Court sheds light on taxation of royalties
18 January 2012
Two recent rulings have highlighted the inconsistency of how India tackles the taxation of royalties. Gagan Kumar of Archer & Angel highlights the controversy surrounding the characterisation of payment for use of software as royalty or business profits.
Despite the definition of royalty in India not changing for the past 50 years taxpayers have yet to figure out the principle which can be used to find the answer to question on whether to deduct tax on payment for use of software.
In a recent judgment, the Karnataka High Court ruled in CIT v. Samsung Electronics Co Ltd and others [ITA No 2808/2005 and others] that payment for use of licensed software is subject to tax in India. The ruling arises out of a batch of appeals filed by companies which distribute shrink wrapped software to end use customers as well as companies that imported software for their end use. The court was required to rule on the characterisation of payments made for imports of software.
The taxpayers argued that grant of right to use off the shelf software is a sale and therefore it has to be...
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