The Supreme Court has exempted the income tax that the Indian companies pay for using the software being developed by foreign firms. The India companies pay a huge sum of royalty for using foreign software.

However, the apex court has settled the long-standing dispute between the companies namely IBM, Samsung, HP, Mphasis, GE India, Sonata Software and more as well as the tax department. Now, the court held that there is no liability for Indian companies to cut tax at source on account of procuring software from foreign companies.

The Bench, consisting of Justices R F Nariman, Hemant Gupta and BR Gavai, has stated that the amount paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale or use of the computer software through EULAs (end user licence agreements)/distribution agreements, is not payment of royalty for the use of copyright in computer software, and it does not give rise to any income taxable in India.

Explaining the case, Rakesh Nangia, chairman of Nangia Andersen India, states that the IT department had broadly characterised the payments made to non-residents for software purchase as royalty.

Taxpayers, on the other hand, contended that such payments for the sale of software are in the nature of business income in the hands of the non-resident, Rakesh said.

As such, companies argued that in the absence of business connection/permanent establishment of the non-resident seller in India, such business income would not be taxable in India.

Two of the most important and conflicting rulings were in the case of Samsung Electronics where the Karnataka High Court had ruled in favour of the revenue department and Delhi High Court’s ruling in the case of Ericsson favouring taxpayers.

Various courts have taken divergent views on this matter, resulting in vast uncertainty and ambiguity in the minds of taxpayers.

“The ruling will have a far-reaching impact as it will now become the law of the land. This issue has been quite convoluted and remained an apple-of-discord for several years. The ruling of the Supreme Court will put to rest open litigation on software taxation and lead to refund to taxpayers,” he said.