𝗡𝗢 𝗧𝗗𝗦 𝗼𝗻 𝗽𝗮𝘆𝗺𝗲𝗻𝘁 𝘁𝗼 𝘂𝘀𝗲 𝗙𝗼𝗿𝗲𝗶𝗴𝗻 𝗦𝗼𝗳𝘁𝘄𝗮𝗿𝗲 - "DO 𝗡𝗢𝗧 𝗔𝗠𝗢𝗨𝗡𝗧 𝗧𝗢 𝗥𝗢𝗬𝗔𝗟𝗧𝗬"

𝗘𝗻𝗴𝗶𝗻𝗲𝗲𝗿𝗶𝗻𝗴 𝗔𝗻𝗮𝗹𝘆𝘀𝗶𝘀 𝗖𝗲𝗻𝘁𝗿𝗲 𝗢𝗳 𝗘𝘅𝗰𝗲𝗹𝗹𝗲𝗻𝗰𝗲 𝗣𝗿𝗶𝘃𝗮𝘁𝗲 𝗟𝗶𝗺𝗶𝘁𝗲𝗱 𝘃𝘀. 𝗖𝗜𝗧 (𝗦𝘂𝗽𝗿𝗲𝗺𝗲 𝗖𝗼𝘂𝗿𝘁) - 𝟮𝟬𝟮𝟭

Supreme Court on Tuesday held that amount paid by Resident Indian for the use of software developed by Foreign Companies do not amount to 'royalty' and that such payment do not give rise to income which is taxable in India.

Accordingly, there is no liability to deduct Tax at Source (TDS) by Indian resident on such payments.

𝙃𝙞𝙜𝙝𝙡𝙞𝙜𝙝𝙩𝙨 𝙤𝙛 𝙩𝙝𝙚 𝙅𝙪𝙙𝙜𝙚𝙢𝙚𝙣𝙩:

1. The decision gave relief to 115 appeals pending before the Apex court on the same issue (However, decision came in favour of Assessee)

2. It took over 20 years to finalize the issue (starting from assessment by department to the time decision made by Apex Court)

3. The entire issues were categorized under 4 major heads: Use of Computer Software by End-User in India/ Indian Companies acting as reseller or distributor and paying to foreign companies/ Paying to reseller or redistributors foreign companies/ Payment for Embedded software with hardware to foreign companies

4. The definition of Royalty under DTAA is favorable to the assessee over definition under the Income Tax Act (broader definition) and therefore Apex court ruled out the definition as perceived by the department for addition of Income on account of non deduction of TDS

5. The distribution agreements/ End-user Service Agreements (EULAs) in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright, therefore, can't be considered as "Royalty" under DTAA

6. "What is "licensed" by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a "Sale of goods"

7. A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act.

𝘾𝙤𝙣𝙘𝙡𝙪𝙨𝙞𝙤𝙣

The much awaited decision is surely a great relief for companies like IBM India, Samsung Electronics, GE India, Hewlett Packard India, Mphasis which import software for sale in India. This ultimately lead to lowering of prices of software due to the said tax relief. However, this will result into big dent to the budgeted revenue of the government and may lead to future amendments in the Act.

Finally, the bigger question would be necessity of such an expansive definition of "Royalty" under Section 9 of the Income Tax Act after the judgement which now be restricted to residents and non-residents to whom DTAA not applicable.

About the writer

Yash Dhanuka is a practicing Chartered Accountant serving clients in Income Tax, GST, Corporate Compliances, Finance and Investment.

He is also passionate about equities, mutual funds, crypto currency & other financial products and helps his clients to build their portfolios.