Microsoft liable for income tax in India, finally? [India]

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.

E-commerce: new ruling will affect taxability of foreign firms [India]

The issue of permanent establishment in India remains a vexed one.

In a decision which would have significant ramifications for foreign companies in general, and Computer Reservation Service (CRS) majors in particular, the Delhi Income-tax Appellate Tribunal, in a recent ruling of Galileo International Inc., has held that payment of arm’s length remuneration to the Indian agent would absolve a company from any further liability to pay tax in India. This decision is in line with the principles laid down by the Supreme Court in the Morgan Stanley case and would surely comfort foreign companies, especially those engaged in e-commerce.
CRS companies specialize in providing electronic global distribution/ticketing services to airlines, hotels, cab operators, etc., by connecting them to travel agents. The issue before the tribunal was related to the taxability of Galileo in India. While rendering this decision, the tribunal made several observations which could impact the taxability of foreign companies operating in India. Also, the tribunal’s conclusions on profit attribution would be of particular importance.
The backdrop
The concept of permanent establishment is one of the most important in international tax treaty law. Virtually all modern tax treaties use it as the key tool to establish taxing jurisdiction over a foreigner’s business activities in the host country. It could be constituted either by having a fixed place of business, or a sustained presence of employees, or even an agent in the other country. So, the focus of this article is to explain the impact of the said ruling and analyse the principles it lays down to constitute permanent establishment in India and attribute profits to it.
The broad facts are as follows: Galileo is a US-based CRS company. CRS firms receive, process, store and disseminate data about flight schedules, seat/room availability, fares, etc. Galileo entered into agreements with various airlines to provide these services. To market and distribute CRS in India, it appointed a distributor in India, who in turn entered into subscription agreements with travel agents across the country. Further, to facilitate CRS operations, computers were installed at the premises of the subscribers.
Galileo was remunerated outside India by the airlines, while it paid fees to its Indian distributor for providing marketing and communication services, at the rate of 33.3% of the booking income from the country. It is against this backdrop that the issue of Galileo’s taxability in India arose.
In most countries, including India, the legislation has not kept pace with the rules of doing trade in the borderless world of e-commerce.
For instance, even the US treasury department has no specific guidance on e-commerce trade, except for a report it issued in 1996, which discussed the emerging trade challenges posed by the Internet economy.