Vivek Rajan.V
Introduction –There have been multiple views about the taxability of software payments. The Finance Act, 2012 has brought a consensus to it by amending section 9(1) (vi) of Income-tax Act, 1961 by inserting Explanation 4 with retrospective effect from 01.06.1976.
Amendments by Finance Act, 2012
Section 9(1) (vi) of the Income-tax Act,1961 treats income by way of royalty payable as Income deemed to accrue or arise in India. Explanation 4 has been inserted w.r.e.f 01.06.1976 to Section 9(1) (vi). It reads as under
“For the removal of doubts , 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”
Henceforth, payments for acquiring computer software falls within the ambit of Royalty u/s 9(1) (vi). As a consequence, the provisions of tax deduction at source u/s 194J and u/s 195 would be attracted in respect of consideration paid/payable for use or right to use computer software.
In light of the above and to exempt multi-level deduction of tax at source, the CBDT has issued notification no.21/2012 dated 13.06.2012. The Central Government notifies that no deduction of tax at source shall be made on the following specified payment u/s 194J of the Income-tax Act
Specified Payment covered by Notification
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-
a) the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification,
b) tax has been deducted-
i. u/s 194J on payment for any previous transfer of such software; or
ii. u/s 195 on payment for any previous transfer of such software from a non-resident, and
iii. the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (i) or (ii) of clause (b) along with the Permanent Account Number of the transferor.
This notification shall come into force from 01.07.2012
Scope of the Notification
Software is made available to end users by software developers either directly or through distributors. In case of direct transfer, the EULA (End user Licence Agreement) prevents the end user from effecting resale of such software. Hence there is no question of multiple level deduction of tax at source. Tax has to be deducted at source either u/s 194J or u/s 195 of Income-tax Act.
However in case of transfer through distributor, the chain is Software developer-Distributor-End-user. The scope of the notification is captured in the following table
| S.No | Software developer | Distributor | End-user | TDS u/s | Benefit of Notification |
| 1 | Resident | Resident | Resident | 194J by Distributor to Software Developer. End user need not deduct Tax at source | Available |
| 2 | Non-Resident | Resident | Resident | 195 by distributor to Software developer. End user need not deduct tax at source | Available |
| 3 | Non-Resident | Non-Resident | Resident | 195 by distributor to Software developer and by End-user to distributor. | Not Available |
| 4 | Non-Resident | Resident | Non-Resident | 195 by Distributor to Software Developer. End-user need not deduct Tax at Source | Available |
Conclusion
Even though the Supreme Court in the case of Tata Consultancy Services held that the Programmed Software when put on a medium like CD are Goods under the Sales Tax Act as well as under Article 366(12) of the Constitution, we have to apply it only in the context of Indirect Taxation. Under the Income-tax Act, the payments for acquisition of software is subject to Tax deduction at source either u/s 194J or u/s195 as the case may be.
Note The article is based on the provisions of Income-tax Act, 1961 as amended by Finance Act, 2012.
Disclaimer: Every effort has been made to avoid errors or omissions in this article. In spite of this errors may creep in. The readers are requested by the writer, to bring to his notice any mistake or error for which act, the writer shall be ever grateful. Author may be contacted at gsv.vivekrajan@gmail.com .
The Article is written in very structured way which provides core knowledge of the subject matter.
Keep it up Vivek.
Dear Umesh sir, thank you for your appreciation. It motivates me. Please send your mail id to my mail address given above & pl give me some time to get back to your query. Thanks
Dear Amit sir,we cannot challenge before the AO on this point as Explanation 4 to Sec 9(1)(vi) inserted by FA 2012 w.r.ef 01.06.1976, clarifies the scope of Explanation 2 to Sec 9(1) (vi). This is evident from the words used in Explanation 4 ” For the removal of doubts……..” . Thank you
Dear Sir, your article is very informative and well structured making it easy to understand for professionals from non-taxation field like myself. We are currently distributors for an American software developer in India but face a peculiar problem as our American counterparts don’t have and will Not take an Indian PAN no. as they cite business operations in 30 countries across the world. Also, they will not allow any tax deduction (tds) again citing the (India-USA)DTAA according to which non-customized software does not fall under the domain of royalty.
In this scenario, we are unable to provide the certificate to the (resident) end-user and the (resident) end-user deducts tds from payments made to us using our PAN number. In this scenario, will it be legally tenable if we make payments to the non-resident counterpart without deducting tds? Please advice. For inf, the s/w is non-customized and delivered without any modifications,the American counterpart don’t have a PE in India. I look forward to your valuable advice, Many Thanks and best wishes.
Dear Sir, in Section 194J reference is only given for explanation 2 to section 9(1)(vi), so can there be any challenge possible before AO on this point.