ARE SOFTWARE PAYMENTS ROYALTY OR BUSINESS PROFIT, ASK FOREIGN COS

K.R. Srivats
The Hindu Business Line

Do payments made for IT software take the character of ‘royalties’ or lead to business profits for software companies? Treating such payments as royalties could imply more revenues for the taxman here. However, revenues may not be guaranteed for the tax department if they are treated as business profits, due to ‘permanent establishment’ issues for multinational software companies.

With the taxability of payments made for software remaining a controversial issue in terms of income-tax liability, the Finance Ministry is now under pressure from foreign companies to bring clarity on the “characterisation” of such payments so as to avoid litigation and remove uncertainty in the business environment.

Multinational software firms operating in India include Microsoft, Adobe, Oracle and SAP. Making a clamour for clarity and certainty in the tax treatment on software payments is AMCHAM, a body representing the interests of US companies in India.

“We have urged the Finance Ministry to put down in a circular on how payments made for software should be characterised. They could treat it as royalties or as payments leading to business profits. But they should take some view on this. It should not be left to the interpretation of assessing officers. Absence of clarity is only leading to a plethora of litigation and uncertainty in business environment,” Sanjiv K. Chaudhary, Chairman, Taxation Committee, AMCHAM, told Business Line.

The high-profile Microsoft case, involving about Rs 700 crore (including interest) for the financial years 1998-99 to 2003-04, is an example of differing interpretations on the “characterisation” of payments made for software.

While the revenue department at the initial assessment levels has taken a stance that such payments are “royalties” and should attract tax in India, the software major does not hold this view and has gone on appeal.

The Indian stance is contrary to the views expressed by the OECD.

Although India is net exporter of information technology (IT) - software and services, many US companies have significant business interests in India in terms of a market for their ‘Software Application Products’.