SAIC Motor Overseas Intelligent Mobility Technology Co. Ltd. v. ACIT (IT) (2024)

💻 SAIC Motor Overseas Intelligent Mobility Technology Co. Ltd. vs. ACIT (IT) – Delhi ITAT on Taxability of Software Payments under India–China DTAA (2024)

📌 Background

The taxation of cross-border software payments has been one of the most litigated areas under Indian international tax law. A recurring controversy is whether payments for software constitute “royalty” under Section 9(1)(vi) of the Income-tax Act, 1961, and corresponding provisions of applicable Double Taxation Avoidance Agreements (DTAA).

In SAIC Motor Overseas Intelligent Mobility Technology Co. Ltd. v. ACIT (IT) [(2024) 229 TTJ 801 / 239 DTR 42 / 159 taxmann.com 779 (Delhi ITAT)], the Tribunal examined whether payments received by a Chinese company for supply of embedded automotive software to an Indian automobile manufacturer were taxable in India as royalty under Article 12(3) of the India–China DTAA, in the absence of a Permanent Establishment (PE).

📂 Facts of the Case

• Assessee: SAIC Motor Overseas Intelligent Mobility Technology Co. Ltd., China
• Assessment Year: 2020–21
• Recipient of Software: MG Motor India Pvt. Ltd.
• Nature of Transaction: Supply/licensing of software embedded in vehicles manufactured and sold by MG Motor India

Key Features of the License Arrangement:

• Non-transferable, non-exclusive, and non-assignable license.
• Software could only be incorporated into vehicles sold to end customers.
• No rights granted to:
  • Make copies of the software,
  • Modify, merge, or combine it with other software,
  • Access source code or create derivative works.
• Technical documentation remained the exclusive property of the assessee.
• All intellectual property rights (IPR) continued to vest with the assessee and its licensors.

The assessee had no Permanent Establishment in India.

❓ Point of Dispute

Whether payments received for supply of automotive software constituted “royalty” under Article 12(3) of the India–China DTAA, thereby taxable in India under Section 9(1)(vi), or whether they were merely payments for copyrighted articles and hence not taxable in the absence of a PE.

📑 Submissions by the Assessee

• No transfer of copyright or right to use copyright was involved.
• The Indian customer only received a limited right to use the copyrighted software, embedded in vehicles.
• No rights under Section 14 of the Copyright Act (reproduction, adaptation, distribution, etc.) were transferred.
• Under Article 12(3) of the India–China DTAA, royalty arises only when there is use or right to use copyright.
• In the absence of a PE in India, business income could not be taxed in India under Article 7 of the DTAA.

📑 Submissions by the Revenue

• Payments were for use of software, which according to the Revenue amounted to royalty.
• Embedded software enabled functionality of vehicles and hence constituted use of intellectual property.
• Taxability was argued under Section 9(1)(vi) read with Article 12(3) of the DTAA.

⚖️ Legal Principles & Tribunal’s Findings

1. Copyright vs. Copyrighted Article

The Tribunal reiterated the settled distinction between:

• Transfer of copyright, and
• Sale/supply of copyrighted article.

Only when rights enabling exploitation of copyright are transferred can the payment be classified as royalty.

2. Scope of Article 12(3) – India–China DTAA

Article 12(3) defines royalty as payments for:

“use of, or the right to use, any copyright…”

The Tribunal observed that:

• The assessee never parted with copyright.
• No rights to reproduce, modify, or commercially exploit the software were granted.
• The Indian entity merely received a restricted license to use the software as embedded in vehicles.

Hence, the consideration did not fall within Article 12(3).

3. Reliance on Judicial Precedents

The Tribunal relied on the ratio laid down in:

• Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (SC)
• Earlier Delhi ITAT and High Court rulings distinguishing royalty from software supply.

4. Absence of Permanent Establishment

Since the assessee had no PE in India, business income could not be taxed under Article 7 of the DTAA.

🏁 Held

The Delhi ITAT held that:

✅ Payments received by the assessee were not royalty under Article 12(3) of the India–China DTAA.
✅ The transaction involved supply of copyrighted software, not transfer of copyright.
✅ In the absence of a PE, the income was not taxable in India.
✅ Addition made under Section 9(1)(vi) was deleted.

✅ Practical Impact for Multinational Businesses

• Automotive & Tech Sector Relief: Embedded software supplied with products does not automatically result in royalty taxation.
• DTAA Protection Reinforced: Treaty provisions override domestic law where beneficial.
• Reduced Withholding Exposure: Payments for standard software licenses with restricted rights may not require TDS in India.
• Contract Drafting Importance: Clearly worded license agreements play a decisive role in tax outcomes.

🔑 Key Takeaways

1. Restricted software licenses ≠ royalty under India–China DTAA.
2. No copyright transfer → no royalty taxation.
3. Engineering Analysis ruling continues to govern software tax disputes.
4. Absence of PE is fatal to Revenue’s case for taxing business income.

📢 Why This Case Matters

The ruling in SAIC Motor Overseas Intelligent Mobility Technology Co. Ltd. (2024) is a significant reaffirmation of taxpayer-friendly jurisprudence on software taxation. As India increasingly becomes a manufacturing and technology hub, cross-border software arrangements are inevitable.

This decision brings certainty by confirming that:

• Payments for embedded or standard software, without transfer of copyright, cannot be stretched into royalty, and
• Treaty protections remain robust against aggressive domestic tax interpretations.

For multinational groups operating in India, this judgment provides a strong defensive precedent against unwarranted royalty characterisation and withholding tax demands.

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