MNCs, Indian Tech Cos Spar over Copyright Tax

Several multinationals and Indian technology companies are in a standoff over the applicability of tax on copyright after a Supreme Court ruling laid down that payments made by local users for the purchase of software form foreign companies or distributors cannot be taxed as royalty.

The question is whether Indian companies that use, sell, or market software-directly or installed in cell phones, computers etc.-should deduct tax on royalty or copyright money they pay to multinationals.

Indian companies have been deducting around 10% tax on copyright and royalties over the years, but multinationals insist that the SC ruling changes all that.

“Indian companies that use imported software still want to continue withholding the tax at 10% but the latter claims that following the SC ruling on copyright, no withholding should apply. Many Indian companies don’t want litigation and are asking the multinationals to get a nil certificate from tax authorities if they want to avail the benefit of SC ruling,” said Rohit Jain, partner with law firm ELP.

A nil certificate is essentially a procedure whereby a company can produce a document that says that there would not be a tax deduction on a particular issue.

Indian companies fear that changing MNC partners changing stance based on the SC ruling could land them in legal trouble. As the regulations stand today, Indian companies collect the tax on multinationals’ behalf and pay to the taxman. This is mainly because multinationals that do not have a “presence” or “permanent establishment” in India are not liable to follow all domestic tax regulations.

Indian companies now fear that taxmen could slap notices and question them if they stopped doing so based on the ruling. “Every ruling has several interpretations, Indian companies do not want to get caught in the crosshairs of MNCs and taxmen on this issue,” said a senior lawyer advising some companies.

Many Indian companies are now asking multinationals to get a “nil certificate” from the taxman or they would continue deducting the taxes.

“These certificates are hard to come by,” said a senior tax consultant. “Not only that, the tax department is not even processing the refunds that many companies have applied for,” he said.

Several multinationals have claimed several thousands of crores in refunds from the Indian of crores in refunds SC ruling on Microsoft.

Multinationals, including Google, Facebook, Amazon and Microsoft have been in one way or another deducting tax on royalty or litigating on the issue and were planning to file for refunds, EF first wrote on March 4.

The SC ruling essentially speaks about what is a copyright and how or whether it can be taxed saying:

“The amounts paid by resident Indian end-users/ distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs (end user license agreement)/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India.”

This would mean companies need not deduct tax at source as per the Income Tax Act, the court ruled, before adding that this would cover the different models used by companies to operate in India.

The ruling by a bench of Justices RF Nariman, Hemant Gupta and BR Gavai goes into the details of what royalty is and what is not, thereby what can be taxed and what can’t be.

Payments cannot be termed royalty and taxed where the software is purchased directly by an Indian end user from an overseas supplier or manufacturer, or form an Indian or foreign entity that acts as a distributor or reseller, the court said.

This applies also to where the software is bundled with hardware. Most multinational companies use a reseller model in India. S-ET

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