Software giant Microsofts Indian arm is under investigation and may have to pay a staggering $27.9 million (Rs 128 crore) in tax and another $27.9 million (Rs 128 crore) as a penalty for tax evasion.

Sources say the companys Gurgaon unit in India carried out certain marketing activities for its Indian operations and has not paid tax for these services, claiming them to be exports. Sources said the service rendered by Microsoft India were not exports as per Rule 3(2) of the export of services rules of 2005. The marketing services provided by the company were covered under business auxiliary services, they said.

The government prescribed a separate set of rules for export of services in 2005, making it clear that any service consumed within India will not be treated as an export. The penalty has been imposed under Section 78 of the Finance Act, 1994.

Since the marketing activities rendered by Microsoft were carried out in India, they cannot be treated as exports. An e-mail sent by the department to Microsoft confirming its liability to pay service tax has yet to receive a response.