Taxation: duplicating CDs is manufacturing, says Indian Court

Adjudicating on the interpretation of The Income Tax Act, s80-1A, the Court found that duplication of disks from a master copy is a manufacturing activity in itself, even though the software had been developed elsewhere.

Oracle India pays Oracle US a fixed price for software which it then reproduces, packages and sells, paying an additional royalty to Oracle US on each sale.

The Indian tax authorities saw the risk of improper transfer pricing, because the royalty was paid on the full retail price even though the software was almost always sold at a discount; the 30% royalty was therefore often significantly greater than 30% of the actual price obtained in India. The Revenue Department saw this as a way of expatriating profits, saying that the actual work done in India, upon which value added is calculated, was minimal.

The previous law on point related to the duplication of audio tapes and said that the process of writing to the tape does not change its substance and is therefore not manufacturing.

The Supreme Court has seemingly reversed that decision.

But there is a significant difference: when data is written to an audio tape, the tape can be re-used by over-writing the data; but with most software CDs, they are WORM (write once, read many) disks and their content cannot be altered nor the disks re-used.

In the case, Oracle India has been granted a tax holiday.