Coming as a shocker to software giant Microsoft, the Income Tax Appellate Tribunal, Delhi, has said the sale of ‘off the shelf’ software is actually the income from licensing and hence is considered royalty which is liable to be taxed.
“The Microsoft software copies are delivered by Microsoft Regional Sales Corporation to the Indian Distributors “ex-warehouse” in Singapore. The distributor sold the products to re-sellers in India who, in turn, sold them to end users. Microsoft entered into agreements with end users to use the software products licensed to them as per terms of agreement,” says the appellate ruling.
It further adds: “The income received for supply of software is assessable as “royalty” as a copyright subsists in a computer programme and it is also a literary as also a scientific work.”
“Microsoft sells copies of its licensed software in India and considers it as sales proceeds which result in business profits and these don’t get taxed. However, courts have opined that the payment received is for the use of copyright and hence, the payment is not a sale but royalty that entails a tax,” explained Anurag Jain, partner at BMR Advisers. This tax on royalty is 10 per cent of the gross payments and whichever entity is sending the software from outside India to inside India will have to incur the tax. The software major, on its part, says that such taxes add to confusion for the software companies.
“Microsoft is reviewing the tax tribunal’s decision in detail. The judgment is disappointing, since it appears to be contrary to previous legal precedents, and is attempting to tax companies that have no direct business connection with India.
