Taxing the Sale of Software: Revisiting the Definition of ‘Royalty’ Under the DTAAs

Abstract

The characterization of payments, for taxation, in the hands of, non-resident payees arising out of a cross-border sale of software, has always remained controversial in India. While the Revenue, contends that such payments are ‘Royalties’ for Licensing of, Copyrights, the taxpayers argue that these payments are merely, Proceeds on the Sales of Copyrighted Articles. There have been, several conflicting decisions by different Income Tax Tribunals, and High Courts that have legitimized each of these characterizations., While the Courts and Tribunals led by the Delhi, HC held for the taxpayers by characterizing these payments as, Proceeds of Sales, the Courts and Tribunals led by the, Karnataka HC held for the Revenue. Therefore, albeit in, different jurisdictions within the country, a dichotomy persisted. In an attempt to resolve this dichotomy, the Government, of India introduced a clarificatory amendment to the Indian, Income Tax Act, 1961 in 2012. However, the conflict persisted, as the amendment did not clarify and could not have, clarified the status of these payments under the Double, Taxation Avoidance Agreements (DTAAs) As a result, the, dichotomy, now limited to Non-Resident Payees whose resident, jurisdiction has a DTAA with India, still prevailed. These, jurisdictions include several Commonwealth nations such as the, UK, Australia, Malaysia, Canada, etc. and Ireland, which is, the most preferred jurisdiction to operate from for almost all the, tech corporations in the world. Therefore, this dichotomy still, affects the tax liability of the residents of these jurisdictions and, their ease of doing business with India. In this article, the author will highlight that the dichotomy,, though existent, has no basis in law. The author will, highlight that the characterization of these payments as has been, contended by the Revenue is the only legitimate characterization., This characterization not only draws support from the, established Rules of Statutory Interpretation but also promotes, the ease of doing business in India. Agreement, Consideration, Copyright, Double-Tax, Income Tax, Licensing, Literary, Payment, Royalty, Resident