The Commissioner of Income Tax (Appeals) CIT(A), has asked Gracemac Corporation, a Microsoft subsidiary, to pay over Rs 700 crore as tax on income earned through royalties on products.
Towards tax on royalty earned from software sales in India between 1999 and 2005
MUMBAI: The Commissioner of Income Tax (Appeals) CIT(A), New Delhi, has asked Gracemac Corporation, a Microsoft subsidiary, to pay over Rs 700 crore as tax on income earned through royalties on products between the assessment years 1999 to 2005.
A copy of the CIT(A) order, which is in the possession of the taxindiaonline.com portal, mentions that the CIT(A) handling international taxation cases in Delhi has recently held that Gracemac is also liable to pay interest on its gross royalty income earned out of licensing of software to Indian customers.
The total gross royalty income for the six assessment years starting from 1999 to 2005 is computed at Rs 2,240 crore.
At a 15% tax on royalty under Section 9(1)(vi) of the Income Tax Act read with Article 12 of the double taxation avoidance agreement with the US, the total tax liability on the Microsoft subsidiary comes to about Rs 350 crore.
Since interest on the same has also been confirmed by CIT(A), the total liability is likely to exceed Rs 700 crore.
T P Oswal, a Mumbai-based chartered accountant and tax advisor to many international firms, said he does not agree with the ruling. “The need,” he said, “is to demarcate sale of copy rights from sale of copyrighted goods.”
“A Supreme Court ruling in 2004 in the Tata Consultancy Services versus Andhra Pradesh case had made it clear that software falls under goods, and thus no royalty can be levied on it.”
The option for Microsoft would be to take the case to higher authorities. Company officials were not available for comment when DNA Money contacted.
In 1999 Microsoft had granted proprietary and ownership rights in license and in intellectual property (IPR) of Microsoft software and hardware products to the Nevada, US-based Gracemac.
Subsequent to the company’s declaration to the I-T department that its income is nil, an assessment officer of the I-T department found that the company had “licensed Microsoft software to end users in India.”
The I-T department view is that software is an invention as “its development requires highly technical manpower with highly sophisticated infrastructure, putting it under the category of “secret formula or process”, the assessing camera decided to view this as taxable.
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