After much argie bargie, an Indian court has ruled that Microsoft will have to pay six years of back tax on its software licenses. For the last six years, Microsoft has argued that when it sells a license this should be tax-free profit.

Although Microsoft can appeal, it is starting to look like it will not succeed. The Appeals Commission in Delhi has ruled there is royalty involved in the software transaction, which is taxable. Tax officials said the company can now approach the Income-Tax Appellate Authority (ITAT) and the high court.

Between 1999-2004, Microsoft refused to pay tax in India, using claiming several loopholes including the double taxation avoidance agreement with the U.S. It also argued that since it flogged its software in India through a circuitous route involving several group companies, it counted as a sale rather than a royalty payment involved.

What sank Microsoft's case was the end-user agreement that said “the product is licensed, not sold.” Tax authorities cited this and said if the software is licensed, there has to be a royalty involved.

Royalty, under domestic law, is taxable at 15 per cent.