Demo Case: Coromandel Systems v. Deputy Commissioner
Is a payment for an off-the-shelf software licence a “royalty” requiring tax withholding?
- Forum
- Illustrative — Appellate Tribunal
- Published
- Reading time
- 5 min
This is an illustrative scenario with fictional parties, written to demonstrate the Case Law in 5 format. It does not describe a real judgment or holding.
01 The question
Is a payment for an off-the-shelf software licence a “royalty” requiring tax withholding?
02 Facts
Coromandel Systems (a fictional company) distributed licences for an accounting package developed by a foreign company. End users could only use the software; they could not modify, reproduce or sub-license it.
The tax officer held that the payments were royalty for the use of copyright and that tax should have been withheld under Section 195.
03 Issue
Whether the payments are royalty under the applicable DTAA, or business income of the foreign developer not taxable in India absent a permanent establishment.
04 Arguments / positions
Taxpayer’s position
The distributor acquired a copyrighted product, not any right in the copyright itself. Under the treaty, this is not royalty, and without a PE there is no taxable income in India.
Revenue’s position
The licence grants a right to use the software, which is a form of copyright. The domestic definition of royalty is wide and includes such rights.
05 Decision
In this illustrative scenario, the tribunal analyses the actual rights granted under the licence. Because no right to reproduce, adapt or exploit the copyright is transferred, the payment is held not to be royalty under the treaty.
The withholding demand is set aside, with the tribunal noting that the treaty definition prevails where it is more beneficial to the taxpayer.
06 Why it matters
Software payments are among the most common cross-border transactions for Indian businesses.
The analysis depends on the specific rights in each licence agreement — not on the label “licence fee”.
07 Key takeaway
Read the licence terms closely. What rights are actually transferred often determines the tax outcome.