CIT (LTU) v. Reliance Industries Ltd (2024)

💻 CIT (LTU) vs. Reliance Industries Ltd.

Bombay High Court on Software Payments Not Being Royalty under India–Finland DTAA (2024)

📌 Background

One of the most persistent controversies in international taxation relates to the characterization of payments for computer software made by Indian companies to foreign software suppliers. The Income-tax Department historically treated such payments as royalty under Section 9(1)(vi), for “use or right to use copyright,” which triggered a TDS obligation under Section 195.

However, the Supreme Court’s landmark ruling in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (2021) clarified that payments by Indian end-users or distributors for software do not constitute royalty, as there is no transfer of copyright, only a copyrighted article.

In CIT (LTU) v. Reliance Industries Ltd. (2024), the Bombay High Court reaffirmed this settled law while dealing with software payments made to a Finnish company under the India–Finland DTAA, dismissing Revenue’s appeal.

📂 Facts of the Case

• Assessee: Reliance Industries Ltd.
• Payee: A non-resident Finnish company, engaged in computer software manufacturing and supply.
• Nature of Transactions: Payments for resale/use of computer software through distribution agreements.
• Assessee’s Position:
  • Software payments are not royalty under Section 9(1)(vi) or Article 12 of the India–Finland DTAA.
  • No transfer of copyright → only a right to use the software.
  • Hence, no tax liability arises in India; accordingly, no TDS obligation under Section 195.
• Assessment Years: 2008–09 and 2009–10.
• Revenue’s Argument:
  • Payments constituted royalty as per domestic law.
  • TDS should have been deducted.

Lower authorities had already granted relief to the assessee, leading to Revenue’s appeal before the Bombay High Court.

❓ Point of Dispute

Do payments to a non-resident Finnish software supplier for software resale/use amount to “royalty” under Section 9(1)(vi) or Article 12 of the India–Finland DTAA, thereby requiring TDS under Section 195?

📑 Submissions by the Assessee

• The foreign supplier granted a non-exclusive, non-transferable licence for using the software.
• No copyright rights were transferred—hence, no “use of copyright.”
• The transaction is merely sale of a copyrighted article, not the copyright itself.
• Fully covered by Engineering Analysis (2021) and earlier Bombay High Court judgments, including CIT v. Reliance Industries Ltd. (2024) 299 Taxman 488.
• Under Article 12 of the India–Finland DTAA, royalty requires transfer of rights in copyright, not mere use of a software copy.

📑 Submissions by the Revenue

• The licence to use software amounted to granting a right “in respect of copyright.”
• Payments fall within Explanation 2 to Section 9(1)(vi).
• Thus, the assessee should have deducted TDS on software payments.
• Tribunal misapplied the Engineering Analysis judgment.

⚖️ Legal Principles & Court’s Findings

1. Engineering Analysis (SC, 2021) governs the issue

The High Court emphasized that the Supreme Court has conclusively held:

• Payments by end-users or distributors for computer software do not constitute royalty.
• What is transferred is only a copyrighted article, not copyright rights.

2. No Transfer of Copyright → No Royalty

Reliance did not receive rights to:

• reproduce the software,
• modify it,
• distribute copies commercially,
• sublicense the software, or
• decompile/alter source code.

Thus, the transaction never involved copyright as defined under the Copyright Act, 1957.

3. DTAA Article 12 overrides domestic law

Even if domestic law were interpreted differently:

• DTAA prevails as per Section 90(2),
• and Article 12 of the India–Finland DTAA taxes royalty only when copyright rights are transferred.

4. No substantial question of law arises

The Court noted:

• The Tribunal’s decision followed binding precedent.
• There was no debatable issue.
• Appeal was merely an attempt to reargue settled law.

Therefore, the appeal was dismissed.

🏁 Held

The Bombay High Court held:

✔ Payments for software resale/use do not amount to royalty.

✔ Income does not accrue or arise in India under Section 9(1)(vi).

✔ No TDS liability arises under Section 195.

✔ Article 12 of the India–Finland DTAA protects the assessee.

✔ Revenue’s appeal dismissed; no substantial question of law involved.

✅ Practical Impact for Companies

• Full clarity on software purchases: Payments for typical software licences or resale arrangements are not royalty.
• DTAA protection remains strong: Taxpayers can rely on beneficial treaty provisions.
• No TDS burden: Purchases of off-the-shelf or standard software do not require withholding tax.
• Certainty for cross-border IT transactions: Helps Indian businesses avoid unnecessary TDS litigation.

🔑 Key Takeaways

1. Engineering Analysis (SC) continues to define the law on software payments.
2. Payments for software use/resale do not constitute royalty under Section 9(1)(vi) or DTAA Article 12.
3. TDS under Section 195 is not applicable in such cases.
4. India–Finland DTAA protections align with global tax norms.
5. High Courts consistently uphold non-taxability of standard software payments.

📢 Why This Case Matters

This ruling further cements jurisprudence on software taxation, ensuring certainty and consistency across High Courts. By reiterating that software payments do not amount to royalty, the Court safeguarded businesses from repetitive litigation and upheld treaty-based taxation principles.

It also contributes to India’s evolving stance on digital payments taxation—balancing technological realities with international tax treaties.

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