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). 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.
Oh, and tax treaties with India can’t apparently be relied on, according to the court.
Ok, so this only applies to payments made before January 1, 1999, while Microsoft had direct arrangements withIndian distributors for the software sale, on a principal-to-principal basis.
Since January 1, 1999, 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).
The point on tax treaties has international tax lawyers choking: the Tax Appeal Tribunal considers that a change in domestic law which conflicts with a tax treaty, and which is made after the tax treaty is signed, will override that tax treaty. The implication is that India can back out of tax treaties if if doesn’t like them, just by passing domestic laws that contradict the treaty. What fun.
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Tags: india, licence, royalties, shrink-wrap