The question as to whether the expenditure incurred towards purchase of computer software should be treated as revenue or capital in nature. Law has been well settled since 2012, still there different treatments in industry to treat the same as revenue or capital. So through this Article, I am trying to conclude whether the amount paid towards purchase of software should be treated as capital or revenue. Only the relevant text of sections is reproduced here for reader’s reference.
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Explanation 4 in section 9(1)(vi) states as follows:
“Royalty means consideration for 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 license) irrespective of the medium through which such right is transferred.”
Explanation As per Section 194J
Any person, not being an individual or HUF, who is responsible for paying to a resident any sum by way of
- Royalty
Shall, at the time of credit of such sum or at the time of payment, whichever is earlier, shall deduct an amount equal to 10% by way of TDS. Deduction shall be made where the amount of such sum or aggregate of the amounts of such sums during the financial year exceed Rs 30,000/-.
However individual or HUF are required to deduct TDS if they were covered by provisions of section 44AB during the immediately preceding financial year.
Explanation As per Section 195
Any person responsible for paying to a non-resident or to a foreign company any sum by way of
- Royalty
Shall, at the time of credit of such sum or at the time of payment, whichever is earlier, shall deduct TDS thereon at the rates in force
Analysis
- Royalty includes payment received for transfer of all or any right to use computer software.
- Royalty includes payment received for transfer or granting of license for computer software.
- On purchase of software from a resident TDS shall be deducted @10% under section 194J.
- On purchase of software from a non-resident TDS shall be deducted under section 195 at the rates in force. (i.e. @ 25% as provided in section 115A or if relevant DTAA provides lower rate than that rate shall apply instead of 25%)
Explanation As per Section 40(a)(ia)
Where any sum is payable to a resident on which TDS is deductible
- Such TDS has not been deducted.
- After deduction, has not been paid on or before the due date specified in section 139(1).
Then 30% of any such sum shall be disallowed in computing the income of that previous year.
Explanation As per Section 40(a)(i)
Where any sum is payable to a non-resident by way of royalty on which TDS is deductible
- Such TDS has not been deducted.
- After deduction, has not been paid on or before the due date specified in section 139(1).
Then any such sum shall be disallowed in computing the income of that previous year.
Below illustration will further clarify the above provisions:
Illustration 1: XYZ Limited purchases software from a resident in India for Rs 1 Lakh.
As the amount paid by XYZ Limited is Royalty, hence TDS is deductible @ 10% under section 194J i.e. Rs.10, 000/-
Illustration 2: XYZ Limited imports software from a company in U.S.A. for Rs 1 Lakh.
As the amount paid by XYZ Limited is Royalty, hence TDS is deductible under section 195 @ 25% as provided in section 115A or rate provided in DTAA whichever is lower.
Illustration 3: XYZ Limited purchases software from a resident in India for Rs 1 Lakh during the A.Y 2020-21. XYZ Limited pays Rs 1 Lakh without deduction of TDS.
Now Rs 30,000 shall be disallowed in the hands of XYZ Limited as per the provisions of section 40(a)(ia) while computing the income of A.Y 2020-21, as TDS of Rs 10,000 was deductible under section 194J and XYZ Limited fails to deduct such TDS.
Illustration 4: XYZ Limited imports software from a company in U.S.A. for Rs 1 Lakh during the A.Y 2020-21. XYZ Limited pays Rs 1 Lakh without deduction of TDS.
Now Rs 1 Lakh shall be disallowed in the hands of XYZ Limited as per the provisions of section 40(a)(i) while computing the income of A.Y 2020-21, as TDS was deductible under section 195 and XYZ Limited fails to deduct such TDS.
Conclusion:
However, it is worth to note that rates of depreciation given in Income Tax Rules provide that computers including computer software are eligible for depreciation @ 60%. But explanation 4 inserted by Finance Act, 2012 to the definition of royalty under section 9 clarifies that payment made towards purchase of computer software is royalty. Income Tax Rules cannot override the Income Tax Act. Thus, amount paid to obtain computer software shall not be added to the block of assets of computer.
Therefore, to conclude with amount paid for purchase of computer software is royalty and shall be allowed as deduction under section 37(1) as revenue expenditure subject to the provisions of section 40(a)(i) and section 40(a)(ia).
