A recent ruling in the Pfizer case has delivered an important lesson for taxpayers deducting TDS on cross-border payments.
The core issue revolved around whether payments for software purchases qualify as “royalty” under the Income-tax Act or tax treaties. The Pfizer case clarified that mere purchase of shrink-wrapped software (off-the-shelf) – without any transfer of copyright or right to reproduce – does not constitute royalty.
Key Practical Takeaway: Many companies have been deducting TDS @ 10-20% on such software payments to non-residents, assuming it as royalty. This ruling suggests that where no copyright is transferred, no TDS may be required under section 195.
However, caution is advised. Each case depends on the specific software agreement and treaty provisions. A blanket no-TDS approach could invite scrutiny.
Action Point: Review your existing contracts for software procurements. Analyse whether the payment is for a copyrighted article or a copyright right. Seek expert advice before revising your TDS posture.
Ignoring this distinction could mean either unnecessary TDS deduction or risky non-deduction
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