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HP Agrawal: Some serious implications of retrospective amendments

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The issue for consideration is whether the sum payable by the Indian companies to foreign enterprises on account of purchase of computer softwares is liable for tax in India or not? And whether, the Indian companies are required to withhold tax at the time of making payment?

The requirement of withholding tax has been clarified by the Hon’ble in the case of P Ltd v CIT [327 ITR 456] that the Indian companies shall be required to withhold tax only when the sum payable to foreign enterprises is liable to tax in India.

In the above context, it is to be determined whether payment made for computer software is liable to tax in India or not. The Income-tax Department has always contended that the sum payable towards computer software is liable to tax in India. However, in various cases, the judicial authorities have taken a view that the amount paid towards computer software is not liable to tax in India (see Dassault Systems K. K., In re, AAR, 322 ITR 125).

In the Budget 2012, certain amendments have been proposed relating to taxability of computer software in India. Explanation 4 has been inserted in section 9(1)(vi) relating to royalty which provides that “it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.”

In the Memorandum to the Finance Bill it is specifically mentioned that the aforesaid amendment has been proposed retrospectively from 1976 considering the conflicting decisions of various courts.

Whether the said amendment will have constitutional validity or not will ultimately be decided by the Hon’ble Supreme Court only. However, the immediate reaction of certain International Trade Bodies is as under:

Every nation has a sovereign right to legislate, but these proposals are disturbing to investors from India’s trading partners in several major respects. Their policy direction is inconsistent with prevailing international norms, which, together with India’s current difficulties in resolving international tax disputes, creates an intolerable risk of double taxation. Their unfettered retroactivity also departs significantly from the practice followed in other countries, which prohibit or carefully limit the use of retroactive tax legislation. Their disregard for the judiciary is particularly striking when compared with the practice of other countries, which respect their court decisions and the principle of res judicata.

Since the aforesaid amendment has been made with retrospective effect, it will lead to great confusion among the Indian enterprises. This is so because in many cases remittances would have already been made without deduction of tax at source. Some of such cases may still be pending at appellate level, or at assessment level, while others might have already been settled. Therefore, if the amended provisions will apply with retrospective effect, then the Indian enterprises shall be required to pay withholding tax on their own account.

Once the payment has been made, the foreign enterprises may not like to remit the money back to the Indian enterprises for the purpose of tax. Moreover, the foreign enterprises will also be reluctant because they may not be able to claim credit of the taxes paid in India on this account in their own country since they might have already filed their return of income in their home country for earlier years.

In addition to this, there is no clarity as to whether the retrospective amendment will empower the AO to make reassessment of the already settled cases. The doubt arises because in certain amendments (which are also retrospective) it has clearly been provided that the AO shall not have power to reassess the income under section 147. However, no such explicit provision has been made with reference to the amendment proposed for computer software.

The proposed amendment, therefore, requires to be seriously reconsidered by the Hon’ble Finance Minister. The sentiments expressed by International bodies, as reproduced hereunder, may also be kept in view:

India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world and restore confidence in the relevance of the judiciary.


The author is a Sr. Partner in S.S. Kothari Mehta & Co.

E-mail: hp.agrawal@sskmin.com 

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