The characterization of payments made for shrinkwrapped software
has been a controversial issue in India, resulting in a large
number of litigations. On the one hand, the revenue authorities
argue that software companies license their software to the
end-users and do not merely provide a copy thereof. Thus, payments
made by the end-users are in the nature of royalty payments, liable
to tax in India under the provisions of the Income Tax Act, 1961;
subject to the beneficial provisions of tax treaties. On the other
hand, software companies contend that end-users only receive a copy
of the software — that is, a ''copyrighted
article,'' as opposed to a right to the copyright of the
software. Consequently, payments made for the software are in the
nature of business income and are not liable to tax in India in the
absence of a permanent establishment in India.
