Software companies are looking at additional tax burden, with the Karnataka High Court ruling that payments made for subscription to online databases, such as those maintained by advisory firms and industry information portals, would be taxed as royalty.
According to tax analysts, the ruling would affect all firms that source and pay for information online.
The high court verdict came in a case involving Wipro and the income tax department, in which the court found Wipro to be in default of its obligations to withhold taxes on payments made to research firm Gartner, for accessing the latter?s electronic database in the United States and Ireland.
?Every company sources electronic data now, and if a company has to start withholding taxes every time it does so, businesses will be impacted,? says Vikram Bapat, executive director, tax and regulatory services, PricewaterhouseCoopers, India.
While an aggregate of expenditure by IT firms on data subscription was not available,as per the high court order, Wipro?s payment to Gartner between financial year 2001 and financial year 2003, which was the period under consideration in the case, was close to R3.75 crore. The income tax department had demanded R52.9 lakh to be paid towards royalty on these transactions, and an additional interest of R11.3 lakh from Wipro in 2003.
?The total sum charged to Wipro could now be backdated to day one,? says KR Girish, partner tax and regulatory services, KPMG India.
In October this year, the Karnataka High Court had ruled that payments for software imports would qualify as royalty, subject to tax deducted at source, or withholding tax. This move was said to have placed an aggregate tax liability of over $1 billion on the IT sector.
Referring to this judgement, the court stated in mid-October, that payments for accessing online databases would also be in the nature of royalties, as there is a transfer of copyright.
According to a Supreme Court judgement passed last year, Indian firms are required to withhold taxes from payments made to non-residential companies only in case of royalties, and not for all cross-border transactions. The authority to determine what constitutes ?royalty?, however, vests with the high courts.
The ruling has also raised questions about accessing domestic databases, such as job portals used frequently by companies, since the definition of royalty is common to both domestic as well as international sources.
?The definition of royalty is the same for both residents as well as non-residents. Considering that, there is a question of whether this will apply to domestic subscriptions as well, online or otherwise,? says Abhishek Goenka, a partner with professional services firm BMR Advisors.
Wipro?s contention in the case was that the rights conferred by Gartner was only for access to the database, analogous to a subscription made for a journal or a magazine,and did not amount to any transfer of copyright.
Consequently, payments made would only constitute business income of Gartner, and as such, could not be held as royalties. The I-T department, on the other hand, had argued that access to the database was granted to Wipro only through the license paid for, without which, usage of data would have been viewed as infringement of copyright.
Analysts are now asking if the court would have held the same view if the transfer of information had been in a physical form such as a book or a magazine, rather than an electronic medium.
Responding to an email query by The Financial Express, a Wipro spokesperson stated, ?The hon?ble high court has relied on its own order involving payments for shrink wrapped software, which the company did not have an occasion to distinguish before the high court in its case involving subscription payments for accessing commercial database and information. The company has been advised that a Special Leave Petition be filed before the supreme court.?
