The Indian arm of software major Microsoft has been charged with evading service tax worth Rs 128 crore during 2006-07. The service tax department has asked the company to pay Rs 256 crore, including penalty, for the evasion.

This is Microsofts second brush with Indian tax authorities. In April this year, the department had asked Microsoft to pay over Rs 700 crore as tax on income earned through royalties on software products licensed to Indian customers between 1999 and 2005.

This time the authorities found that Microsoft Indias Gurgaon unit carried out marketing activities for its India operations and not for the Singapore unit as it had claimed in its reply to a show cause notice served by the department earlier.

However, Microsoft officials said they had not received any notice from the tax department in this regard.

We have finalised the notices which would be served very soon. The tax evasion pertains to the period between June 19, 2006 and December 12, 2007, a senior service tax official said.

The evasion has been confirmed after investigations. We had served them a show cause notice in April this year, the official said.

The company will have to pay Rs 128 crore as tax and another Rs 128 crore as penalty.

In April, Microsoft paid about Rs 700 crore as income tax, including interest on royalty income of Rs 2,240 crore generated from sale of software in India for six years, from 1999 to 2005.

According to the commissioner of income tax (appeals), Gracemac Corporation, a 100 per cent subsidiary of Microsoft, was liable to pay tax on its gross royalty income earned from licensing of software to Indian customers.

In 1999, Microsoft had granted a licence for Microsoft software and hardware products to the Nevada, US-based Gracemac. But Microsoft declared to the income tax (I-T) department that its income was nil. An assessment officer, however, found that the company had licensed Microsoft software to end users in India through Gracemac.

The I-T departments view is that software is an invention as its development requires highly technical manpower with highly sophisticated infrastructure, putting it under the category of secret formula or process, making it taxable.