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India clarifies software payments to non-residents

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Tax Hot Topics newsletter The Indian Supreme Court has ruled that amounts paid by resident Indian end-users or distributors to non-resident software manufacturers and suppliers under licensing and distribution agreements cannot be classified as ‘royalty’ payments made for the use of copyright in the computer software. Hence, it does not give rise to any income taxable in India and accordingly, no tax is required to be withheld at source (TDS) at the time of making such payments.

The Supreme Court held that the ruling would apply to the following categories of transactions:

  • Computer software is purchased directly by an end-user who is resident in India, from a foreign non-resident supplier or manufacturer.
  • Resident Indian companies act as distributors or resellers by purchasing computer software from foreign non-resident suppliers or manufacturers and then resell the same to resident Indian end-users.
  • Foreign non-resident vendor, who after purchasing software from a foreign non-resident seller, resells the same to resident Indian distributors or end-users
  • Computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign non-resident suppliers to resident Indian distributors or end-users.

This is a landmark ruling that has finally settled the contentious issue of the characterization of software payments in favor of the taxpayers. Going forward, while these payments would be excluded from the income tax net, taxpayers would need to evaluate the applicability of equalization levy provisions in these cases.

For more details, see the story from Grant Thornton Bharat: “Tax alert payment to non-resident for imported software

Contact:
David Sites
Partner
Washington National Tax Office
T +1 202 861 4104

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