TDS On Purchase of Standard Software
Finance Act 2012 has amended the definition of “royalty”. The amendment in section section 9 (1) (vi) now defines ‘royalty’ as 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.
Section 194J provides for deduction of tax at source on payment of professional fees, technical fees, directors remuneration and royalty payments
Hence payments towards right to use computer software will be liable to tax deduction at source under section 194J @ 10%
Notification 21/2012 Dated July 1, 2012
sale of computer software involves a channel i.e. from developer to distributor to dealer to end-user. To avoid tax deduction at several levels, CBDT issued the Notification 21/2012
As per the said notification, the tax deduction at source (‘TDS’) will not apply on acquisition of software from another person, being a resident,
- if the software is acquired in a subsequent transfer and
- the transferor has transferred the software without modification and
- TDS has been deducted under section 194J or 195 of the Income tax Act, 1961 (‘the Act’) on payment of previous transfer of software
Deduction by end-user
Based on above description, the following check-list will be helpful in deciding about deductibility of tax on software purchase
|
Payments towards Standard Software
|
Deduct Tax |
Reason |
|
Payment below Rs. 30,000 |
No |
Section 194J provides for no deduction in case payment is below Rs. 30,000
|
|
Payment to a non-resident Indian |
Yes |
Tax is deductible in all cases and no exemption under Notification 21/2012 is available
|
|
Payment above Rs. 30,000 to resident where no declaration under Notification 21/2012 is given by the transferor
|
Yes |
Declaration is mandatory under Notification 21/2012 |
|
Payment above Rs. 30,000 to resident where declaration under Notification 21/2012 is given by the transferor
|
No |
Declaration is mandatory under Notification 21/2012 |
Declaration under Notification 21/2012
The declaration under above Notification can be given by the transferor only if
- The software in question is being transferred without any modification
- Tax has been deducted under section 194J or 195 by transferor or by a previous transferor
|
Case |
Can Declaration be given |
Reason |
|
Developer is directly selling to End-user
|
No |
No tax deduction at any stage |
|
Dealer is paying to Developer but making no deduction of tax being exempt ( Individual not covered under mandatory tax audit) |
No |
No tax deduction at any stage |
|
Dealer is paying to Developer but making no deduction as amount is below Rs.30,000 |
No |
No tax deduction at any stage |
|
Dealer buys from distributor who has deducted tax while making payment to developer , but Dealer does not have PAN |
No |
Valid PAN is required |
Sample Declaration
“Declaration in terms of CBDT Notification (Income Tax) No. 21/2012 dated 13.6.2012: ‘The transaction represented in this Invoice is a resale of Software without any modification, and tax has been deducted previously under Sec. 194J. Our PAN number is ….”
should we deduct tds on purchase of Projector
Vaishnavi
February 8, 2013 at 5:01 PM
Very good article & easy to understand complicated provisions of Sec.194J. Pushpa
Pushpa
January 18, 2013 at 10:54 AM
Does the UPS batteries attract Tax Deduction at Source, if yes then what rate should consider 2% or 10% ?
Shubhangi
January 3, 2013 at 1:45 PM
when does purchase of operating software attract 2% tds? and when 10%?
supriya
November 16, 2012 at 12:39 PM
[...] Above notification exempts a deductor from making deduction of tax at source, if software ( without any modifications ) is acquired in a subsequent transfer and tax has been deducted on previous transfer of software. For more details please read http://blog.ffcs.in/2012/08/14/tds-on-purchase-of-standard-software/ [...]
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