The Hon’ble Supreme Court this week delivered a judgement for a batch of over 86 appeals on a two-decade old controversy of taxation of payment for software. The Hon’ble Supreme Court held that the amounts paid by the resident Indian end user/ distributors to non-resident computer software manufacturers/ suppliers as consideration for the resale/ use of the computer software is not in the nature of “Royalty” for the use of copyright in computer software. The same, being business income, does not give rise to any taxable income in absence of Permanent Establishment in India and accordingly no consequential liability of withholding tax arises.
In this judgement, the SC ruled that the scope of 'royalty' as per the definition in Double Taxation Avoidance Agreement (“DTAA”) is narrower as compared to the definition as provided under Income-tax Act, 1961 (“the Act”). While the definition under the DTAA is a restrictive definition and would generally, interalia include consideration for use of or the right to use any copyright of a literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, etc.; the definition of the royalty under the Act is comparatively wider and also covers “transfer of all or any rights (including granting of a license) in respect of any copyright, etc.”.
The Hon’ble Supreme Court while delving onto a 2 decade old controversy and after a 6-day long hearing has passed its decision in favour of the taxpayer that software sale is not royalty and dismissed the Tax Departments Appeal on characterization of cross-border software sale as royalty.
In this regard, we are pleased to share our enclosed newsflash analysing the SC judgement for your ready reference. Hope you find the same useful.