Software royalty likely to cost Centre Rs 5,000 crore every year

Sources said about hundreds of companies, including Facebook and Amazon, could seek tax refund because they import software for sale in India.

The Centre is likely to lose more than Rs 5,000 crore annually in corporate tax after its plea on imposing tax on payment abroad for software was turned down in the Supreme Court, ending a 20-year-old dispute between companies and the Income-Tax Department.

The apex court has settled the long-pending dispute that involved companies such as Samsung Electronics, IBM, Hewlett Packard, Mphasis, Sonata Software, and GE India.

According to sources, the department is examining the court’s ruling and seeking legal opinion on it.

“We have done an internal assessment. We are also looking at provisions to assess if there is any scope of amendment in the law or in the definition,” said a senior government official.

The court had on March 2 upheld the case of tech companies, stating that cross-border payments for software to a non-resident were not to be taxed as royalty.

So far, software companies paid 10 per cent royalty tax.

It is learnt that following the court’s order some tech firms approached the department for tax refund, said the official cited above.

However, for earlier years, refund will happen after the companies get orders on their individual cases based on this judgement, he said.

Sources said about hundreds of companies, including Facebook and Amazon, could seek tax refund because they import software for sale in India.

Also, foreign companies or sellers that do not have business connections or permanent establishments in India need not pay tax on business income.

International taxation officials, however, say the order will end ambiguity and bring clarity on various aspects.

An officer said the judgment made it clear that payment for acquiring software amounted to buying goods and was not royalty payment.

Also, the judgment has made it certain that end-users merely receive a copyrighted article and not a right to the copyright in the software when they purchase software.

There is no royalty payment in such purchases.

Around 86 appeals and cross-appeals were filed in similar matters before the court both by software companies and the department.

Deciding all of them, the court cited the definition of royalty in Article 12 of the double taxation avoidance agreements and 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/ end users licence 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”.

Tax authorities have said the Indian entity is granted the right to exploit the intellectual property or copyright in the software and consequently the payment for such purchases amounts to royalty income for the seller, said Rakesh Nangia, chairman, Nangia Andersen India.

However, taxpayers have argued that payment received for selling computer software is business income and in the absence of a business presence or permanent establishment of the seller in India, such business income is outside the ambit of taxation.

A retrospective amendment had been introduced in the Finance Act, 2012, to extend the provisions for royalty.

It said irrespective of the channel through which software was transmitted, payments for the right to use computer software would be taxable as royalty income.

Nevertheless, there were contentions that the clarification was against the provisions of tax treaties.

This issue has been challenged in various courts for two decades.

Then there were conflicting rulings in the case of Samsung Electronics, in which the Karnataka high court had ruled in favour of the department and the Delhi high court’s ruling in the case of Ericsson was for the taxpayers.