The latest Supreme Court verdict in favour of Microsoft can lead to other big tech giants such as Google, Amazon and Facebook claiming crores of refunds from the government of India.
On Tuesday, the SC finally settled the software royalty tax dispute that has been going on for over two decades. SC has concluded that all cross border payments that are made for the sale of software to a non-resident or foreign firm do not qualify to be taxed as ‘royalty’.
Now, according to legal experts, while the ruling spoke majorly about Microsoft, the same logic can be applied by other MNCs for their own cause as well.
Consultants and lawyers with knowledge said multinationals such as Google, Facebook, Microsoft and Amazon have been either paying tax on royalty or litigating on the issue. Thus, these companies are very likely to opt for claiming refunds as the SC’s ruling is binding on the tax department as well.
The Tuesday ruling which was doled out by a bench consisting of Justices RF Nariman, Hemant Gupta and BR Gavai went on to explain the details of what makes a ‘royalty’ and therefore what can be taxed and what couldn’t.
According to the court, payments cannot be defined as royalty and taxed if the software happens to be directly purchased by an Indian end-user from an international manufacturer or supplier, or from an Indian or foreign entity acting as a distributor or reseller. The SC also said that it applies to where the software gets bundled with hardware.
In India, most multinational companies tend to use the reseller model and thus experts expect that the SC ruling will have a wide impact on the industry at large.
Rahul Garg, Partner at Asire Consulting, believes that the ruling can trigger a massive cash outflow from the GOI’s coffers in the form of refunds. Software companies could claim these against the taxes it have been collected by the tax department in the previous several years.
SC’s recent ruling has put to rest several litigations regarding payments of such kind being defined as royalty. Now, earlier judgements such as the one passed on Samsung Electronics by the Karnataka HC which was pro-revenue, now stand to be overruled.
However, all is not lost for the Indian Government. Tax Partner at AKM Global Amit Maheshwari mentions that as per the proposed amendment to the Finance Bill 2021, many such payments would be attracting an equalisation levy of 2% which MNCs would need to charge besides getting registered in India to avoid tax royalty.
People in the know have revealed that Amazon, Google and Facebook are currently seeking an opinion regarding the same from their lawyers post the ruling and they would soon file for the refunds.
As of now, no responses have been received from the same regarding their upcoming steps. We will keep you updated on all future developments. Until then, stay tuned.