Karnataka HC order jitters software importers

The tax treatment of income from sale of software products has been a contentious issue in India. The Karnataka High Court on October 15, 2011 passed a judgment on the dispute between software companies and the income tax department and ruled that payments made by software firms in India to their foreign software suppliers would amount to 'royalty' and the companies had an obligation to deduct tax at source from the amount that they paid.

The implication of this decision will adversely impact all the software importers. It has been estimated that it would slap the tax liabilities to the software importers worth Rs 5,000 crore. The order enables the Income Tax Department to recover tax dues from major IT companies from the year 2000 at an interest rate of 10% of the value of all softwares imported. A division bench comprising Justice VG Sabhahit and Justice Ravi Malimath passed the order while allowing an appeal by the IT department, challenging the 2005 order of the Income Tax Appellate Tribunal. As per media reports, the tribunal, on appeal by major IT companies, including Wipro, Infosys, HP, Samsung, Sonata, GE India and others, had said that the payment did not attract tax in India as there was no permanent establishment of non-resident foreign suppliers here.

Commenting on this Judgment, the Mumbai based software importers, Rajesh Kothari, CEO, Blue Chip Computers, and ex-chairman of Infotech Software Dealers Association (ISODA) said, "This decision would be a watershed for mid to small software importers as software partners are already in fix of double taxation. Having said that,we have been religiously paying withholding taxes and working with only those suppliers who are ready to deduct withholding taxes or offer higher margins so that we can cover the expenses. Nevertheless, problems will be for those who are not deducting it." In his view, the decision will not reach to any conclusion as it will see multiple litigation as most of the affected companies will file appeals or special leave petitions before the Supreme Court against the order. And only those can oppose the judgment who have deep pockets, but small time importer will die. This is least we can accept from the government. Instead, it should have a pragmatic view while handling the case. If this comes true, it will be a serious issue," added Kothari. According to Harinder Salwan, secretary, ISODA, "In our view, large distributors like Redington, Ingram, Sonata, Wipro, etc, will be affected with this order. Very few members of our association are into software import." The DQWeek tried to speak to the national distributors to take their viewpoint. But, none of them were available when the story was going for print.