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The ITAT Delhi has ruled that the receipts from the sale of software licenses are not considered royalty income. The case involves a non-resident corporate entity, UT Starcom Inc, which is a tax resident of the USA. The company is engaged in the development and marketing of telecommunication equipment and related software.

The Assessing Officer (AO) noticed that UT Starcom Inc had receipts of Rs.7,34,95,361/- from certain Indian companies but had not offered these receipts for taxation. The AO questioned why the receipts should not be treated as royalty income. UT Starcom Inc submitted that it had sold the software along with hardware on an outright sale basis. They argued that the software sold by them is embedded in the hardware and is only for the purpose of operating the hardware, therefore it cannot be treated as royalty.

However, the AO concluded that the receipts from the transfer of the right to use the software are indeed royalty income. Additionally, since UT Starcom Inc had a branch office in India and the agreements with Indian telecommunication companies were signed in India, the AO held that the royalty income is connected to the branch office, which constitutes a Permanent Establishment (PE) in India. Therefore, the receipts would be taxable in India as royalty income.

The Commissioner (Appeals) directed the Assessing Officer to calculate the income of the PE in accordance with the judgment of the Tribunal in the case of Motorola Inc. vs. DCIT [2005] 95 ITD 269 (Delhi ITAT) (SB). This means that the income should be based on a percentage of net profit on global services applied to Indian sales.

Ultimately, the ITAT Delhi held that neither manufacturing nor any other activities related to hardware and software supply took place in India. Therefore, the profit/income from offshore supply of equipment and software cannot be attributed to the PE and thus cannot be taxed in India. They further held that the receipts from Indian telecommunication companies cannot be taxed as royalty or as business profits in India.

In conclusion, the ITAT Delhi ruled that receipts from the sale of software licenses are not considered royalty income. They also stated that while such income may be considered business profit, no part of it can be attributed to the PE in India.

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