Software Supply Not Royalty under India-Germany DTAA: ITAT reaffirms Supreme Court View, holds Payments Non-Taxable [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal (ITAT) Mumbai has ruled that consideration received by Siemens AG from the supply of standard software to Indian customers does not constitute royalty under the Income Tax Act or the India–Germany DTAA. Citing the Supreme Court’s landmark judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021), the Tribunal held that such software payments are not taxable in India since no rights in the copyright are transferred.

Siemens AG, a non-resident company, derived income in India through royalties and fees for technical services from its Indian associated enterprises (AEs).

The AO had treated an amount of ₹17.64 crore received by Siemens AG as royalty income for the supply of software, because the software was supplied separately from the hardware and constituted a distinct taxable component.

Siemens contended that the software was standard off-the-shelf software provided along with its medical and industrial equipment, which could only be used on Siemens’ proprietary hardware and did not involve any transfer of copyright. The DRP upheld the addition, citing earlier departmental interpretations of software payments as royalty. Aggrieved by this order, the assessee filed an appeal before the Tribunal.

Before the Tribunal, Siemens argued that its position was fully supported by the Supreme Court’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021), which held that payments for use of copyrighted software do not constitute royalty unless there is a transfer of rights in the copyright itself.

The assessee further relied on earlier ITAT rulings in its own cases for AYs 2001–02 to 2009–10, which had accepted that software payments were not taxable as royalty under the India-Germany DTAA.

The Department contended that separate invoicing for software indicated that it was an independent supply liable to royalty taxation. However, the Tribunal noted that even where software was invoiced separately, it was integrally linked to the equipment, served as an operational interface, and could not be used independently.

The Bench cited the detailed comparison drawn in Siemens’ submissions, demonstrating that its software licensing terms were analogous to those examined by the Supreme Court in Engineering Analysis -i.e., granting only a limited, non-exclusive, non-transferable right to use the software for internal operations without any right to reproduce, modify, or commercially exploit it.

The Tribunal reiterated that such restricted use does not amount to transfer of copyright under either Indian law or Article 12 of the India-Germany DTAA. Consequently, the payments were merely consideration for the use of a copyrighted product, not for the use of copyright itself.

Following the binding precedent of the Supreme Court and the coordinate benches’ earlier orders, the bench, comprising Beena Pillai (Judicial Member) and Renu Jauhari (Accountant Member), concluded that the income from the supply of software could not be taxed as royalty under the Income Tax Act or the DTAA. The addition was accordingly deleted in its entirety, reaffirming the non-taxability of software supply receipts.

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