SC backs taxpayers in software royalty case

NEW DELHI: Resolving a twodecade-old taxation conundrum, the Supreme Court on Tuesday ruled that payments made by an Indian resident to a foreign recipient for the import of software that is to be sold in India will not be assessable as “royalty”.

A top court bench, headed by justice Rohinton F Nariman, held that such payments for the use of software “will not give rise to any income taxable in India” and therefore, no liability would accrue for the resident firms to deduct TDS under Section 195 of the Income Tax Act.

The bench, which also included justices Hemant Gupta and BR Gavai, clarified that the ruling will apply across the board; when a computer software is purchased directly by an end-user resident in India from a foreign supplier or manufacturer; when resident Indian companies act as distributors or resellers for other residents; when a foreign distributor resells to Indian users; and when software is sold affixed to a device by a foreign supplier to Indian residents.

The judgment, which involved approximately ₹500 crore in tax revenue, will impact companies such as IBM India Ltd, Samsung Electronics Co Ltd, Hewlett Packard India, Mphasis Ltd, Sonata Software Ltd, and GE India, among others.

The judgment will also impact over 100 companies that import software for sale in India, since the payments made by them will now constitute as “business income” in the hands of the recipient, and in the absence of a permanent establishment of such a recipient in

India, no tax is required to be withheld at source.

The dispute began after a Karnataka high court judgment in 2011 decided in favour of the tax department, holding that payments to non-resident firms for purchase of software should be treated as royalty, and obligating resident companies to deduct TDS at the time of credit or payment, whichever is earlier. However, some other high courts and the income tax tribunal took a divergent view, calling upon the Supreme Court to examine the question of law and settle it.

Before the top court, the tax department contended that the sale of copyrighted software would constitute grant of an interest in their copyright under the Copyright Act, thus necessitating the deduction of tax at source under Section 195 of the Income Tax Act.