Dewan P. N. Chopra & Co.
The Supreme Court of India has today put the long standing controversy of Taxability of Software as Royalty to rest by deciding the issue in favour of the Taxpayers. The case revolves around the taxability of cross-border software payments i.e. whether payments received by non-residents of India as consideration for sale of license of computer software to Indian companies/entities is taxable as Royalty or as Business Profits. The pertinent issue is whether software providers are remunerated for a copyrighted article or for the use or right to use a copyright. The former would be characterised as business income, which would not be taxable in India in the absence of PE in India, whereas the latter would be taxable as Royalty and subject to withholding taxes.
The Indian Tax Department characterised the income received from sale of software as Royalty. This view of the Department was further reinforced with the retrospective amendment in definiton of Royalty under Indian Income Tax Act wherein it was clarified that payment for a right to use computer software is taxable as royalty. However, since there was no corresponding amendment in the definition of Royalty in Tax Treaties, the Taxpayers continued to take the shelter under the Tax Treaties on account of it being more beneficial than the Indian Income Tax Act.
The copy of judgement is still awaited and will be shared once the same is available.
Should you require any further information/clarification in this regard, please feel free to contact us.