Sum Received From Supply of Software to Be Embedded in ‘MG Car’ Not Taxable as Royalty | ITAT

Case Details: SAIC Motor Overseas Intelligent Mobility Technology Co. Ltd. vs. Assistant Commissioner of Income-tax, (IT) - [2024] 159 taxmann.com 779 (Delhi - Trib.)

Judiciary and Counsel Details

• Ms Astha Chandra, Judicial Member & Shamim Yahya, Accountant Member
• Ajay Vohra, Sr Adv. Neeraj Jain, Adv. Ms Shaily Gupta & Himanshu Goel, CA’s for the Appellant
• Vizay B. Vasanta for the Respondent.

Facts of the Case

Assessee-company was incorporated under the laws of China and tax resident of China. It did not have any Permanent Establishment (PE) in India. It was engaged in the business of supplying or licensing automobile-related software.

During the relevant assessment year, the assessee entered into a License Agreement with MG Motor India Private Limited (“MG India”) for granting a licence to incorporate the “Intelligent connected vehicle system” (“Software”) into the head unit (supplied by another company) which is supplied from outside India and get fitted into MG India’s car.

Assessee claimed that the amount received was non-taxable under the provisions of the India-China DTAA. During the assessment proceedings, the Assessing Officer (AO) treated such income as royalty and made additions to the assessee’s income.
The Dispute Resolution Panel (DRP) also upheld the order passed by AO. The matter reached before the Delhi Tribunal.

ITAT Held

The Tribunal held that the assessee granted the license to MG India on a non-exclusive, non-transferable, and non-assignable basis. The software included features such as an online map and navigation, online weather, intelligent voice, and Bluetooth protocol. This software was embedded in a hardware device known as a head unit. The head units were car model-centric, i.e. they remained the same for all cars of a particular model.

Further, no rights were provided to make copies of software products or to modify, merge or combine with other software, and no right to change the object code from source code and make any derivative products. The technical documentation for the software remained the assessee’s property, and the assessee was responsible for any patent infringement claims. Thus, there was no transfer of intellectual property rights.

MG India merely purchased the licensed software embedded in the head unit and fitted it into cars for end use by the car buyer. Moreover, the end user signed the Licence Agreement for using the licensed software and had no right to copy, reverse engineer, disassemble, attempt to derive the source code of, modify, or create derivative works of the licensed software. MG India merely purchased the software and acted as a reseller.

Further, the Supreme Court, in the case of Engineering Analysis Center of Excellence Pvt. Ltd [2021] 125 taxmann.com 42 (SC) ruled that the payer who gets nonexclusive, non-transferable, and restricted right to a copy of the software makes payment for the supply of copyrighted article and not for the use of the copyright of the owner was business income and not royalty.

The ratio of the Hon’ble Apex Court squarely applies to the assessee’s case; accordingly, the sum received by the assessee couldn’t be categorized as royalty.