tax news: Distributor should pay tax on software procured from company outside India: Bengaluru ITAT

Mumbai: A Bengaluru bench of the Income Tax Appellate Tribunal ruled that tax is applicable on payment made by distributor for getting software from a foreign company.

As per the details of the case, an Indian arm of a Jersey based company was responsible for software distribution in India, conducting events and other advertising expenses. The Indian entity charged 15% margin over the cost incurred.

The tax department said that that the tax should not just be paid on the margins.

The ITAT noted that the main issue in dispute was whether the sum debited to the profit and loss account by the taxpayer as software expenses was purchase of software or mere reimbursement by the taxpayer to the foreign entity (being the cost incurred by the Jersey company after retaining 15% of cost incurred by the AE), a Deloitte research said

The ITAT ruled that the manner of fixing purchase price of the taxpayer would not alter the nature of the transaction. – It was not established that the contents of the letter were being acted upon. Even if it was acted upon, the conditions of the letter about reimbursement of various expenses to the taxpayer by the Jersey entity such as salary, travelling and travelling related expenses etc. would not alter the nature of the transaction, the research report said.

“This ruling has held that payment to foreign AE (Jersey company) as a distributor/intermediary for procurement of software is taxable as royalty liable for withholding tax in India. Taxpayers with similar arrangements may want to evaluate the impact of this ruling to the facts of their case,” the Deloitte research added.