By LE Staff

New Delhi, March 2: Ruling in favour of taxpayers in a 20-year-old software royalty tax case, the Supreme Court has rejected the income tax (I-T) department’s stand that the money paid by Indian companies for use of software developed by foreign firms amounts to royalty and is taxable in the country.

The apex court has settled the long-pending dispute between companies such as Samsung Electronics, IBM, Hewlett Packard, Mphasis, Sonata Software, GE India & others and the tax department.

A bench comprising Justices R F Nariman, Hemant Gupta and BR Gavai held that there is no liability for Indian companies to deduct tax at source with respect to the purchase of software from foreign companies.

The apex court said the amount paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs (end user licence agreements)/distribution agreements, is not payment of royalty for the use of copyright in computer software, and it does not give rise to any income taxable in India.

The tax department had argued that when a software is sold, the embedded programme is licensed to the end-user. The Indian entity is granted the rights to exploit the intellectual property or copyright in the software and so, the payment for such purchases amounts to royalty income in the hands of the seller. Hence, the tax must be deducted at the source.

Companies, on the other hand, argued that these transactions are in the nature of a sale and not a licence. No copyright or part of any copyright is licensed to the taxpayer and the non-resident owner continues to have proprietary rights in the software. The companies contended that the use of the software by the Indian company is limited to making backup copy and redistribution. So, the payment received for the sale of computer software is business income and in the absence of a business presence or permanent establishment of the seller in India, such business income is outside the ambit of taxation.

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