Supreme Court’s Big Judgement in 20 Year Old Software Royalty Tax Case
The Supreme Court of India has ruled in favour of the assessee taxpayers in the 20-year-old software royalty tax case.
The three-judge bench of Justice RF Nariman, Justice BR Gavai and Justice Hrishikesh Roy dismissed the tax department’s appeal and allowed the appeal by the assessees. The victory will impact companies such as Samsung Electronics Co. Ltd., IBM India Ltd., Hewlett Packard India.
The victory will impact companies such as Samsung Electronics Co. Ltd., IBM India Ltd., Hewlett Packard India, Mphasis Ltd., Sonata Software Ltd., GE India and 100 others who import software for sale in India.
The case revolves around the taxability of cross-border software payments. Specifically, whether the payment received by a non-resident for giving licence of the computer software is taxable as royalty or sale receipt.
Broadly, the tax department characterized this income as royalty. It argued that when the software is sold, the embedded programme is licensed to the end-user. The Indian entity is granted the rights to exploit the intellectual property or copyright in the software and so, the payment for such purchases amounts to royalty income in the hands of the seller. Hence, the tax must be deducted at the so
Companies have argued these transactions are in the nature of a sale and not a licence. No copyright or part of any copyright is licensed to the taxpayer. The non-resident owner continues to have proprietary rights in the software and the use of the software by the Indian company is limited to making backup copy and redistribution. So, the payment received for the sale of computer software is business income. And in the absence of a business presence or permanent establishment of the seller in India, such business income is outside the ambit of taxation.