CIT (IT) v. Nagravision S. A. (2023)

📺 CIT (IT) vs. Nagravision S.A. – Delhi High Court: Sale of Conditional Access Systems & Middleware Not Royalty Under India–Switzerland DTAA (2024)

📌 Background

The taxation of cross-border software and technology transactions continues to be one of the most extensively litigated issues under Indian international tax law. Section 9(1)(vi) of the Income-tax Act expands the domestic definition of “royalty,” but when a Double Taxation Avoidance Agreement (DTAA) applies, Section 90(2) mandates that the treaty definition overrides.

In recent years, Indian courts—especially after the Supreme Court’s landmark ruling in Engineering Analysis (2021)—have consistently held that payments for standard software or technology products do not constitute royalty unless there is a transfer of rights in copyright, patents, or processes.

In CIT (IT) v. Nagravision S.A. (2024), the Delhi High Court applied these principles to hold that the sale of conditional access systems (CAS) and middleware products by a Swiss company to Indian customers does not amount to royalty, either under Section 9(1)(vi) or Article 12(3) of the India–Switzerland DTAA.

The Supreme Court later dismissed the Revenue’s SLP, confirming the correctness of the ruling.

📂 Facts of the Case

• Assessee: Nagravision S.A., a Swiss tax resident.
• Products Supplied:
  • Conditional Access System (CAS) technology
  • Middleware products enabling secure access to TV and digital broadcast networks
• Customers: Indian telecom/broadcast operators.
• Nature of Transaction:
  Sale of technology products without transferring intellectual property rights.
• Revenue’s Stand:
  • Payments received for CAS and middleware amounted to royalty under domestic law.
  • The products allowed Indian customers to use patented technology and embedded software.
  • Therefore, Article 12(3) of the India–Switzerland DTAA was applicable.
• Assessee’s Stand:
  • The transactions involved sale of standard equipment/software.
  • No copyright, patent, or process was transferred.
  • Customers only received usage rights necessary to operate the product—not rights to exploit or commercialize the technology.
  • Hence, the payments were business profits, taxable only if the assessee had a PE in India—which it did not.

Assessment Year: 2017–18.

❓ Point of Dispute

Whether consideration received by the Swiss company for sale of conditional access systems and middleware products to Indian customers constituted royalty under Section 9(1)(vi) or Article 12(3) of the India–Switzerland DTAA?

📑 Submissions by the Assessee

• No transfer of copyright or rights therein:
  The Indian operator could not reproduce, modify, decompile, or exploit the CAS technology commercially.
• Embedded software only operated the hardware; users had no access to underlying source code.
• DTAA definition narrower:
  Article 12(3) taxes royalty only if a right to use copyright, patent, process, or secret formula is transferred.
• Equipment supply is not royalty:
  CAS and middleware were technology products, sold as equipment/software packages.
• No Permanent Establishment (PE):
  Therefore, income cannot be taxed as business profits.

📑 Submissions by the Revenue

• CAS and middleware contained proprietary embedded software.
• Indian customers obtained the right to use specialized technology to decrypt and access digital signals.
• This constituted “use of process” or “use of equipment” and therefore fell under royalty definitions.
• Tribunal erred in following Engineering Analysis too broadly.

⚖️ Legal Principles & High Court’s Findings

1. No transfer of any copyright or IP rights

The Court held that Nagravision retained complete ownership of all intellectual property:

• No source code was transferred.
• No right to replicate, modify, or commercially exploit the CAS or middleware was granted.
• Customers simply used the products as intended.

Thus, no royalty arose.

2. Embedded software does not trigger royalty

Echoing Engineering Analysis (SC 2021), the Court held:

• When software is embedded in a device, consideration paid for the device cannot be taxed as royalty.

CAS products were supplied as integrated technology solutions, not IP licenses.

3. Article 12(3) of India–Switzerland DTAA overrides domestic law

The DTAA defines royalty more restrictively than Section 9(1)(vi):

• Only payments for the use of, or right to use, copyright, patent, trademark, secret formula or process can be taxed.

The Court found no such rights granted to Indian customers.

4. No “use of process”

A process must be:

• secret,
• proprietary, and
• made available to the user.

Indian broadcasters merely used the output of Nagravision’s proprietary process; they were never given access to or control over the process itself.

5. Tribunal’s view was correct

The Court upheld the Tribunal’s finding that the payments were for procurement of technology products—not for licensing intellectual property.

🏁 Held

✔ Receipts from sale of conditional access systems and middleware not royalty.

✔ No transfer of copyright or rights in a process.

✔ Article 12(3) of India–Switzerland DTAA not attracted.

✔ Income not taxable in India in absence of PE.

✔ Revenue’s appeal dismissed.

SLP of Revenue dismissed by Supreme Court, affirming the High Court’s decision.

✅ Practical Impact

• Strengthens jurisprudence that embedded software does not create royalty.
• Reduces litigation for foreign technology suppliers selling equipment with embedded software.
• Confirms DTAA protection for equipment/software supply transactions.
• Ensures India remains compliant with global tax norms after Engineering Analysis.

🔑 Key Takeaways

1. Sale of CAS or middleware is akin to sale of equipment—not a copyright license.
2. Embedded software does not trigger royalty characterisation.
3. DTAA overrides domestic deeming provisions.
4. No income taxable in India absent a PE.
5. Supreme Court affirmation makes the ruling settlement of law.

📢 Why This Case Matters

This decision offers crucial clarity for foreign technology and broadcast-equipment suppliers. It confirms that mere use of technology products does not amount to use of copyright or royalty, aligning Indian jurisprudence with international standards.

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