Payments by end-users to foreign software firms not taxable as royalty: SC

This applies to amounts paid by resident Indian end-users or distributors to non-resident foreign manufacturers

The Supreme Court Tuesday held that amounts paid by resident Indian end-users or distributors to non-resident foreign manufacturers as consideration for the use of the computer software is not taxable as 'Royalty'.

A bench of Justices R F Nariman, Hemant Gupta and B R Gavai said the amount paid is not the payment of royalty for the use of copyright in the computer software and does not give rise to any income taxable in India.

"The amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through End-user license agreements/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India ," the bench said adding that the persons were not liable to deduct any TDS.

The apex court, while hearing a bunch of appeals, dismissed the appeal filed by the Income Tax Department and allowed the appeals filed by assesses.

In one of the cases, Engineering Analysis Centre of Excellence Pvt. Ltd, a resident Indian end-user of shrink-wrapped computer software, directly imported from the United States of America.

The Assessing Officer found that what was in fact transferred in the transaction between the parties was copyright which attracted the payment of royalty and thus, it was required that tax be deducted at source by the Indian importer and end-user, EAC and it was held liable to pay the amount of Rs 1,03,54,784.

The High Court of Karnataka had held that resident Indian importers were liable for deduction of tax at source which was set aside by the apex court.