Cross-border Payments for sale of Software not Taxable as 'Royalty': Supreme Court

The Supreme Court ruled on Tuesday that payments made by non-residents in exchange for the selling of a computer software licence to Indian companies/entities are not taxable as "Royalty."

The appeals filed by assesses were allowed, while the Income Tax Department's appeals were dismissed by a bench of Justices Rohinton Nariman, Hemant Gupta, and BR Gavai (IT department).

The IT department had attempted to impose a royalty tax on money earned from software sales. They argued that before paying the foreign seller, the Indian entities to whom the software licence was issued should deduct tax at source.

Companies objected, claiming that the transaction between the foreigner seller and Indian companies is a sale rather than a licencing agreement. As a result, the revenue generated cannot be classified as royalties, but rather as business revenue.