M. Tech India – Delhi High Court finds that the mere right to customize software purchased for resale does not render the consideration a royalty

The Indian case law on the distinction between a software royalty (subject to withholding) and the purchase of software as a product apparently is well developed. The purchase price of specialized software acquired by an Indian company from a non-resident for resale to Indian end users was found not to be a royalty in the face of a Revenue argument that the right of the purchaser to customize the software established that it could use the software and, therefore, the payment, in fact, was a royalty. Bakhru J. stated:

In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright.

Neal Armstrong. Summary of Principal Commissioner of Income Tax-6 v. M.Tech India P. Ltd., ITA 890/2015, under s. 212(1)(d).