Corporate Tax News Issue 58 - April 2021

Apex Court of India holds that software payments is not Royalties

The taxability of software payments has been one of the most contentious issues on which the Apex Court of India (SC) has finally decided, after two decades of litigation. Recently, the SC has held that the following types of software payments do not come within the ambit of Royalties under the provisions of the specified tax treaties with India, and hence should not be liable to tax in India:

  • Computer software purchased directly by an Indian resident end-user from a foreign/non-resident supplier or manufacturer.
  • Resident Indian companies acting as distributors or resellers for a foreign company/non-resident supplier or manufacturer of computer software.
  • Non-resident distributors reselling computer software to a resident Indian distributor or end-user.
  • Computer software embedded into hardware sold as an integrated unit/equipment by foreign company/non-resident suppliers to resident Indian distributors or end-users.

Following this landmark ruling, taxpayers with similar facts can approach the Indian Revenue Authorities to seek a refund of taxes paid or withheld in India, subject to certain limitations. However, going forward, with the wider scope of the Equalisation Levy (EL) and proposals (as mentioned below) which have been proposed in the Indian Budget, it is more likely that the Indian Revenue Authorities would be imposing an EL on these software transactions. Accordingly, non-resident taxpayers would need to mindful of the implications from an EL perspective on their businesses.

For further details see our alert on this important Ruling.

Bhavin Shah

Jagat Mehta