2012 (4) TMI 116 - HC - Income Tax

Software License Fees to Foreign Suppliers Deemed 'Royalty' under Income-tax Act

The High Court upheld the Revenue's appeal, ruling that consideration paid by Indian customers to foreign suppliers for the right to use software/computer ... Royalty paid to foreign software Supplier – Held that:- Consideration paid by the Indian customers or end-users to the assessee - a foreign supplier, for transfer of the right to use the software/computer programme in respect of the copyrights fells within the mischief of 'royalty' as defined under sub-clause (v) to Explanation 2 to Clause (vi) of section 9(1). See CIT v. Samsung Electronics (P.) Ltd (2011 - TMI - 208153 - Karnataka High Court)– Decided in favor of Revenue Issues:Interpretation of 'royalty' under sub-clause (v) to Explanation 2 to Clause (vi) of section 9(1) of the Income-tax Act, 1961.Analysis:The High Court heard an appeal by the Revenue against a Tribunal order favoring the assessee, following a precedent set by the Tribunal in a previous case involving M/s. Hewlett-Packard [India] Pvt. Ltd. The key legal question revolved around whether the consideration paid by Indian customers to a foreign supplier for the right to use software/computer programs constituted 'royalty' under the Income-tax Act, 1961. This issue had been previously addressed by the court in cases such as CIT v. Sinopsis International Old Ltd. and CIT v. Samsung Electronics (P.) Ltd., where it was established that such payments fell within the definition of 'royalty'.The court reiterated that the consideration paid by Indian customers to foreign suppliers for the transfer of the right to use software/computer programs involving copyrights indeed constituted 'royalty' as per the relevant provisions of the Income-tax Act, 1961. Building upon previous judgments, the court held that the amounts paid in such transactions were subject to taxation in India and that the appellant was liable to deduct tax at the source. The court's decision was based on the consistent interpretation of the law regarding royalty payments in similar cases, leading to a ruling in favor of the Revenue and against the assessee.In conclusion, the High Court upheld the appeal by the Revenue, aligning with the legal precedent established in previous cases regarding the taxation of payments made by Indian customers to foreign suppliers for the right to use software/computer programs. The judgment clarified that such payments were classified as 'royalty' under the Income-tax Act, 1961, affirming the appellant's obligation to deduct tax at the source. The court's decision was in line with the consistent interpretation of the law in similar cases, emphasizing the tax implications of such transactions and providing clarity on the legal framework surrounding royalty payments.