Several foreign companies like Amazon, Microsoft, Google, Oracle, IBM and Salesforce providing software as a service (mother-in-law) product have received a new notice of tax demand from the Income Tax Department for FY 2021-22 and 2022-23. According to sources, the tax department has issued evaluation orders to these companies. Under this, the income earned by these companies from Indian customers will be considered as ‘fee for technical services’ (FTS) under the Indian Tax Act. Any payment for technical, managerial or counseling service is considered FTS and 15 % tax is levied on such income under the Indo-US double taxation prohibition treaty.
For information about this, emails were sent to the concerned companies as well as the Central Board of Direct Taxes (CBDT) but the reply did not come till the news was written. Prior to 2021 such payments were often considered ‘royalty’. However, in a historic verdict in 2021 in the Engineering Analysis Center of Excellence case, the Supreme Court said that the standard, off-the-shelf software paid, is not as taxable as royalty under Indian law or tax treaties.
Despite the decision of the apex court, the tax department has started investigating whether the payment made by Indian users to foreign mother -in -law providers can be taxed as FTS. A person aware of the developments said, ‘The Income Tax Department has now passed the assessment order proposing tax demand for FY 2022 and FY 2023, while many companies have already paid 2 % equipment on these transactions during that period. This can cause a case of double taxation.
A tax expert on the condition of anonymity said that the Finance Ministry argues that such companies have paid the equalization fee on voluntary basis while they are mandatory to pay tax on FTS as per the Income Tax Act. India introduced 2 % equipment on migrant e-commerce operators in 2020 which had more users in India but did not have a physical appearance. The purpose of this fee was as a backstop. This applies to places where income tax provisions and tax treaties could not be applied. However, in April 2024, the government has agreed to abolish this fee in a phased manner.
Experts have warned that new tax demand can become a case of double taxation as companies have paid the equipment on gross receipts and are now facing income tax demand on the same income. They also have no clear mechanism to claim credit. Tax experts argue that mother -in -law services are automated, standardized and do not include human input and also do not transfer intellectual property. In such a situation, it cannot be considered as royalty or FTS under Indian law or Indo-US tax treaty.
Himanshu Parekh, partner in KPMG, said, ‘According to the Supreme Court’s decision in engineering analysis, the income of the mother -in -law should not be equal to royalty. Also, mother -in -law is a standard facility provided to customers, so income should be considered as FTS. Law experts believe that affected companies can challenge the evaluation order. Another expert said on the condition of anonymity, “Unless the CBDT issues guidelines to clarify the position of the Income Tax Department, there is a possibility of new litigation in the case and may increase uncertainty for foreign digital businesses operated in India.”
First Published – April 23, 2025 | 11:52 pm IST
Related post