A unit of Microsoft Corp. has been asked by an Indian appellate authority in income tax to pay more than 7 billion rupees - or about US $175 million on income earned for the assessment period of 1999 to 2005.
The amount is computed based a tax rate of 15% on royalties earned in the country. If interest is added, the total burden is likely to go even higher.
How did this situation came about? According to The Economic Times:
The essence of the case, which pertained to the period 1999-2004, is Microsoft’s decision not to pay tax in India citing several legalities, including the double taxation avoidance agreement with the US. The company, which sells its software in India through a circuitous route involving several group companies, had maintained that its deal with the customers is a sale and no royalty payment is involved. It is this position that has now been rejected.
The irony is that what nailed the case here is Microsoft’s own EULA. Tax authorities cited a clause in the document which stated “the product is licensed, not sold,” concluding that since the software is licensed, a royalty is involved.
Obviously, it is not the last word on the case yet. Microsoft believes it should not have to pay the tax, citing several legalities, including a double taxation avoidance agreement with the United States. At the moment, Microsoft can move on to the Income-Tax Appellate Authority (ITAT) and the hig court to appeal its case.
A Microsoft spokesperson said, “Microsoft believes it is in full compliance with the Indian tax laws and the income-tax treaty agreement between India and the US. Microsoft is reviewing the order and we will determine our course of action accordingly.”
Still, I find it interesting that Microsoft believes its products to be licensed - as stated in its EULA, and not sold. I have never really considered the implications of “licensing” a software versus “purchasing” one. What do you have to say about this?