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TDS On Purchase of Standard Software

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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 ….”


11 Comments

  1. rohit rajani says:

    I have purchase Rs. 50000.00 software and totally capitalised in balance sheet i have deduct the tax?

  2. Anjul says:

    I need to purchase a software worth USD 14000 from USA will I have to deduct tds 20% on it

    • Ankish Jain says:

      Hi Anjul,

      Have you received the solution to your query. If yes please share us the results.

    • No, the new rate of tax on royalty is 25%.

      However, if the Software provider gives TRC and procures PAN, you need to deduct TDS @ 10 % only. Also you can take benefit of grossing up at lower rates applying DTAA even if he does not have PAN.

      If the Bill is split into Software purchase say USD 10000 and USD 4000 as Support charges, you can save yourself from deduction of tax on Support charges as There is a beneficial “make available” clause in India-US treaty.

      For any further help, you can drop me a mail at mehul@raseshca.com

      CA Mehul Shah
      Partner
      Rasesh Shah and Associates
      9723459572

  3. Manish says:

    Gr8, very informative !!
    Thanks for sharing.

  4. Vaishnavi says:

    should we deduct tds on purchase of Projector

  5. Pushpa says:

    Very good article & easy to understand complicated provisions of Sec.194J. Pushpa

  6. Shubhangi says:

    Does the UPS batteries attract Tax Deduction at Source, if yes then what rate should consider 2% or 10% ?

  7. supriya says:

    when does purchase of operating software attract 2% tds? and when 10%?

  8. […] 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   https://blog.ffcs.in/2012/08/14/tds-on-purchase-of-standard-software/ […]

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