|
September 5, 2006
Withholding
tax on purchase of software
The
Authority for Advance Rulings ("Authority") has
recently held that in the case of an Indian company there exists a
legal obligation to withhold taxes while making payments for the
software purchased from a foreign company.
The
applicant, Headstart Business Solutions Pvt. Ltd. (‘Headstart’),
an Indian company had entered into a Solution Provider Agreement
with Microsoft Sales Corporation, Singapore ('Microsoft') for
the purchase of business software solutions. It had sought a
ruling from the Authority on whether it was required to withhold
taxes while making payments for the purchase of such software from
the foreign company.
The
applicant contended that the payments for software would be
taxable as royalty only if the software imported was accompanied
by copyright thereby enabling the applicant to replicate the
software. In the present case, as the imported software did not
confer any copyright on the applicant, the remittance made by the
applicant to the foreign company for the purchase of software did
not entail deduction of taxes. Further, the income arising in
India to the foreign company from the sale of such software is
business income and in the absence of any linkage to a ‘permanent
establishment’ of the foreign company in India, the same is not
liable to tax.
For
the purposes of determining the obligation to withhold taxes, the
Authority did not take the nature of payment into consideration
and did not find it necessary to deliberate over the issue as to
whether any copyright had been conferred on the applicant. The
Authority said: “The arguments advanced by the learned counsel
for the applicant with regard to there being no royalty income or
the statement that MRSC has no PE (Permanent Establishment) in
India are beyond the scope of consideration and subject matter of
this application.” The Authority solely relied on Section 195
(1) of the Income Tax Act, 1961 (“ITA”), holding that
the expression “any other sum chargeable under the provisions of
this Act” brings within its ambit not only the amounts, the
whole of which are taxable without deduction, but also amounts of
a mixed composition, where only a part of it may be liable to tax,
as well as other disbursements which are of the nature of gross
revenue receipts.
Thus,
the Authority ruled that there was indeed a legal obligation to
withhold taxes when making payment for the purchase of software
from a foreign company, as such a payment falls within the scope
of section 195 (1) of the ITA.
Impact:
The rulings of the AAR are private and binding only on the
applicant and tax authorities, in the case of the applicant.
However, they do have persuasive value. This ruling will have an
impact on many Indian companies, which buy off-the-shelf software
products from abroad. The ruling does not discuss the
India-Singapore tax treaty provisions and their overriding effect
on the ITA.
|
|
|
You
can direct your queries or comments to the authors
|
Source:
AAR/103/2005-06/349
|
