The income-starved government will have to cough up tens of thousands of crores of rupees more than the next couple of months towards honouring the claims of refunds of the 10% ‘royalty tax’ to scores of non-resident software program suppliers to Indian corporations, following Tuesday’s Supreme Court (SC) ruling, tax professionals mentioned.
Companies importing software program for sale have due to the fact 1998 been expected to deduct the tax payable by the foreign software program provider devoid of a permanent establishment in India. While a sections of these importers have complied with the TDS obligation, other individuals have been contesting the tax notices in many forums such as tax tribunals and courts. Tax professionals mentioned that whilst a precise estimate of the aggregate TDS quantity is not quickly offered, they mentioned the refunds, such as interest accrued, could add up to Rs 50,000 crore or more.
In its ruling, the apex court has stated that amounts paid by resident Indian finish-customers/distributors to non-resident laptop software program producers/suppliers, as consideration for the resale/use of the laptop software program by means of EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the laptop software program. These amounts would be classified as business enterprise revenue for such software program provider, which, in the absence of PE, will stay outdoors the tax net.
Asked whom the tax division would will need to refund, a tax specialist mentioned, “ordinarily, the non-resident software provider”.
The SC has granted the advantage of the useful provisions of the Double Taxation Avoidance Agreements (DTAAs) in spite of the expansive definition of ‘royalty’ in India’s Income Tax Act. Since most overseas software program providers operate type nations with which India has DTAAs, the ruling will virtually cover the bulk of such transactions.
While the SC decided on a set of 115 appeals prior to it, a tax specialist on situation of anonymity mentioned: “Certainly, when you compute the implication (of the ruling), you don’t have to look at only the SC cases, but the impact it will have on all the cases that are before various tribunals and High Courts. Because now various tribunals and high courts are going to follow the Supreme Court orders, which may also have revenue implications. The tax department owes a lot of money to these companies.” All the situations which have been lost in tribunals would have currently paid one hundred% tax demand, he noted.
Of course, in situations exactly where the 2% equalisation levy (EL) introduced through Finance Act 2020 for ‘on-line services’ offered to Indian persons by non-residents, the latter will be liable to spend the EL. Vishal Malhotra, National Tax Leader-TMT at EY India, mentioned: “If software is supplied physically, then it will not apply. If software is contracted and provided via online platform, 2% equalisation levy will apply.”
“The authoritative pronouncement (by the SC) deals with the extensive arguments made by both sides and jurisprudence under tax and copyright law to conclude that there is no interest or right created in favour of the distributors/end-users, which would amount to use of or right to use any copyright. The primacy of tax treaties over the domestic tax law has once again been upheld while coming to this conclusion. Foreign software suppliers will breathe a sigh of relief with the long uncertainty finally reaching a well-founded outcome in their favour,” mentioned Ravi Mahajan, companion at Ernst & Young LLP.
Also Read: YES Bank gets shareholders’ nod to raise Rs 10,000 crore
Software firms like IBM India, Samsung Electronics, GE India, Hewlett Packard India, Mphasis Ltd, Sonata Software Ltd and other individuals who import software program for sale in India are amongst the principal beneficiaries of the SC ruling. The ruling will reduce the price of software program purchases for Indian firms across sectors as the overseas software program sellers may possibly chose to reduce rates, taking benefit of the tax relief.
Earlier court rulings on the dispute have been conflicting. In the case of Samsung Electronics, the Karnataka High Court had ruled in favour of the taxman whilst the Delhi High Court, in the Ericsson case, upheld taxpayer’s contention. The subsequent rulings by other higher courts have been divergent.