A recent ruling by the Delhi High Court on taxability of payment for software supplied along with hardware is a huge relief for the software industry.
GyanMagnus Associates (GMA), a corporate law house based in Kochi, says this is especially true considering the ‘wafer-thin’ margins on which the industry operates.
NOT FINAL
The issue is pending before the Supreme Court and finality may be reached only once the matter is decided there, says Sherry Oommen, founder and senior partner of GMA.
The High Court ruled in a case of Nokia Networks that payment for software would not qualify as ‘royalty’ under the India-Finland Double Taxation Avoidance Agreement (DTAA).
Nokia had entered into agreement for supply of GSM equipment with a few Indian cellular operators.
The GSM equipment manufactured in Finland was sold from outside India on a principal to principal basis, under independent buyer-seller arrangements.
Sherry Oommen said that ‘royalty’ was hitherto defined to mean consideration for the transfer of all or any rights in respect of any copyright.
ASSESSEE CLAIM
The definition was amended by the Finance Act retrospectively with effect from April 1, 1976, irrespective of the medium through which such right is transferred.
Applying the beneficial provisions of the DTAA, the assessee claimed that the income was not chargeable to tax in India.
But revenue authorities were of the view that post-amendment to Finance Act, related payments would require deduction of taxes at source.
The court in turn ruled that an assessee could choose to be governed either by the domestic tax provisions or related tax treaty, depending on which is more beneficial.
Thus Nokia could choose to be governed by either the provisions of the Act or the India-Finland DTAA. The court also laid down a key principle that the amendments effected in the Act cannot be read into the DTAA.