SC refuses to reopen 2021 ruling exempting foreign software payments from royalty tax

New Delhi: The Supreme Court on Monday again rejected the income tax department's review petitions against its March 2021 ruling that payments made to non-residents for software purchases cannot be taxed as royalty.

The tax department had argued that cross-border payments made to foreign software companies and distributors amounted to royalty because the software sold to end users involved licensing of the underlying programme. It maintained that Indian buyers were granted rights to exploit software copyright and that the payments therefore constituted royalty income for overseas sellers. A three-judge bench comprising justices Sanjay Kumar, KV Viswanathan and K Vinod Chandran noted that the court had already dismissed review petitions filed by the tax department against the same judgment in April 2024. The bench said it would not be proper to reopen the issue and dismissed the latest review petitions after a brief hearing in open court.

The 2024 order had rejected the department's arguments both on grounds of delay and on merits, finding no justifiable reason to interfere with the 2021 judgment.


In its March 2, 2021 ruling, the apex court had held that end-user licence agreements do not transfer or assign copyright over software and that distributors are granted only a non-exclusive, non-transferable licence to resell software. The judgment had lowered software acquisition costs for Indian companies, as overseas sellers could reduce prices due to the tax relief. Companies including IBM India, Samsung Electronics, GE India, Hewlett Packard India and Mphasis, , were among the key beneficiaries.

"The principles laid down in the 2021 decision have been consistently applied by lower courts to multiple evolving tech models including cloud, digital marketing etc. as the sole guiding framework, and revenue will now have to align its position in pending assessments and withholding tax proceedings accordingly considering this dismissal in open court proceedings," said Asire Consulting managing partner Rahul Garg.