Withholding Tax On Software-Related Payments - An Analysis

Payments towards “software” has been a subject matter of continued litigation

- Adv Sherry Samuel Oommen

1. Software – Typical business models

While the tax payer depending on the business model would contend that such payments should not be subjected to withholding tax in India, the Department would contend otherwise. The Department’s contention has been morbidly revolving around the contention that the payments partook the nature of “royalty” under Section 9(1)(vi) of the Income-tax Act, 1961 (“the Act”) and Article 12 of the concerned tax treaty.

The argument of the Revenue stood bolstered when the Hon’ble Karnataka High Court in the case CIT Vs Samsung Electronics Co Limited [2012] 345 ITR 494 held that payments effected by an Indian company towards import of a shrinkwrapped software partook the nature of “royalty” both under the Act and the related tax treaty. The Hon’ble High Court negatived the argument of the assessee that when any buyer purchases a software, there was no transfer of any intellectual property/ copyright which would entail its classification as “royalty”; on the contrary, all that the assessee did was to purchase a copy of the software without the right to exploit a “copyrighted right”.

Briefly, the dispute surrounding taxability of software payments revolves around the following business/ operating models:

i. Where a party in India purchases a software from a non-resident supplier for his own use;

ii. Where a party in India purchases a software from a non-resident supplier for further sale – This would typically apply in the case of a reseller of a product;

iii. Where a non-resident after purchasing the software from another non-resident resells it to an Indian distributor or an end user;