If a survey is conducted in India with the sole objective of finding a non-user of Microsoft software, the exercise may not yield tangible results at all. In other words, no computer literate can even feign ignorance about his familiarity with Microsoft products. So pervasive and entrenched are the Microsoft brand name and products in any computer-literate society.
Microsoft pays income tax on income generated from its software licensing in all other countries in the world. But not many know that the Microsoft Corporation does not contribute even a single penny to the Indian exchequer in terms of income tax!
The CIT(A) -- Commissioner of Income Tax (Appeals) -- handling international taxation cases in Delhi has recently held that the Gracemac Corporation, a 100% subsidiary of Microsoft which had in 1999 granted proprietary and ownership right in license and in intellectual property (IPR) of Microsoft software and hardware products, is liable to pay income tax on its gross royalty income earned out of licensing of software to Indian customers.
The total gross royalty income for the six assessment years -- from 1999 to 2005 -- is computed to be about Rs 2,240 crore (Rs 22.40 billion). Going by 15% tax on royalty u/s 9(1)(vi) of the Income Tax Act read with Article 12 of the DTAA (Double Taxation Avoidance Treaty) with the United States, the total tax liability on the Microsoft subsidiary which has been named after Bill Gates' wife -- Melinda -- is calculated to be about Rs 350 crore (Rs 3.50 billion). Given that interest has also been confirmed, the total liability is likely to exceed Rs 700 crore (Rs 7 million).
No doubt, this case has all the makings of a big revenue newsmaker which would travel up to the Apex Court in due course of time, but a studious perusal of the facts, the legal positions -- both domestic as well as international -- and the lucidity with which every point of the counsels of the assessee has been torn apart, reveals that the Revenue department has indeed made a solid case which would serve as a model decision for others in the department and also a quality training material for the young revenue officers who are keen to dabble into the complex architecture of international finances and their tax liabilities.