Wednesday, 19 March 2014

Section 194j of Income Tax Act.
As per this section: -
Any person, not being an individual or a Hindu undivided family,
who is responsible for paying to a resident any sum by way of   royalty
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,
Deduct an amount equal ten per cent of such sum as income-tax.
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).
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.
 Whether consideration for use of computer software is royalty or not;
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.
 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
 The possession or control of such right, property or information is with the payer;
Such right, property or information is used directly by the payer;
The location of such right, property or information is in India.
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.]
 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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