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High Court rules payments for software license is not royalty


The Delhi High Court has delivered an important ruling in the case of Infrasoft Ltd, holding that payments to a non-resident for software licenses are not in the nature of royalty and therefore would be liable to tax in India only if the non-resident has a Permanent Establishment (PE) in the country. Taxand India discusses the case which led to this judgment.

The taxpayer was a software development and marketing company incorporated in USA and had a branch office in India. The branch in India imported certain software used for civil engineering work and for design of highways, railways, airports, ports, mines etc, and delivered the same to customers in India. The taxpayer also provided installation support, minor customisation of software and training for operation of the system. 

The taxpayer considered the receipts towards sale of software products to Indian customers as its business income and offered the same to tax in India. However the Tax Officer treated the income as royalty, the gross amount of which is taxable at 20% in India. Though the Commissioner of Income-Tax (Appeals) upheld the order of the the Revenue authorities, on further appeal, the Income Tax Appellate Tribunal (ITAT) followed the ruling of the Special Bench of the ITAT in the case of Motorola Inc and held that the amounts received cannot be considered as royalty as the taxpayer transferred only a copyrighted article as distinguished from copyright right. The Revenue appealed against this order before the Delhi High Court.

The Delhi High Court held that the consideration received by a non-resident towards licensing of computer software should not be treated as royalty, and therefore ruled in favour of Infrasoft Ltd.

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Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010 

Taxand's Take

It is pertinent to note that the Delhi High Court has expressed its disagreement with the view taken by the Karnataka High Court in the case of Samsung Electronics Co Ltd, wherein it was held that copying of the software and storing the same in the hard disk of the designated computer would amount to copyright work and therefore the payment towards grant of license should constitute royalty.

As a general rule, when there are conflicting views of 2 High Courts, the one in favour of the taxpayer would be applied, as long as the adverse ruling was not delivered by the jurisdictional High Court. With several cases on this issue still pending before various Benches of the ITAT across the country, it would be interesting to note if this general principle is applied by the ITAT. 


Taxand's Take Author

Mukesh Butani
Taxand Board member