Software companies doing business in India have been put on
notice by the Indian Income Tax Department following an unexpected
outcome in the Income Tax Appellate Tribunal (Microsoft Corporation
v. Assistant Director of Income-tax, International Tax
The key issue considered by the Tribunal was whether the sale of
"off the shelf software product" (i.e. shrink wrapped) by
non-resident companies (i.e. Microsoft and its subsidiaries) to
independent Indian distributors is taxable in the hands of such
non-resident companies as royalties within the meaning of the
domestic Indian tax laws and under the double tax agreement between
India and the United States of America.
It was found by the Tribunal that the sale of the shrink wrapped
product to the distributors by Microsoft and its subsidiaries was
fully taxable in India as a royalty (under the domestic law and tax
treaty). This decision is contrary to a series of other decisions
handed down within the Indian judiciary.
This recent decision is in contrast to the current view of the
Companies forming part a multinational group which provide the
use of software to offshore related parties should seek
confirmation that the supply of the right does not represent
royalties, which may trigger a royalty withholding tax liability in
the overseas jurisdiction.
Indonesia introduces transfer pricing implementation
Indonesia recently issued transfer pricing implementation
regulations (DGT Regulation No 43/2010 "Application of Common
Business Practices and Arm's Length Principle in Transactions
between Taxpayers and Parties who have a Special Relationship"
or "DGT 43"), which is a significant tax development for
multinational groups doing business in Indonesia . The guidelines
apply the internationally accepted "arm's length
principle" and are generally consistent with the OECD
In relation to available transfer pricing methods, the
guidelines apply a hierarchical approach with preference placed on
the traditional methods. The transactional net margin method (TNMM)
is permitted as a method of last resort which means that taxpayers
should only apply the TNMM if none of the other methods are
reliable or practical.
Taxpayers are required to prepare Transfer pricing documentation
for each related party transaction in excess of Rp10 million, which
is approximately AUD$1,150.00. Interestingly, similar to the rules
in Malaysia, the Indonesian transfer pricing provisions apply
equally to domestic transactions.
If you have any queries in relation to this publication or which
to discuss you transfer pricing issues, please contact Daren Yeoh
For more transfer pricing insights, visit our site at:
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