CIT(IT-3) v. Lucent Technologies GRL LLC (2024)

💻 CIT (IT-3) vs. Lucent Technologies GRL LLC

Bombay High Court on Software Payments Not Being Royalty (2024)

📌 Background

Whether payments for computer software qualify as “royalty” under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India–USA DTAA has been one of the most litigated issues in international taxation.

For years, tax authorities treated software payments as royalty, arguing that they involve the use of copyright. However, the landmark Supreme Court judgment in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (2021) settled the law:
Payments made by Indian end-users or distributors to foreign software suppliers do not constitute royalty, since they involve transfer of a copyrighted article, not a copyright right.

In CIT (IT-3) v. Lucent Technologies GRL LLC (2024), the Bombay High Court reaffirmed this position, dismissing Revenue’s appeal and protecting taxpayers from unwarranted TDS liability.

📂 Facts of the Case

• Assessee: Lucent Technologies GRL LLC, a USA-based non-resident.
• Nature of Income: Receipts from supply of software to Indian customer, Reliance.
• Claim of Assessee:
  • Income is business profits under the India–USA DTAA.
  • No Permanent Establishment (PE) in India → No tax liability.
• Assessing Officer’s Stand:
  • Payments represent royalty u/s 9(1)(vi) as they involve a licence to use software.
  • Hence, Indian payers required to deduct tax at source.
• CIT(A): Allowed assessee’s appeal.
• ITAT: Confirmed CIT(A)’s decision.
• Revenue Appeal to Bombay High Court: Challenged ITAT order.

Assessment Years involved: 2003-04, 2004-05, 2006-07, 2010-11.

❓ Point of Dispute

Whether consideration received by a foreign company for supply of computer software to Indian end-users constitutes “royalty” under Section 9(1)(vi) and Article 12 of the India–USA DTAA, thereby requiring TDS u/s 195?

📑 Submissions by the Assessee

• The supply of software constituted sale of a copyrighted article, not the copyright itself.
• Reliance received only a non-exclusive, non-transferable end-user licence for operating the software.
• No PE existed in India; therefore, under DTAA Article 7, business income cannot be taxed in India.
• Supreme Court’s judgment in Engineering Analysis (2021) squarely covers the issue.
• Hence, payments cannot be treated as royalty, and no TDS obligation arises.

📑 Submissions by the Revenue

• Revenue contended that the end-user licence involved “use of copyright,” hence qualifying as royalty under Section 9(1)(vi).
• Argued that the ITAT failed to appreciate the licence terms and the nature of rights transferred.
• Sought to tax the receipts in India and hold payer responsible for TDS default.

⚖️ Legal Principles & Court’s Findings

1. Engineering Analysis (Supreme Court, 2021) is binding

The Court held that the controversy had been conclusively resolved in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT.

The Supreme Court ruled that:

• Payments for shrink-wrapped/off-the-shelf software—whether direct, via distributors, or through EULAs—
  do not constitute royalty under domestic law or DTAAs.
• Such transactions involve sale of a copyrighted article, not transfer of copyright rights.

2. No “use or right to use copyright”

The High Court noted that Reliance only received:

• Right to install and use the software,
• Without right to modify, reproduce, commercialize, or transfer.

Thus, there was no transfer of copyright, only a right to use the product.

3. DTAA Article 12 prevails over domestic law

Even if Section 9(1)(vi) were interpreted differently, the DTAA’s more beneficial provisions would apply as per Section 90(2).

Under Article 12(3) of the India–USA DTAA:

• Royalty covers use of copyright,
• Not the use of a copyrighted article.

4. ITAT’s view stands; no substantial question of law

The High Court held:

• ITAT’s order was perfectly aligned with Supreme Court law.
• No substantial question of law arose under Section 260A.
• Revenue’s appeal was dismissed.

🏁 Held

The Bombay High Court held:

✔ Payments received by Lucent Technologies for supply of software are not royalty.

✔ No income is deemed to accrue or arise in India under Section 9(1)(vi).

✔ No TDS obligation under Section 195 arises.

✔ Engineering Analysis (SC, 2021) governs the matter.

✔ Revenue’s appeal dismissed; ITAT order affirmed.

✅ Practical Impact on Taxpayers

• Final clarity: Software payments to foreign suppliers are not taxable as royalty unless copyright rights are transferred.
• No PAN, no PE, no problem: Non-residents without a PE continue to be protected by DTAA.
• TDS relief: Indian payers need not deduct tax on standard software purchases.
• Consistency in rulings: Strengthens jurisprudence across multiple High Courts and Tribunals.

🔑 Key Takeaways

1. Payments for software use are not royalty, unless rights akin to copyright ownership are transferred.
2. Engineering Analysis (SC) remains the decisive authority.
3. DTAA protection overrides aggressive domestic interpretations.
4. Payers purchasing software for internal use face no TDS liability.

📢 Why This Case Matters

The Lucent Technologies ruling further cements Supreme Court’s 2021 landmark judgment, offering certainty in cross-border software transactions. It prevents unnecessary TDS litigation and aligns Indian tax jurisprudence with international norms distinguishing between copyright and copyrighted articles.

This case is instrumental for IT companies, distributors, and multinational enterprises engaged in software supply arrangements.

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