IT companies to pay tax on software purchases
By siliconindia   |   Friday, 25 September 2009, 15:10 IST   |    2 Comments
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IT companies to pay tax on software purchases
Bangalore: According to a new order given by the Karnataka High Court, IT companies will now have to pay tax in case of software purchases from global vendors like Microsoft. By this order, the technology firms will have to withhold between 10-20 percent of their software purchase payments in the future, reports Economic Times. The division bench constituting Justice D V Shylendra Kumar and Justice Arvind Kumar pronounced the judgement on Thursday afternoon while upholding an appeal by the Income Tax Department that technology firms were legally obliged to withhold tax on software purchases. The order is with retrospective effect. The IT department argued that any software purchase amounted to royalty payment for a license to use it and it should not be taken as a mere purchase of goods that are excluded from withholding tax. The order could impact branded software vendors such as Microsoft, their third party distributors like Sonata Software, hardware manufacturers like Samsung and GE who rolls up branded software with their products, technology firms like Infosys or even the local arms of HP and IBM which could be licensing software from their parents. This is the first court order that has gone against the taxpayer in income tax disputes relating to withholding tax on software purchase. In fact, the Karnataka High Court intervention came after the Income Tax Tribunal had ruled in favour of taxpayers, which prompted the department to go for an appeal. "The bench did not venture into the question whether purchase of software amounted to royalty payment or not. The court said firms buying software should not sit on judgement whether the recipient is obliged to pay tax in the country. They have to deduct tax the moment they make payments to a non resident party. To an extent, this leaves several issues open ended," said Abhishek Goenka, Partner, BMR Advisors. More knowledge on the ruling could only be obtained when the affected parties will study the court order in detail. The certified copy on the ruling is expected in coming days. "More than technology services firms, it is branded software distributors and hardware manufacturers who bundle the software are going to be affected in a significant way. Several companies could become interested parties with this litigation going forward, as they need to address the question whether they are obliged to pay taxes in the country for sale of software," said Goenka.

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