to hardware are part of the sale of goods, not royalties.
2. No copyright transfer: Customers receive no right to reproduce, adapt, or distribute software.
3. DTAA protection: Under Article 12 of the India–China DTAA, payments for copyrighted articles are not taxable as royalties.
4. Judicial consistency: Confirms the Supreme Court’s consistent stance from Engineering Analysis (2021) onwards.

📢 Why This Case Matters

The CIT (IT) v. ZTE Corporation (2024) decision is a vital reaffirmation of India’s evolving stance on cross-border software and technology taxation. It conclusively distinguishes supply of goods containing software from licensing of intellectual property, reducing the risk of double taxation and unnecessary TDS burdens.

By upholding the Delhi High Court’s view and dismissing the Revenue’s review petition, the Supreme Court ensured stability, predictability, and alignment with treaty obligations — strengthening India’s attractiveness for global technology manufacturers.

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