Applicability of tds on software purchase

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Querist : Anonymous

Querist : Anonymous (Querist)

29 August 2012 Our company is into trading of software goods.As per our advice of statutory auditors since the royalty definition has been amended, tds is applicable on all the software purchases from our vendors whether the service tax has been charged on it or not. Also, let us know the date from which the TDS is to be deducted on software purchases.

CA AYUSH AGRAWAL

CA AYUSH AGRAWAL (Expert)
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29 August 2012 In a major benefit to the software sector, the government has decided to do away with complex multi-level system of Tax Deduction at Source (TDS)under section 194 J with effect from July 1.

CBDT has released notification number 21/2012 dated 13.06.2012 in this regard with few conditions.

NOTIFICATION NO. 21/2012 [F.No.142/10/2012-SO(TPL)] 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 1st day of July, 2012.

(J. Saravanan)
Under Secretary(TPL-III)
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Short note on above amendment

I. When benefit of notification available –

The CBDT has issued a Notification No. SO 1323 (E), dated 13-06-2012, that no deduction of tax at source shall be made from payment made for acquisition of software, if following conditions are satisfied:

(1) Payment is made by a person ("transferee") for acquisition of software;

(2) Payment is made to another person ("transferor");

(3) The transferor is a resident person;

(4) The software is acquired in subsequent transfer. In other words, the transferor should not be the original developer of the software and it must have acquired the same either from the original developer (from within India or outside India) or through a chain of dealers (from within India or outside India);

(5) The transferor has transferred the software without any modification i.e. branded software, etc. (If transferor is customizing the software as per customers' requirement i.e. unbranded software etc., the benefit of such notification would not be available);

(6) Tax has been deducted by transferor from payment of such software during any previous transfer under section 194J (payment to a resident) or section 195 (payment to a non-resident). In other words, the transferor should have deducted tax from payment made to the original developer or previous dealer, from whom such software was acquired; and

(7) The transferee obtains a declaration from the transferor that it has deducted tax from payment made to original developer or previous dealer (as discussed in point 6).

II. Fallacies in availing benefit of above said exemption –

(1) The benefit of above notification would not be available if payment is made for software which is a specialized one and exclusively custom-made to cater to the needs of an individual client. These are typically referred to as "unbranded software";

(2) The exemption from tax deduction would be available only if software is standardized and marketed such as Windows etc. These are referred to as "branded software" or "off -the shelf software" or "shrink wrapped software";

(3) If transferor has taken benefit of favourable judgments for non-deduction of tax at source from payment made to original developers or dealers, the transferees would be under obligation to deduct tax at source from payment made to the transferor.

(4) If Indian customer buys software from a non-resident dealer for his user, he would be under obligation to deduct the tax, as benefit of such notification would be available only if payment is made to a resident transferor.

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Earlier report
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Earlier Finance Minister has announced about this change .

“The abolition of multi-level TDS for software companies will be effective from July 1. The law ministry is vetting the final blueprints of the amendments in the I-T Act,” a finance ministry official told PTI.

Under the current structure, TDS of 10 per cent is levied at every level of software distribution chain - right from master distributor to retailer and then to the final consumer.

Responding to the long-standing demand of the software sector, Finance Minister Mr Pranab Mukherjee had last week said that Section 194 (J) of the Income Tax Act, 1961, would be amended so as to avoid multi-level TDS on information technology sector.

Section 194(J) of the I-T Act deals with fees for professional and technical services and covers royalty and non-compete fees.

Software industry body NASSCOM, which has been long lobbying for this, said the move would benefit the IT sector and improve finances.

The TDS model, it had argued, “was leading to an unsustainable model for software distributors who operate on very low margins

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Querist : Anonymous

Querist : Anonymous (Querist)

29 August 2012 Thanks a lot for the great explanation stated above of the circular.But we have also come to know about changes in royalty definition ie - With Budget 2012-13 defining ‘royalty’ as any ‘right for use’ or ‘right to use’, a computer software (including granting of a licence), irrespective of the medium through which such right is transferred. Due to this amendment in royalty definiton- is tds to be deducted on software purchases? If you can also throw some light on the amendment in royalty definition.

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CA Amit Jaiswal

CA Amit Jaiswal (Expert)
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30 August 2012 Practically in industry TDS is deducted on sofware acquisition from companies like SAP, Oracle etc.

So, you should follow the same.

CA Amit Jaiswal

CA Amit Jaiswal (Expert)
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30 August 2012 Practically in industry TDS is deducted on sofware acquisition from companies like SAP, Oracle etc.

So, you should follow the same.

Querist : Anonymous

Querist : Anonymous (Querist)

30 August 2012 If you could just explain us the implication of amendment in royalty definition as stated above then it would be helpful to us and what impact that definition would have on our company that is into trading of software goods.