TDS ON SOFTWARE PURCHASED
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Section 194j of
Income Tax Act.
As
per this section: -
1.
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Any person, not being an individual or a
Hindu undivided family,
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2.
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who is responsible for paying to a resident
any sum by way of royalty
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3.
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shall, at the time of credit
of such sum to the account of the payee or at the time of
payment thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier,
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4
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Deduct an amount equal ten per cent of such
sum as income-tax.
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And as per
Explanation of section 194j “royalty" shall have the same meaning as
in Explanation 2 to clause (vi) of sub-section (1) of section 9;
Section 9 of Income Tax talks about “Income deemed
to accrue or arise in India”.
And sub section vi of section 9 talks about “income
by way of royalty”.
And Explanation
2 of sub section vi of section 9 defined the meaning of royalty.
Extract
of Explanation 2
Royalty means consideration
(including any lump sum consideration but excluding any consideration which
would be the income of the recipient chargeable under the head "Capital
gains") for—
(i) the transfer of all or any rights
(including the granting of a licence) in respect of a patent, invention, model,
design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information
concerning the working of, or the use of, a patent, invention, model, design,
secret formula or process or trade mark or similar property ;
(iii) the use
of any patent, invention, model, design, secret formula or process or trade
mark or similar property;
(iv) the
imparting of any information concerning technical, industrial, commercial or
scientific knowledge, experience or skill;
(iva)
the use or right to use any industrial, commercial or scientific equipment but
not including the amounts referred to in section 44BB;]
(v) the transfer of all or any rights
(including the granting of a licence) in respect of any copyright, literary,
artistic or scientific work including films or video tapes for use in
connection with television or tapes for use in connection with radio
broadcasting, but not including consideration for the sale, distribution or
exhibition of cinematographic films ; or
(vi) the
rendering of any services in connection with the activities referred to in
sub-clauses (i) to 93(iv), (iva) and (v).
Notes:-
In in above
explanation it can be observed that provision of this section didn’t talks
about the following below matter and some judicial decisions have interpreted
this definition in a manner which has raised doubts.
1
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Whether consideration for use of computer
software is royalty or not;
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2
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Whether the right,
property or information has to be used directly by the payer or is to be located in India or
control or Possession of
it has to be with the payer.
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Similarly, doubts have been raised regarding
the meaning of the term processed
Considering the
conflicting decisions of various courts in respect of income in nature of royalty
and to restate the legislative intent,
Finance Bill 2012 has amended the following
provision/explanation which is as follows:-
1. Section 9 sub-section vi explanation 4 (extension
to meaning of royalty which is define under Explanation 2) “it is hereby clarified that the transfer of
all or any rights in respect of any right, property or information includes and
has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium
through which such right is transferred.
2. Section 9(1)(vi)
explanation 5, includes consideration in respect of any right, property or information,
whether or not
a.
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The possession or control of such right,
property or information is with the payer;
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b
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Such right,
property or information is used directly by the payer;
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c
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The location of
such right, property or information is in India.
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These amendments will take effect retrospectively from
1st June, 1976 and will accordingly apply in relation to the assessment year
1977-78 and subsequent assessment years.
So it is very much
clear from the above amendments that computer software is also regarded as
royalty. And it is also clear that even uses of such computer software will be
regarded as royalty.
[Explanation 3.—for the purposes of this clause, "computer
software" means any computer programme recorded on any disc, tape,
perforated media or other information storage device and includes any such
programme or any customized electronic data.]
Problem:-
Very soon after Bill passed, it has been
observed that amendment creates Double taxation, because generally software are
sold by intermediate.
Example:- X ltd, being a Indian
company engaged in a software development sold software to Y ltd being an Indian
company engaged in sales of software without making any change to software.
As per amendment Y
ltd while making payment to X ltd should deduct the TDS @ 10%. Now again when X
ltd will shall software to some other company will other company should deduct
the TDS???? Bcz it’s like two time tax on a particular transaction.
To avoid such confusion
CBDT dated July1, 2012 issued Notification which is as follows;
Notification for Non
deduction of TDS on Software.
In exercise of the
powers conferred by sub-section (1F) of section 197A of the Income tax Act,
1961(43 of 1961), the Central Government hereby notifies that
No deduction of tax
shall be made on the following specified payment under section 194J of the Act,
namely:-
Payment by a person
(hereafter referred to as the transferee) for acquisition of software from another
person, being a resident, (hereafter referred to as the transferor), where
i. the software is
acquired in a subsequent transfer and the transferor has transferred the software
without any modification,
ii. Tax has been
deducted,
(a) Under section
194J on payment for any previous transfer of such software; or
(b) Under section 195
on payment for any previous transfer of such software from a Non-resident, and
3. The transferee obtains a
declaration from the transferor that the tax has been deducted either
under sub-clause (a) or (b) of clause (ii) along with the Permanent Account
Number of
the transferor.
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