'PAYMENT FOR IMPORTED SOFTWARE NOT ROYALTY'

The Supreme Court has rejected the income tax department's petition seeking review of its March 2021 judgment that held that payments made to non-residents for software purchase can't be taxed as royalty.

The revenue authorities had termed these cross-border payments made to foreign software companies and distributors for the software purchase as royalty.

The rationale being that when software is sold, the incorporated programme is licensed to the end user. The taxman had also contended that since the Indian entity is granted the rights to exploit the software copyright, the payments for such purchases amount to royalty income for the seller, a stand the apex court rejected again.

A bench of Justices BR Gavai, BV Nagarathna and Pankaj Mithal rejected a batch of review petitions filed by the Commissioner of Income Tax both on merits as well as on the grounds of delay.

"There is an inordinate delay of 515 days in filing the review petitions, which has not been satisfactorily explained. Even otherwise, having gone through the review petitions and the connected papers, we do not find any justifiable reason to entertain the review petitions," it said.

This means tax liability of foreign software seller without a permanent establishment in India would reduce to the 2% equalisation levy introduced via Finance Act 2020 from the 10%-15% royalty tax, which the Indian buyer has hitherto been liable to withhold.

Rahul Garg, managing partner of tax and regulatory consultants Asire Consulting, said the decision rejecting the review petitions "would be a big dent to the revenue as it has been following different position in the ongoing assessments under a hope of a favourable review."

"The decision has put to rest a major controversy which would have industry wide implications as the principles laid down in the original 2021 decision have been also applied by the lower courts in the tech world/online multiple other models like cloud, digital marketing etc. in the last few years," Garg said.

Prior to the 2021 ruling, earlier judgments on taxability of software were conflicting. In the case of Samsung Electronics, Karnataka High Court had ruled in favour of the taxman, while the Delhi High Court, in the Ericsson case, had upheld the taxpayer's contention. The subsequent rulings by other HCs were also divergent.

The March 2, 2021, the SC judgment stated that the end user licence agreements of the software do not transfer or assign the copyright over the software and what is given the distributor is only a non-exclusive, non-transferable licence to resell computer software. The ruling had lowered the cost of software purchases for Indian firms as the overseas sellers may choose to lower prices, taking advantage of the tax relief.