The Concept of royalty is generally a periodical payment to be paid by the user of the assets. It is made in exchange for the proper use of another party’s property. The royalty payments received are considered to be income. i.e. this payments likely to incur taxes. Currently India has seen lot of cross border transactions which results in the payments of royalties to foreign nationals or foreign companies. The increased globalization and growth of information technology also increased the import of software technology services and other intellectual property. The focus of government on the socio-economic development coupled with all round development of various sectors also increased. Therefore the country is faced with more challenges to import the necessary intellectual property and it has resulted in increased outflow of payments in the form of royalties. With the growing technologies, taxing computer software under royalties is an unending controversy. There are no specific provisions under the Income tax Act,1961 that specifically deals with the taxability of income that arises from software related transactions. The taxability of income related to software that arises in an international transaction is ruled by general taxation principles, concepts and provisions of the Act. It is a never ending issue on whether software related payments which is made by a resident to a foreign recipient is in the nature of “Royalties” or “Business Income”.
