TDS on Software purchased from Non-Residents
♠ The matter before the Supreme Court was – Whether payment made to Non-residents in the following 4 cases are ‘Royalties’ as per applicable DTAAs in case of respective Non-Residents.
a. Purchase of software directly by end-user in India from foreign manufacturer;
b. Resident software distributors who purchase software from foreign manufacturers and resell in India to end-users without any modification;
c. Non-Resident software distributors who purchase software from foreign manufacturers and resell in India to end-users without any modification;
d. Computer software is affixed onto hardware and is sold as an integrated unit / equipment by foreign non resident suppliers to resident Indian distributors or end users.
♠ The SC analyzed the provisions of DTAAs of 13 countries, which were subject matters of appeal, with respect to definition of ‘Royalty’ in case of software.
♠ As per the provisions of such DTAAs limited use licenses given under Software End User License Agreement (EULA) does not partake the nature of ‘Royalty’ as per the provisions of DTAAs, however, such payments are ‘Royalties’ as per section 9(1)(vi) of the Income Tax Act.
♠ The SC observed that EULA entitles end users to use the software for specific purposes only and restricts reselling, modification, reverse engineering, making additional copies, retrieving of algorithms etc. & hence, the payment made by Indian companies is not for any use or right to use any copy right.
♠ Since the provision as per DTAAs are beneficial to Non-resident assessees, the same shall be applicable to them. [para number 168 of the judgement].
♠ The benefit of the DTAA can be given upon fulfilment of certain conditions – as per section 90 of the Income Tax Act, read with Rule 37BC – such conditions are:
a. The Non-resident should furnish his Tax Residency Certificate & Form 10F;
b. The Non-resident must not have any Permanent Establishment in India (a declaration to this effect shall be obtained from them);
c. The Non-resident shall furnish his Tax Identification Number, E-Mail ID, Contact Number & Address;
Some important questions answered:
1. Whether all the payments made towards software are covered by the above judgement? :
No.
The above judgement covers basically four types of transactions as mentioned above. However, the ratio of the judgement can be applied in similar circumstances.
2. Are payments made towards software license are outside the purview of royalty as per the Income Tax Act, 1961. :
No.
Payment for software license is still covered under the purview of royalty as per section 9(1)(vi) of the Income Tax Act, 1961 read with explanation 2 & 4 thereto.
3. What is the crux of the SC judgement in respect of royalty? :
The SC made a distinction in the scope of royalty as per Income Tax Act & applicable DTAAs. It ruled that even though payments for software are covered under the purview of royalty as per Income Tax Act, if such payments are outside the scope of royalty as per DTAA, the same cannot be taxed in India and no TDS is required u/s 195 of the Income Tax Act.
4. Is there any documentation required for claiming the relief as per the SC judgement? :
Yes.
The SC ruled that the beneficial provisions of the DTAA shall be applied to a Non-resident.
As per section 90, in order to claim the benefit of DTAA, the Non-resident shall produce a TRC & Form 10A. There have been no changes in this compliance aspect & was not a subject matter of the appeal before the SC.
5. An Indian company purchases a software from a non-resident for usage in its business & it does not have any right to make any copies of such software or transfer such software. Is TDS attracted?:
No.
If the limited license of such software is not a royalty as per the DTAA with such country.
6. Can it be generalized that payments made to non-residents for purchase of software is outside TDS, irrespective of the country of such non-resident? :
No.
It will be outside the scope of TDS only if such payments are not royalty as per DTAA with such country.
Definition of royalty differs in each DTAAs and needs to be analyzed before concluding.
7. Is purchase of software same as subscription of software or rental of software? :
No.
Purchase is one-time payment for acquisition of software and subscription and rental are recurring payments.
The judgement of the SC was in respect of the purchase of software and not about subscription or rental charges. In its judgement, the SC made the position clear by giving the following example of the book.
“If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of license or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book. Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author, it can be said that copyright in the book has been transferred by way of license or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the license.”
8. Whether the judgement has any impact on subscription or rental of the software? :
The judgement made it clear with above example that only selling of software partakes the nature of selling of goods and not liable for TDS.
Renting of the software or subscription for a software is a different ballgame. Even in case of tangible assets like furniture of computers, selling the same is not subject to any TDS, but renting the same is liable for TDS.
However, going by the intention of the judgement, it deals mainly with what is a use or right to use a copyright & what is not. Even in case of a subscription to or rental of a software, no copyright is transferred in case of limited use licenses granted through EULA (as per applicable DTAAs) & hence, it will not be taxable in India as such.
More clarity in this area is expected as things unfold after this judgement.
The SC also made is very clear the selling of software is taxable under the category of ‘Business Profits’ and not ‘Royalties’. Since Non-residents without having a permanent establishment are not taxed in India on ‘Business Profits’ the same automatically becomes outside the scope of TDS.
9. An Indian company makes payment for usage of various portals for easing its business operations – whether TDS is required? :
It was not a subject matter of the above SC Judgement. The judgement was on the matter of sale or purchase of software.
Portal charges paid will get covered under the category of “consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment” as per DTAAs and still be taxable in India.
10. An India company makes certain payments for subscription etc. of software through credit cards – whether the beneficial provisions of the above judgement available? :
No.
In such cases, the benefits of DTAA are not available unless the Indian company obtains TRC & Form 10A from the Non-resident, which is not quite observed in case of payments made through credit cards.
11. Are payments for software made to residents of India covered under above judgement? :
No.
These payments are covered under section 9(1)(vi) of the Income Tax Act and there is no question of applicability of any DTAA & hence, the judgement is of no relevance.
12. Whether terms contained in End User License Agreement are of any relevance for deciding TDS applicability? :
Yes.
The terms of EULA are of much significance along with any other agreements with software manufacturer.
Where the EULA or other agreements provide a right to Indian assessee to commercially exploit the software, the same is ‘Royalty’ without any doubt & TDS provisions are triggered.
Author Bio
In one place, Form 10A to be read as Form 10F. This is a typographical error.
– Author