PCIT Vs IBM Singapore Pvt. Ltd. (Karnataka High Court)
Buying Software Is Not Buying Its Copyright: Karnataka HC Rejects Revenue’s “Royalty” Argument
The Karnataka High Court dismissed the Revenue’s appeal concerning payments received by IBM Singapore Pvt. Ltd. from the sale of software.
The AO had characterised the software receipts as royalty under Section 9(1)(vi) and contended that the payments attracted deduction of tax under Section 195. The ITAT, following its decisions in IBM Singapore’s own cases for earlier assessment years, deleted the royalty addition.
The High Court held that the controversy was conclusively covered by the Supreme Court’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (432 ITR 471). Payment for acquiring copyrighted software, without transferring any right or interest in the underlying copyright, does not constitute royalty and does not give rise to taxable income in India on that basis.
The Court also followed its earlier judgment dated 12 August 2025 in IBM Singapore’s connected appeals and held that the questions raised by the Revenue were no longer res integra. The Revenue’s reference to a pending review petition against Engineering Analysis did not prevent dismissal of the appeal.
List of Cases Discussed / Relied Upon
- PCIT Vs IBM Singapore Pvt. Ltd. (Karnataka High Court)
- ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VS. COMMISSIONER OF INCOME-TAX AND ANOTHER (2021) 432 ITR 471 — [destination verified for the Supreme Court ruling]
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The above appeal by the Revenue filed under Section 260A of the Income Tax Act, 1961 is directed against order dated 08.05.2023 in ITA.No.177/Bang/2023 for the assessment year 2015-16 (Annexure-A) passed by the Income Tax Appellate Tribunal ‘C’ Bench, Bengaluru, raising the following substantial questions of law:
“1. Whether on the facts and in the circumstances of the case, the Tribunal’s order is perverse in nature in by holding that the payment made to non-resident entities in respect of purchase of software was not royalty and that the same did not give rise to income taxable in India and therefore, the petitioners were not liable to deduct tax at source under Section 195 of the Act?
2. Whether on the facts and in the circumstances of the case, the Tribunal’s order is perverse in nature in holding that the payments made to non-resident entities were not in the nature of royalty as defined in Explanation 2 to section 9(1)(vii) of the Act and the Double Taxation Avoidance Agreement as well?
3. Whether on the facts and in the circumstances of the case, the Tribunal’s order is perverse in nature in holding that the sale of software license did not include a right or interest in copyright, which thus did not give rise to payment of royalty and would be an income deeded to accrue in India under Section 9(1)(vi) of the Act, requiring the deduction of tax at source?
4. Whether on the facts and in the circumstances of the case, the Tribunal’s order is perverse in nature in not considering the fact that the development of advanced cloud-based computer software by the assessee would not come under copyright as envisaged in Section 14(a)/14(b) of the Copy Right Act?
5. Whether on the facts and in the circumstances of the case, the Tribunal’s order is perverse in nature in not appreciating that conditions for holding applying Explanation 2(v) to Section 9(1)(vi) of the Act were fully satisfied in present case as payments were made to a non-resident by way of royalty for use of or the right to use any copy right and Review Petition filed by Revenue is pending for adjudication before Supreme Court in case Engineering Analysis Centre of Excellence (reported in 432 ITR page 471)?”
2. The Assessing Officer had treated the payment received by the respondent/assessee for the sale of software as Royalty. The respondent/assessee was before the Tribunal and the Tribunal followed the order passed in ITA.Nos.1311 to 1313/BANG/2018 for the assessment years 2009-10, 2010-11 and 2012-13 of the respondent/assessee, wherein it was ordered to delete the addition made as Royalty. It is also submitted that the issue involved in the above appeal is covered by the decision of the Hon’ble Apex Court in the case of ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED VS. COMMISSIONER OF INCOME-TAX AND ANOTHER (2021) 432 ITR 471.
3. The order passed by the Tribunal in ITA.Nos.1311 to 1313/2018 was the subject matter of ITA.No.681/2023 and connected appeals. This Court by judgment dated 12.08.2025, by following the judgment in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED (supra) held that the questions raised for consideration are no longer res integra and stands covered by the decision of the Hon’ble Apex Court in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED (supra).
4. In the light of the above, we are of the considered view that in the present appeal also, the questions raised would no more survive for consideration. By following the decision of Hon’ble Apex Court in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PRIVATE LIMITED (supra) and the judgment dated 12.08.2025 in ITA.No.681/2023 and connected appeals, the present appeal also stands dismissed.
