Do payments made to NRI computer software manufacturers/suppliers constitute as royalty?



Quick Summary
A recent Supreme Court decision clarifies that payments made by Indian entities to non-resident computer software manufacturers for the resale or use of software do not constitute royalty. This ruling settles a long-standing tax dispute, classifying such payments as business profits, which are not taxable in India unless a permanent establishment exists. This aligns with international tax principles.

I am pleased to share a copy of my presentation, wherein I have analysed the recent decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT [Civil (Appeal) 8733-8734 of 2018 (SC)]. 

In the said case, the Court has held that payments made 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/distribution agreements, does not constitute royalty since the payment is not for the use of or the right to use copyright in the computer software.

NRI Software Payments: Royalty or Business Profit

The controversy surrounding the taxation of payments for computer software in international transactions has been a subject matter of extensive litigation for over two decades in India. Ruling of the Supreme Court in a batch of appeals involving cases of IBM India, Samsung Electronics, GE India, Hewlett Packard India, Mphasis of the world, is a welcome respite.

In its succinct and well-reasoned decision, the Supreme Court has settled the vexed issue of characterization of payments to non-resident vendors for import of software licenses for use or resale in India, holding as business profits as opposed to royalty and hence in absence of a PE not taxable, as per the source rule in India – a view which is also aligned to the international understanding.

I trust that you will find the same useful.

 

Looking forward to receiving your valuable feedback.

 

Presentation copy of the judgment has been enclosed herewith




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