Tax shadow over software MNCs

Microsoft studying Rs 700 cr royalty order.

Multinational software firms like Microsoft, SAP and Oracle -- which license software and earn royalty on it from Indian customers – are facing the heat from assessing officers if they have not paid taxes on the gross royalty income.

According to a ruling by New Delhi-based Commissioner Income Tax (Appeal), Microsoft has to cough up over Rs 700 crore in taxes and interest for the period 1999 to 2005.

The case pertains to Gracemac Corporation, a subsidiary of Microsoft. The CIT (A) ruled that the company was liable to pay income-tax on its gross royalty income from licensing of software to Indian customers.

The gross royalty income for the six assessment years is computed to be about Rs 2,240 crore. “The product is licensed, not sold” are the key words. Hence, it is treated as royalty and there's a 15 per cent tax on royalty. However, in response to a notice, Microsoft had filed returns of income for all these years, declaring nil income.

"Microsoft believes it is in full compliance with the Indian tax laws and income-tax treaty agreement between India and the US. This is an appellate order. Microsoft is reviewing the order and we will determine our course of action accordingly," said a Microsoft spokesperson.

This issue is being debated for the last 15 years, say Chartered Accountants (CAs), income-tax experts and analysts. They view this as an attempt to add newer revenue streams.