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Withhold taxes whilst paying to Microsoft for software: Advance Ruling

AIT News Network

NEW DELHI. Authority for Advance Rulings(Income Tax) vide a recent ruling has ruled that in view of the provisions of section 195(1) there exists a legal obligation on the part of the applicant to withhold taxes whilst making payment for the software purchased from Microsoft.

T H E F A C T S:

The applicant Headstart Business Solutions Private Limited (‘HBSPL’) is a company incorporated under provisions of the Companies Act, 1956 having its registered office at S-85, Greater Kailash Part II, New Delhi-110048. Microsoft Regional Sales Corporation, Singapore ('MRSC') is a non-resident company, having its registered office at Singapore entered into a Solution Provider Agreement ('SPA') vide agreement dated: July21, 2005 with HBSPL for supplying packaged business software solutions. The product is delivered in physical form through a compact disc accompanied by a software license key which is delivered electronically through e-mail over the internet. The software license key that is purchased from MRSC always bears the name of the client to whom the software is to be delivered. MRSC and HBSPL have also signed the Microsoft Business Solutions (MBS) Solution Provider Agreement ('SPA'), and Addendum along with the SPA, in order to provide the licensed software to HBSPL, who is intending to commence the purchase of the software from MRSC.

Q U E S T I O N B E F O R E A U T H O R I T Y:

“Whether there exists a legal obligation on the part of HBSPL to withhold taxes whilst making payment for the software purchased from MRSC?"

R U L I N G O F A U T H O R I T Y:

· The issue is clearly covered by sub-section (1) of section 195 of the Act. A plain reading of the sub-section shows that any person responsible for paying to a foreign company (i) any interest; or (ii) any other sum chargeable under the provisions of the Act (except salary) is required to deduct income-tax at the time of credit of such sum to the account of the payee or at the time of actual payment thereof, whichever is earlier.

· The expression "any other sum chargeable under the provisions of this Act" would mean a sum on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The only consideration would be whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act. The sum may or may not be income or income hidden or otherwise embedded therein. The scheme of tax deduction at source applies not only to the amount paid which wholly bears "income" character but also to gross sums, the whole of which may not be income or profits of the recipient.

· The expression "any other sum chargeable under the provisions of this Act" in section 195(1) contemplates not only amounts, the whole of which is taxable without deduction, but also amounts of a mixed composition, a part of which only might turn out to be taxable income, as well as other disbursements which are of the nature of gross revenue receipts, are yet sums chargeable under the provisions of Act and come within the ambit of section 195(1) of the Act.

( Click here for full text of ruling AIT-2006-123-AAR)