Just when you thought it couldn’t get more confusing … Following on from the post on the Microsoft case, I came across a Advance Ruling given to GeoQuest Systems BV (a Dutch company) by the Indian authorities in August.
Remember that the Delhi Tax Appeal Tribunal pretty much held that all software payments are royalties, and withholding tax needs to be deducted from payments, even if for shrink-wrap boxed software? Well, the GeoQuest Advance Ruling concludes that a payment for the licensing of special purpose software does not constitute a royalty – so no withholding tax on payments made from India.
The sound you hear is my head hitting the desk in confusion.
The Advance Ruling concludes that a payment for a software license does not fall within the parameters of a “royalty,” being a payment of any kind made for the use of, or the right to use, a copyright of a literary or scientific work.
Could the department dealing with Advance Rulings tell the Tax Appeal Tribunal that, please?
The customer was granted an exclusive, but non-transferable, right to use the software and the associated proprietary information. but no rights to modify the source code, make copies or transfer the software to any other person. The software had to be returned at the end of the licence period.
The Advance Ruling confirmed that:
- unless the right to directly exploit copyright in the software (by copying it, amending it or similar) is granted to the payer, the payment should not be considered a royalty under Indian domestic law; and
- a payment for the use of a product that has an embedded copyright is not the same thing as a payment for the use of the copyright.
Now, see, these points make sense. The Advance Ruling makes it clear that income from a supply of software constitutes business profits rather than a royalty, so that no withholding tax should apply. Now, could they just explain this to the Tax Appeal Tribunal?