WITHHOLDING
TAX ON TELCO SOFTWARE IMPORTS GOES
IN A landmark verdict,
a New Delhi tax tribunal has held that the import of customised
software by telecom companies for use in India will be exempt
from withholding tax.
If the import is
a copyrighted article and not the right of copyright, the
payment for the import could not be construed a royalty. The
beneficiary of this order will be telecom operators such as
Nokia, Motorola, Ericsson, and others supplying the telecom
switching equipment. The tax payable for royalty is 20% under
the Indian I-T Act and 10-15% under the Double Taxation Avoidance
Agreement (DTAT) between India and the US. The decision is
also a great boost to Indian companies who import application
software as the I-T department has been treating payment for
such imports as royalty. The order by a Special Bench of Income-tax
Appellate Tribunal (ITAT), New Delhi, on an appeal filed by
all the three operators in India held that payment for import
of software could not be construed as payment of royalty and
hence not taxable. Ericsson, Nokia to benefit
Clause pertaining
to royalty can be applied only when the software imported
is accompanied by the copyrights enabling the importer to
replicate it. Such transaction is not taxable even if these
companies have a permanent establishment in India
The facts of the
case are this: Ericsson, Nokia and Motorola have imported
telecom switching equipment together with software to operate
the equipment.
The I-T office
held that the profit on equipment supply was liable to tax
in India because they have permanent establishments in India.
Under the Double
Taxation Avoidance Agreement (DTAA) India has with most countries,
a transaction is taxable in India if the entity has a permanent
base in India.
The decision by
the ITAT is in tune with the proposals made by the Emerging
Issues Task Force(EITF), a committee set up by the government
to advise it on latest tax issues. Dinesh Kanabar, partner
of Indian accounting firm RSM said. “The decision of the ITAT
is to the effect that merely because supply of software is
covered by a license the payment does not constitute royalty.
The Tribunal accepted the distinction between the receipt
for use of copyright and receipt for copyrighted articles.
It held that payment for software is for a copyrighted article
and therefore not in the nature of royalty and hence not liable
to tax “.
Rajesh Chaturvedi,
senior partner of accounting firm Chaturvedi & Shah said
“ This is the first judicial decision on the taxability of
software import as royalties. This judgement is in tune with
the interpretation given by the US Supreme Court. And the
ITAT order will definitely resolve the ongoing dispute between
tax authorities and assesses all over India on the same matter”.
T P Ostwal, member of the Emerging Issues Task Force (EITF),
said “This judgement is the correct interpretation of Law
on the subject and will go a long way in assisting the Task
Force in resolving disputes on the subject”.
