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SC: Amount paid by Indian cos to use foreign software not royalty, can’t be taxed

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New Delhi, March 2 : The Supreme Court on Tuesday held that the amount paid by Indian companies for the use of software developed by foreign companies cannot be termed as royalty and does not give rise to any income that is taxable in India.
A bench comprising Justices R.F. Nariman, Hemant Gupta and B.R. Gavai said: “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 EULAs/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.” As a result, there is no liability for Indian companies to deduct tax at source in connection with purchase of software from foreign companies.
The top court declined to entertain the Centre’s argument that distribution of copyrighted computer software would constitute the grant of an interest in copyright under section 14(b)(ii) of the Copyright Act, thus necessitating the deduction of tax at source under section 195 of the Income Tax Act.
In its 226-page verdict, the top court said: “There is no obligation on the persons mentioned in Section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright.” The verdict has come on over 80 appeals, which challenged the decisions of various high courts, which ruled that amounts paid for purchase of foreign software amounts to royalty.


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