Thursday 4 November 2010

Beware withholding taxes on software to India

In an early start to the pantomime season, the earlier sensible decision on shrink-wrap software of the Bangalore Tax Appeal Tribunal appears to have been thoroughly ignored by the Delhi Tax Appeal Tribunal, which has held that payments received by Microsoft from end users in India through distributors for sale of Microsoft off-the-shelf, shrink-wrap, software are taxable as royalties (and so are subject to Indian withholding taxes).

Ok, so this only applied to payments made before January 1, 1999, while Microsoft had direct arrangements withIndian distributors for the software sale, on a principal-to-principal basis. But it still holds good for other companies' sales of software now. In effect, the decision means that any sale of software to India should have tax withheld from the payment, no matter what form the software actually takes - that's going to make quite a difference to some profit margins.

The reason it doesn't apply to Microsoft's sales since January 1, 1999, is that since then Microsoft software has been manufactured and distributed in India by Gracemac Corporation (a US company) under an exclusive licence. The Tax Appeal Tribunal also held that payments for software licensing should be treated as royalties for tax purposes, which makes a little more sense than their decision on shrink-wrap given that Gracemac is actually exploiting the intellectual property by manufacturing the CDs (not a lot more, assuming that the licence doesn't actually allow Gracemac to change, adapt or otherwise directly use the intellectual property).

There was also some outrageous comments on the ability of Indian domestic law to override tax treaties - that's not IP specific, but it's got international tax lawyers choking.

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