India Supreme Court - Cross-border payment for software not royalty

3/4/2021

Issue:

  • Income tax authority used to characterise the payment made by Indian entity to non-resident entity for software purchase as Royalty. Therefore, tax should have been deducted while remitting payment to those non-residents.
  • On the other hand, taxpayer used to contend that such payment for software is in the nature of business income for non-resident entities. In the absence of Permanent Establishment in India for those non-resident entities, no tax arises in India and therefore, no tax is required to be deducted.
  • In these situation, question arises if those payment were liable to tax in India?

Judgement from Supreme Court:

  • Supreme Court agreed with the taxpayer’s view that payment made by Indian end-users/ distributors to non-resident software manufacturer/ supplier for resale/ use of such software cannot be considered to royalty
  • Since non-resident continue to have proprietory rights in the software, no copyright is transacted
  • Therefore, no tax liability arises in India and thus, no tax is required to be deducted in India.

Impact:

  • Non-resident software companies not having a business presence or permanent establishment in India, would be outside the ambit of taxation since it is not a royalty.
  • On other hand, Indian payer entities are not obliged to deduct tax while making the payment for software to non-resident entities.

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Binit
Binit Shah
Partner, Information Technology