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India Supreme Court - Cross-border payment for software not royalty
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.
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.
Partner, Information Technology
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