The Centre is examining the possibility of bringing software companies under tax net, along with business process outsourcing firms.

A task force on non-resident taxation established by the revenue department is examining the issues including whether software income should be defined as royalty.

The task force headed by director general of international taxation, Vijay Mathur said it has been mandated to look into categorisation of income -- business, royalty and fee -- for technical services, as the industry was divided on treatment of software.

Speaking at an interactive session on the Indo-US double taxation avoidance agreement organised by the Indo-American Chamber of Commerce, joint secretary in the Central Board of Direct Tax, A J Majumdar said the department had to examine the issue as there was no unanimity in the treatment of royalty under US laws and under Organisation of Economic Cooperation.

Responding to the industry's demand to keep such income out of the ambit of taxation, Majumdar said the government must have the right to tax income, which originates in India. He said industry will get credit for such taxation so it will not be hurt adversely against international competition.

The joint secretary said as a source country, under the international protocol India had the right to tax all economic activity, which was conducted on its soil.

He said this flowed from the definition of permanent establishment. But the issue of taxation of foreign telecasting entities has not been referred to the task force.

But the department is likely to issue a circular soon on the subject. Mathur said Internet and technological advancement has thrown the concept of PE haywire. Even in brick and mortar companies, the differentiation is not clear.

Official sources said the Double Taxation Avoidance Agreement between India and USA has come into focus with the Centre clamping down on the Mauritius route for investments gradually.

The DTAA provisions have also acquired significance as more and more domestic companies are doing business with the USA.