CIT (IT) v. Microsoft Regional Sales Pte. Ltd. (2024)

💻 CIT (IT) v. Microsoft Regional Sales Pte. Ltd. – Supreme Court Affirms: Software Sales Revenue Not Taxable as Royalty in India (2024)

📘 Background

The taxation of software sales under Section 9(1)(vi) of the Income-tax Act, 1961, and Article 12 of various DTAAs has been one of the most litigated issues in Indian international tax law.

Following the landmark ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT [(2021) 432 ITR 471 (SC)], the Supreme Court once again reaffirmed the principle that payments for software sales cannot be treated as “royalty.”

In CIT (IT) v. Microsoft Regional Sales Pte. Ltd. [(2024) 301 Taxman 402 (SC)], the Supreme Court dismissed the Revenue’s Special Leave Petition (SLP), thereby upholding the Delhi High Court’s decision in CIT (IT) v. Microsoft Regional Sales Pte. Ltd. [(2024) 159 taxmann.com 278 (Delhi)(HC)].

The judgment provides complete judicial certainty that revenues from software sales to Indian clients by a non-resident entity are not taxable in India as royalty or fees for technical services (FTS) under the India–USA DTAA.

⚙️ Facts of the Case

• Assessee: Microsoft Regional Sales Pte. Ltd., a company incorporated and tax resident in Singapore, part of the Microsoft Group (USA).
• Assessment Years: 2010–11 to 2017–18.
• Nature of Income:
  • The assessee earned revenue from sale of software licenses to Indian distributors and clients.
  • The software was delivered electronically or through physical media.
• Transaction Model:
  • The assessee sold off-the-shelf (standardized) software under End User License Agreements (EULAs).
  • The Indian customers obtained only a non-exclusive, non-transferable licence to use the software; no copyright or source code rights were transferred.
• Revenue’s Stand:
  • The payments were for the use or right to use copyright, and hence taxable as royalty under Section 9(1)(vi) and Article 12 of the India–USA DTAA.
  • The assessee should have been subjected to TDS under Section 195.
• Assessee’s Contention:
  • The transaction was sale of copyrighted articles, not use of copyright.
  • The income was business profit, not taxable in India in the absence of a Permanent Establishment (PE).

❓ Key Issue

Whether the revenue from software sales to Indian customers by Microsoft Regional Sales Pte. Ltd. constitutes “royalty” or “fees for technical services” (FTS) under Section 9(1)(vi)/(vii) or Article 12 of the India–USA DTAA, thereby being taxable in India.

📑 Relevant Legal Provisions

🔹 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 process.

🔹 Section 9(1)(vii) – Fees for Technical Services

Covers consideration for managerial, technical, or consultancy services.

🔹 Section 195 – TDS on Payments to Non-Residents

Requires deduction of tax at source on payments chargeable to tax in India.

🔹 Article 12(3) of the India–USA DTAA – Royalty Definition

“Payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific work…”

🔹 Article 7 – Business Profits

Business income is taxable in India only if the foreign enterprise has a Permanent Establishment (PE) in India.

⚖️ Delhi High Court’s Findings (2024)

The Delhi High Court, following the ratio of the Supreme Court in Engineering Analysis (2021), held in favour of the assessee.

Key Observations:

1. Nature of Software Transaction:
   • The sale of software licences to Indian customers was for use of copyrighted articles, not use of the copyright itself.
   • No transfer of rights under Section 14 of the Copyright Act, 1957 occurred.
2. Not Royalty under Section 9(1)(vi):
   • Payments made for use of software copies do not constitute royalty either under the domestic law or the DTAA.
3. Amendments to Section 9(1)(vi) Not Applicable:
   • The retrospective amendments expanding the meaning of “royalty” do not alter the definition under the DTAA.
   • DTAAs override domestic law under Section 90(2).
4. No Technical Services Involved:
   • The sale of off-the-shelf software did not involve any managerial, technical, or consultancy service; therefore, it could not be taxed as fees for technical services.
5. Absence of Permanent Establishment:
   • The assessee had no PE in India, and hence business income could not be taxed in India.

⚖️ Supreme Court’s Decision (2024)

• The Supreme Court dismissed the Revenue’s SLP, affirming the Delhi High Court’s findings.
• The Court relied on and reaffirmed its earlier rulings in:
  • Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471 (SC); and
  • CIT v. GE India Technology Centre Pvt. Ltd. (2024) 469 ITR 389 (SC).

Key Takeaways from the Supreme Court Order:

1. No Royalty Characterization:
   • Revenue from software sales to Indian clients cannot be treated as royalty under Section 9(1)(vi) or Article 12 of the India–USA DTAA.
2. No TDS Obligation:
   • Since the income is not taxable in India, the assessee is not liable to deduct tax under Section 195.
3. Finality of Engineering Analysis Doctrine:
   • The Supreme Court reiterated that licensing of copyrighted software is not licensing of copyright.
4. Dismissal of SLP:
   • The Court found no merit in the Revenue’s appeal and dismissed the SLP, thereby confirming the High Court’s judgment.

✅ Held

• Revenue from software sales to Indian clients is not taxable as royalty.
• Payments for standard software licences are not for use of copyright, but for use of copyrighted material.
• No FTS element is involved.
• Assessee not liable to deduct TDS under Section 195.
• Supreme Court dismissed Revenue’s SLP and upheld Delhi High Court’s ruling.

💡 Key Takeaways

1. Software Sales = Sale of Goods, Not Royalty:
   • Payments for standard software (off-the-shelf) licences are business receipts, not royalty income.
2. DTAA Supremacy:
   • Article 12 of the India–USA DTAA overrides domestic law amendments to Section 9(1)(vi).
3. No Withholding Tax:
   • TDS under Section 195 is not required when payments are not chargeable to tax in India.
4. No Technical Services:
   • Software licensing does not involve managerial or consultancy services; therefore, it is not fees for technical services under Section 9(1)(vii).
5. Judicial Finality:
   • Supreme Court’s consistent approach—from Engineering Analysis (2021) to GE India (2024) and now Microsoft (2024)—provides complete legal certainty.

🌐 Why This Case Matters

The Microsoft Regional Sales Pte. Ltd. ruling consolidates judicial clarity on software taxation in India. It ensures that foreign software vendors and distributors are not unfairly taxed as earning “royalty” income when selling off-the-shelf or licensed software to Indian clients.

This decision strengthens India’s commitment to DTAA consistency, promotes ease of doing business, and aligns Indian tax jurisprudence with global OECD standards on royalty definition.

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