Indians Not Required To Pay ‘Royalty’ Tax On Imported Software; 20-Year Old Tax Dispute Resolved!
Setting to rest an important issue which has been problematic for resident end users/distributors of imported “shrink wrapped software” or “ off the shelf software” as is more widely known, the Supreme Court in a landmark ruling, has ruled that the amount paid by companies/distributors for use of imported software developed by foreign companies do not amount to “ Royalty” and that it does not give rise to income which is taxable in India.
This particular issue has been a tussle for over 20 years now. The case in question pertains to treatment of payments made by end users or tech companies or distributors in India of imported software to suppliers abroad of imported software as “ royalty”. The 20 year litigation involved more than 80 appeals from various Indian companies including Samsung Electronics, IBM amongst others. In 2011, Karnataka Hight Court had held that payment so made to suppliers abroad amounted to “ royalty” and therefore the Indian purchaser had an obligation to deduct tax at source. In this particular case the High court division bench had reversed the judgement of the IT Apellate Tribunal which had held that the amount paid to suppliers abroad was not “ royalty”. Following this decision, several cases were decided against the Indian software organizations making them liable for payment of TDS.
The Present Ruling
The Supreme Court has set aside this judgement of the Karnataka High Court and has approved the view taken by the Delhi High Court.
The Supreme Court Bench comprising of Justices, R F Nariman, Hemant Gupta and B R Gavai rejected the argument of the Income Tax department that the purchase of software is taxable as income arising out of India. The court ruled that since no copyright over the software was given, so payment for user license agreement does not amount to royalty. The bench was hearing a batch of 86 appeals which challenged the decisions of various High Courts holding that consideration paid for purchase of foreign software amounts to ‘royalty’ and hence liable for tax to be paid in India, over several days in February 2021.
Commenting on the development, Ajay Vohra, Senior Advocate, appearing on behalf of Sasken Communications Tech emphasized that “ ….law cannot compel one to do the impossible , namely, to deduct tax at source on an expanded definition of royalty which did not exist at the time of payment/deduction to be made under Section 195 of IT Act”.
This landmark judgement will put at rest several litigations on this contentious issue and provide relief to the technology companies which are operating out of India, while at the same time setting to rest any further complication in the matter.