The cloud of taxing software as royalty

A recent Supreme Court order has resolved a decades-old problem for software taxation. It was a long wait for justice, but justice has been delivered.

The core issue was that when payment for the purchase of software was made to a non-resident seller, it was treated by the taxation authorities as “Royalty” or “Business Income” in the hands of the seller. 

The SC bench was hearing a batch of 86 appeals dealing with the above issue which were grouped by the Court into four categories: 

software purchased directly by an end-user from a non-resident supplier; 

software purchased from a non-resident supplier by an Indian distributor and resold to Indian end-users; 

software purchased from a non-resident supplier by a non-resident distributor and resold to Indian distributors or end-users and 

software sold as integrated hardware unit by non-resident suppliers to Indian distributors or end-users.

After much deliberation, the SC came to the conclusion that since the payment is for sale of software and such sale of software does not find a place in the definition of ‘Royalty’ under the Tax Treaty, the income of the foreign software vendors could not be regarded as royalties under the applicable tax treaties. Accordingly, the Court also upheld that the income was not taxable in India and there was no obligation on the Indian companies to deduct tax at source under 195 of the Act.

Source - Financial Express