IBM to contest tax demand of Rs 620 crore due to undervaluation of imports

Global technology major IBM is likely to contest the tax demand of Rs 620 crore imposed by the tax authorities owing to undervaluation of imports, sources said. However, the company will put forward its arguments on valuation methodology adopted by it for imports to the tax authorities before taking legal recourse.

“IBM is preparing to present before the tax authorities the methods that were used for the valuation. If the discussion falls through, the company will take the legal route,” said a person in the know.

The Indian unit of IBM had received a tax notice of Rs 620 crore last week owing to under-invoicing of equipment imported in 2014. The notice also said that IBM had not paid Customs duty on some of its inter-company transfers. An IBM spokesperson declined to comment.

IBM had also faced a tax demand of around Rs 5,300 crore from the income-tax (I-T) department in 2013 owing to alleged underreporting of profits, which the technology firm had contested in the Karnataka High Court (HC).

Multinational corporations (MNCs) working in the technology services area have been under the radar of Indian tax authorities in recent years. Tax experts and industry watchers are of the opinion that issues related to inter-company transfers, payment of royalty by the Indian unit to its parent firm abroad, dividend distribution tax (DDT), and under-invoicing of imports are some of the areas in which these companies had faced tax demands.

Even the definition of ‘intermediary’ is currently under debate, with an advance tax ruling favouring the imposition of tax on exports done by any intermediary.

“Indian units of global technology firms usually face tax demands on issues relating to transfer pricing in case of inter-company transfers and royalty payment, among others. Overall, the interpretation of what can be called ‘service’ is also a grey area,” said Pareekh Jain, founder of Pareekh Consulting.

Apart from these tax provisions, even payment of DDT is another area under which many companies had faced tax demands.

In March 2018, the I-T authorities had frozen certain bank accounts of Cognizant owing to a dispute over payment of DDT. The technology services firm had received a demand notice of around Rs 2,800 crore for non-payment of DDT, which it is contesting in the Madras HC. The department had alleged that Cognizant had remitted about Rs 19,415 crore to its non-resident shareholders in May 2016 without paying any DDT.