Consideration Paid To Foreign Company For Use Of Computer Software Not ‘Royalty’, No TDS Liability: Delhi High Court

The Delhi High Court has reiterated that consideration paid by an Indian entity to a foreign company for the resale/ use of their computer software is not ‘royalty’.

A division bench of Justices V. Kameswar Rao and Vinod Kumar thus held that the Indian entity is not liable to deduct TDS in such cases.

The bench in this regard relied on Engineering Analysis Centre of Excellence Pvt. Ltd. v. The Commissioner of Incometax & Another (2021) where the Supreme Court had held that amounts paid by Indian companies for the use of softwares developed by foreign companies do not amount to ‘royalty’ and that such payment do not give rise to income which is taxable in India.

In the case at hand, the Income Tax Department had initiated proceedings against respondent-Xiocom (NZ) Ltd, a US-based company involved in designing and providing off the shelf software solutions.

During the Assessment Year (AY) 2010-11, the respondent had sold its software to Zylog Systems (India) Ltd. to utilize the technology in certain areas in India.

The Department contended that income of ₹19,24,80,000/- generated by the respondent through the said transaction was taxable in India under Section 9 (1) (vi) of the Income Tax Act, 1961 and under Article 12 of Indo-NZ Double Taxation Avoidance Agreement.

The Commissioner of Income Tax (Appeals) had set aside the demand, citing Director of Income Tax v. Infrasoft Limited (2013) where the High Court had held that where the right transferred is not to use the copyright but only to use the copyrighted material, the same does not give rise to any royalty income.

After ITAT upheld the CIT(A) order, the Department approached the High Court.

The High Court heavily relied on Engineering Analysis Centre of Excellence (supra) and held,

“it is clear that the consideration for the resale/use of computer software through EULAs/distribution agreement is not Royalty for the use of copyright of the software and the same does not give rise to any taxable income in India and as a result, the persons referred to under Section 195 of the Act were not liable to be deduct any TDS under Section 195 of the Act.”

As such, it dismissed the appeal.

Appearance: Mr. Ruchir Bhatia, SSC with Mr. Anant Mann, JSC & Ms.Aditi Sabharwal, Advocate for Appellant

Case title: The Commissioner Of Income Tax – International Taxation -3 v. Xiocom (Nz) Ltd

Case no.: ITA 299/2025

Click here to read order 

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}