Microsoft may have to fork out Rs.700 crore in unpaid taxes

When you buy Microsoft Windows software (of course, many just use the pirated copy), you do not buy a product, but merely the license to use it. That is what the income tax department has decided in its ruling, which stipulates a royalty fee to be paid by Microsoft for the sale of its software in India.

Microsoft's corporate relationships in India are a bit complex. The company has its exclusive licensee Gracemac Corporation, USA, which in turn has a non-exclusive licensee in Microsoft Operations PTE Singapore. This company, in turn, has made Microsoft Regional Sale Corporation (MRSC), USA, a non-exclusive licensee to distribute Microsoft products in Asia to end users.

The commissioner of income tax appeals has ruled that the products that MRSC distributes are not a sale, and provides reasons why the price realised is license fee. Income from software license is royalty income, under both domestic law and the double taxation agreement with US, said the commissioner, and hence, Microsoft is liable to pay additional taxes on the additional royalty income assessed.
 
As a result of this ruling, Microsoft's royalty income for the financial years 1999 to 2004 stands corrected at Rs2240 crore instead of Rs868 crore assessed earlier, resulting in an additional tax liability, inclusive of interest, of Rs700 crore. Royalty income is taxed at a rate of 15 per cent.

However, this ruling has many detractors. Tax experts feel that the ruling is flawed as it has equated Microsoft's copyrighted software with software where intellectual property is transferred with the sale. Microsoft's software expressly forbids its unauthorised copying, modification and distribution, and hence, even if it's not an outright sale as argued by the tax authorities but merely a license to use it, it still cannot be considered as a sale of royalty. Hence, they contend that Microsoft has a favourable chance of successfully appealing against this ruling.

Experts also feel that Indian software companies will also be adversely affected if a higher authority did not overturn this ruling. Of course, as with any other story, there are two sides to this one as well. Many feel that Microsoft had adopted a legally vague route to avoid paying taxes in India, quite similar to the Indian businesses that route their funds into the Indian bourses through Mauritius, and in now being made to pay tax for income made in India.

Microsoft has said that it ''believes it is in full compliance with Indian tax laws and the Income Tax treaty agreement between India and US'' and is reviewing the order, according to which it will determine its future course of action.