Microsoft faces Rs 700cr tax claim

Indian tax authorities have asked Microsoft to pay over Rs 700 crore as tax on income earned through royalties on software products licensed to Indian customers between 1999 and 2005.

In an order passed recently, the commissioner of income tax (appeals), New Delhi, has said, “Gracemac Corporation, a 100 per cent subsidiary of Microsoft which had in 1999 been granted proprietary and ownership right in licence and in intellectual property of Microsoft software and hardware products, is liable to pay income tax on its gross royalty income earned out of licensing of software to Indian customers.”

Microsoft said it was reviewing the order and would, accordingly, prepare a course of action.

“Microsoft believes it is in full compliance with Indian tax laws and the income tax treaty agreement between India and the US. The case in point is an old issue relating to the financial period 1999 to 2004 and for an overseas Microsoft entity,” the company spokesperson told The Telegraph.

According to the order, the total gross royalty income for the six assessment years starting from 1999 to 2005 stands at Rs 2,240 crore.

At a 15 per cent 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 this has also been confirmed by the commissioner, the total liability is around Rs 700 crore.

The tax department said that the price charged for the use of Microsoft’s software in India was royalty and tax was payable on it.

“This is because the software is not sold, but licensed and Microsoft continues to retain its intellectual property rights over the software,” said income tax officials.

Moreover, its agency has to activate the software, and the end-user agreement says that the product is licensed and not sold, they added.

A CBDT spokesperson said: “If Microsoft desires it can go on an appeal against the finding before the income tax appellate tribunal.”

In 1999, Microsoft had granted a licence for Microsoft software and hardware products to the Nevada, US-based Gracemac.

But Microsoft declared to the income tax (I-T) department that its income was nil. An assessment officer, however, found that the company had “licensed Microsoft software to end users in India through Gracemac.”

Analysts said that this implied that royalty payments were coming out of India, which could be taxed.

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’, making it taxable.”