Tax Thursday: India – Withholding tax on Royalty by distributors of Software

The Supreme Court of India has ruled in favor of the taxpayers on the dispute concerning treatment of software imported into India by distributors and end users.

Background

Income tax department had disputed that software companies have to withhold taxes on payments made to foreign entities  for software imported either for sale to Indian customers, or  for  own usage by Indian resident entities. The tax department argued that when software is sold through whatever medium, the program is licensed to the software company (Indian importer) who then had the right to exploit the software.

The Supreme Court has pronounced its judgement interpreting Article 12 of the DTAA  to say that “the payment received for the sale of right to use 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 Indian taxation”

To do

Indian software companies should evaluate their contractual terms with the foreign entities before applying this decision. This judgement does not address what the Indian distributors should do when they in turn sell the license to Indian customers, this should also be evaluated on the contractual arrangements and other facts on case-to-case basis.

Questions

If you have any questions, please contact V Raghavendran. [email protected]