The characterization of computer software transactions has been a contentious issue with the Indian tax authority over the last several years. This Ernst & Young http://tmagportal.ey1.dedicated.nines.nl/wp-content/uploads/2010/11/2010G_CM2141_Conflicting-decisions-on-India%E2%80%99s-treatment-of-software-payments.pdf alert summarizes conflicting decisions of the Delhi Income Tax Appellate Tribunal (Delhi ITAT) in the Microsoft Corporation case and Mumbai Income Tax Appellate Tribunal (Mumbai ITAT) in the Reliance Industries Ltd case on computer software payments.
While the Delhi ITAT concluded that the payments should be treated as a royalty under Indian Tax Laws (ITL) and therefore subject to Indian withholding tax, the Mumbai Tribunal held that they were business profits, not subject to Indian withholding tax.
The alert also states "The conflicting views conveyed by the Indian tribunals on the taxability of software payments have left taxpayers confused. While most of the recent case laws have characterized the payments to be treated as business profits based on the nature and extent of rights granted, the current ruling of the Delhi ITAT deviates from the principles emerging from earlier rulings. In spite of a favorable Mumbai ITAT ruling, foreign recipients of software payments from India are likely to continue to face significant litigation."
