6 Reasons for TDS on Software Purchase

Some Relief For Software Buyer –

 

TDS on software purchase is a controversial issue which has been settled in favour of income tax department recently by Karnataka High Court by its decision in CIT (International Tax) vs Samsung Electronics 2011 16 taxmann.com 141  in which it was held that in software purchase , whatis bought is the right to use the copy righted material and that is  “royalty” even under restrictive meaning of Royalty . As such ,TDS has to be made on payment to non residents for the software.

CBDT has now issued a notification  stating the conditions which if fulfilled , no TDS is required on payment for purchase of software. The said notification 21/2012 [F.No.142/10/2012-SO(TPL)] effective from 01/07/2012  is as under

S.O. 1323(E), DATED 13-6-2012

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

(iii)       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.

2.         This notification shall come in to force from the 1^st day of July, 2012.

Meaning of CBDT Notification on TDS on Software Purchase

In following condition , a person will have to deduct tax at source on payment for buying software and no relief from the aforesaid notification by CBDT can be derived.

1. The buyer is paying for software to a non resident .

2. The buyer is paying for a software which has been modified by seller .

3. No TDS was deducted at any point of sale of software.

4. The buyer of the software fails to obtain a certificate from seller of software that TDS was deducted previously u/s 194J or Section 195.

5. The seller of the software has no PAN or buyer fails to obtain PAN of the seller.

6. The buyer is not the first one to buy the software. In other words, what person is buying is already transferred software. For example , X company built software. When it sells for first time in India , teh payment for such software must suffer TDS and the relief as per CBDT notification is available to all subsequent purchases.