The Supreme Court on Friday reaffirmed its decision that payments made by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, for the resale/use of the computer software through EULAs/distribution agreements, is not characterised as royalty for the use of copyright in the computer software.
Dismissing a special leave petition filed by the Income Tax Department, the Court said, the issue sought to be raised by the Department of Revenue is covered by the decision of the Court in Engineering Analysis Centre of Excellence Private Limited-versus-Commissioner of Income Tax case, in which it was held that such amount paid as consideration for resale/use of computer software through EULAs/distribution agreements does not give rise to any taxable income in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act.
With this ruling, the broader issue around the characterisation of software payments for tax purposes appears to have been settled. Experts feel that tax burden on software businesses is considerably reduced as equalisation levy was also abolished in Budget 2024.
Commenting on the matter, Rakesh Nangia, Chairman at Nangia Andersen India, said that the ruling is leading to a greater degree of finality on this long-standing issue. “While there may still be specific cases or scenarios - such as cloud services, mixed contracts, and payments related to emerging technologies, namely artificial intelligence (AI) software, blockchain applications, or digital platforms - that could still be subject to interpretation or future litigation, the broader controversy around the characterisation of software payments for tax purposes appears to have been settled,” he said.
End to controversy
Yeeshu Sehgal, Head of Tax Markets at AKM Global, stated that “the Supreme Court with its 2021 Engineering analysis judgment ruled that payments for shrink-wrapped software were no longer to be treated as royalties under double taxation avoidance agreements. The decision removed the long running controversy with respect to the characterisation of such payments from the tax standpoint. It also made India a more attractive destination for foreign software firms and strengthened the position of domestic distributors as tax certainty is achieved.
“Further, with a clear statement upholding the finality of this decision, the Supreme Court has held that this position is final and no more review petitions will be allowed. The impact of this is far reaching as the tax burden on software businesses is considerably reduced as equalisation levy was also abolished in Budget 2024,” he said.