Enigma of software taxation: Royalty or business income?

The Delhi Bench of the Income Tax Appellate Tribunal recently delivered a judgment in relation to the characterization of receipts from software licensing in the case of Infrasoft Limited, a branch of Infrasoft US. The company imports software from Infrasoft US, which it provides to its customers in India, after customizing it with specific limitations on the right to its use, copy, sale and sub-licensing.

The assessing officer held that the receipts from such software should be classified as royalty income, which is liable to taxation in India in accordance with the provisions of the India-UK Tax Treaty and the Income Tax Act, 1961.

Infrasoft Limited contended that software licensees were entitled to receive only a copy of the software, and that they did not acquire rights to exploit its copyright. Infrasoft Limited relied on Motorola Inc v DCIT and Samsung Electronics Co v ITO, where the tribunal had distinguished between the right to use a copyright and the right to use a copyrighted article. The receipts from the transfer of software, which was actually a copyrighted article with limited rights, did not amount to royalty, as the copyright remained with the licensor/company.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbaibased law firm that provides legal and tax counselling. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.