Republished with Amendments
Author Bio
Dear sir,
we had sale quick heal antivirus software annual subscription to a customer on November 2022 and customer paid full amount against our bill but now customer deducted TDS against last year all software bill on June 2023 from my other bill payment ,they deducted TDS 194jb and 194c . please help rules and what can I do.
thanks
Debasish Dutta
We are using Adobe services like Photoshop, InDesign & Creative Cloud all apps.in India but bill generated from Ireland and we have deduct RCM so will pl. advise if we get it changed billing from Irland to India then what is the TDS Rate and under which section.
Awaiting your favourable reply soon
Dear Sir/mam,
whether TDS IS applicable for purchase of Microsoft 365 license Key ? If Yes, at what rate of Tax is to deducted.
Any update on this topic ?
for Example..
GST software from Cleartax.. yearly charges around 60000/- … payment is made online so no option to deduct tds on online payment.
make to order software is requested to a resident company… yearly expenses around 80000/-..
now it is a contract for us with him to provide the service for customized software. will it come under 194C or 194J ?
Dear Sir, I Aslam Ansari, from Girdharilal Constructions pvt ltd.i viewed your passage regarding tds on purchase of software.it was very useful. thanks a lot.god bless you.
Comments from 2015
Article Date 2020
???
Kindly consider the Notification attached and provide light on this.
NOTIFICATION NO. 21/2012 [F.No.142/10/2012-SO(TPL)] S.O. 1323(E), DATED 13-6-2012
As per notification 12/2012 CBDT dated June 13, 2012 it is said that No TDS should be deducted for Purchase of Software …… is my understanding correct …… Could someone please guide me
Thanks for this nice and informative topic. Sir, I want to know the treatment of amount paid towards purchase of e-Books and Online Data Base access through a Foreign Vendor and an Indian Vendor regarding provisions of TDS.
we purchase a computer software in nov. 2018 and paid Rs. 247820/- but we not deduced any tds.
now please tell me what is the solution.
The moot issue according to me in case of a Tally ERP software should be whether, post the amendments brought since 2012, off-the-shelf software or copyrighted software are Royalty as per the definition of Income-tax. Classification of the expenses as revenue or capital does not make any difference with respect to the TDS liability.
Please advice whether Service Tax and VAT would be applicable or not? If Yes, then at which rate?
Dear sir
our organisation is NGO and recently purchase a tally erp software, we neither deduct tds nor obtained declaration from transferor, and same is subsequent transfer.
Very helpful. Many Thanks.
Yor are not required to deduct TDS if you are acquiring software in subsequent transfer from a resident. He has transferred software without any modification and transferor has already deducted TDS while acquiring the software. For this you are required to obtain declaration from the transferor.
For details refer NOTIFICATION NO. 21/2012 [F.No.142/10/2012-SO(TPL)] S.O. 1323(E), DATED 13-6-2012.
Dear Sir,
We are purchasing software and license fee is payable to the party. But party is denying for the deduction of TDS saying that they are reseller of software.
Kindly guide.
Mr. Navin,
Agree with you that issue is very debatable. But still would like to highlight some key points-
-The clarificatory amendments by Finance Act, 2012 have broadened the scope of taxation of royalty. The factors of medium, ownership use or right to use and location have been clarified as immaterial in these amendments. The amendments have thus given a new dimension to tax administration in the sphere of royalty taxation.
-Many taxpayers rely on the Hon’ble Supreme Court Decision in the case of Tata Consultancy Services. In the said ruling, software was declared as ‘goods’. It may however, be stated that the Supreme Court Decision was in the context of sales tax act and does not have application on income tax cases.
The article seems to make a contentious issue look very simple. But then, all software purchases are basically a right to use and based on this logic, the tax department treats it as royalty. But what happens in case of customized software developed at the specific request of the client? And what about big software installations like SAP, etc. wherein the amount runs into crores? Will the department treat it as revenue expenditure and allow 100% deduction in the year of use? And mind you, all software requires periodic updatation. How will this be treated? I have my doubts. Plus we should also take guidance from the Supreme Court judgement in TCS case, wherein the point of argument was whether software is liable to sales tax or service tax.