Confusion over taxing foreign firms will be no more

New Delhi: A recent verdict by Authority for Advance Rulings (AAR) is expected to clear the confusion over how to tax foreign firms selling copyrighted software in India. The quasi-judicial body said the earnings of Japanese software firm Dassault Systemes KK would be classified as 'business income' rather than 'royalty.'

A transaction classified as 'royalty' can attract tax of up to 10 percent of the gross amount, said a tax consultant to Livemint. If the transaction is classified as 'business income,' a foreign firm can evade taxes if it does not have a permanent establishment in India. "This is the most comprehensive decision on characterization of income as regards licensing software on a non-exclusive and non-transferable basis," said Mukesh Butani, Partner at consultancy BMR Advisors, who represented Dassault Systemes in the hearing at AAR.

AAR is headed by a retired Supreme Court judge and was set up to settle disputes while assessing the tax due from non-residents. The body has a six-month deadline to reach a conclusion and its verdict is binding on both the non-resident and the income-tax department. The only appeal possible against AAR's verdict is by a special leave petition in the Supreme Court.

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