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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 (
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 fi le 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.