Payment to Non Resident
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
23 November 2009
we have parent company abroad and it has purchased license for various softwares such as MS Office. It has allocated cost of softwares among various subsidaries including our companies and raised invoice for the same.
In this case whether use of software through server fall under payment for Royalty or technical service or not?..and should we deduct TDS?
the payment is simply reimbursement of expenses from Subsidiary to holding company.
In this case whether use of software through server fall under payment for Royalty or technical service or not?..and should we deduct TDS?
the payment is simply reimbursement of expenses from Subsidiary to holding company.
23 November 2009
Ideally it should not as there is no sale or rendering of services to third party
Querist : Anonymous
Querist :
Anonymous
(Querist)
23 November 2009
not satisfied
09 August 2024
The situation you described involves a parent company abroad allocating the cost of software licenses to its subsidiaries and raising invoices for these costs. This raises questions about whether such payments fall under the category of royalty or technical services and whether TDS needs to be deducted. Here’s a detailed analysis:
### **Nature of Payment**
1. **Royalty vs. Technical Service:**
- **Royalty:** Under Indian tax laws and treaties, royalty typically refers to payments for the use of intellectual property rights, including the right to use or enjoy software, patents, trademarks, etc. If the payment to the parent company is for the right to use software (e.g., MS Office) and not merely a reimbursement, it might be considered royalty.
- **Technical Service:** Technical service includes payments for technical support or consulting services. If the payment is solely for the right to use the software and not for any technical assistance or support, it usually does not fall under technical services.
2. **Reimbursement of Expenses:**
- If the payment is simply a reimbursement of expenses incurred by the parent company for acquiring software licenses, and not for the use of the software itself, then it might not fall under the categories of royalty or technical services. However, this distinction can be complex and depends on the specifics of the transaction and agreements in place.
### **Tax Deducted at Source (TDS) Implications**
1. **TDS on Royalty Payments:**
- If the payment is considered royalty, TDS should be deducted under **Section 195** of the Income Tax Act. The rate of TDS on royalty payments to a non-resident can be governed by domestic tax laws or the relevant Double Taxation Avoidance Agreement (DTAA) between India and the country of the parent company.
2. **TDS on Technical Services:**
- Similarly, if the payment is for technical services, TDS should be deducted under **Section 195**. The rate and applicability would again depend on the DTAA.
3. **Reimbursement:**
- If it is purely a reimbursement of costs and not a payment for royalty or technical services, then TDS might not be applicable. However, proper documentation and clear evidence that it is a reimbursement are crucial to support this.
### **Recommended Actions**
1. **Review Agreements:**
- Examine the agreements between the parent company and the subsidiaries to determine the nature of the payment. If it specifies that the payment is for the use of software, then it is likely royalty.
2. **Consult DTAA:**
- Check the relevant Double Taxation Avoidance Agreement (DTAA) between India and the country of the parent company to understand the tax treatment of royalty and technical services. This will help in determining the correct TDS rate if applicable.
3. **Documentation:**
- Maintain clear documentation indicating that the payment is a reimbursement and not for royalty or technical services. This should include the nature of the expenses incurred and the basis of allocation.
4. **Seek Professional Advice:**
- Given the complexity of tax laws and international agreements, it is advisable to consult with a tax advisor or legal expert to ensure compliance and correct TDS treatment.
### **Summary**
- **If Payment is Royalty:** TDS under Section 195 will be applicable based on the DTAA rate.
- **If Payment is Technical Service:** TDS under Section 195 will be applicable based on the DTAA rate.
- **If Payment is Reimbursement:** TDS may not be applicable, but proper documentation is essential.
Always ensure compliance with the latest regulations and seek expert advice to handle such cross-border transactions correctly.
### **Nature of Payment**
1. **Royalty vs. Technical Service:**
- **Royalty:** Under Indian tax laws and treaties, royalty typically refers to payments for the use of intellectual property rights, including the right to use or enjoy software, patents, trademarks, etc. If the payment to the parent company is for the right to use software (e.g., MS Office) and not merely a reimbursement, it might be considered royalty.
- **Technical Service:** Technical service includes payments for technical support or consulting services. If the payment is solely for the right to use the software and not for any technical assistance or support, it usually does not fall under technical services.
2. **Reimbursement of Expenses:**
- If the payment is simply a reimbursement of expenses incurred by the parent company for acquiring software licenses, and not for the use of the software itself, then it might not fall under the categories of royalty or technical services. However, this distinction can be complex and depends on the specifics of the transaction and agreements in place.
### **Tax Deducted at Source (TDS) Implications**
1. **TDS on Royalty Payments:**
- If the payment is considered royalty, TDS should be deducted under **Section 195** of the Income Tax Act. The rate of TDS on royalty payments to a non-resident can be governed by domestic tax laws or the relevant Double Taxation Avoidance Agreement (DTAA) between India and the country of the parent company.
2. **TDS on Technical Services:**
- Similarly, if the payment is for technical services, TDS should be deducted under **Section 195**. The rate and applicability would again depend on the DTAA.
3. **Reimbursement:**
- If it is purely a reimbursement of costs and not a payment for royalty or technical services, then TDS might not be applicable. However, proper documentation and clear evidence that it is a reimbursement are crucial to support this.
### **Recommended Actions**
1. **Review Agreements:**
- Examine the agreements between the parent company and the subsidiaries to determine the nature of the payment. If it specifies that the payment is for the use of software, then it is likely royalty.
2. **Consult DTAA:**
- Check the relevant Double Taxation Avoidance Agreement (DTAA) between India and the country of the parent company to understand the tax treatment of royalty and technical services. This will help in determining the correct TDS rate if applicable.
3. **Documentation:**
- Maintain clear documentation indicating that the payment is a reimbursement and not for royalty or technical services. This should include the nature of the expenses incurred and the basis of allocation.
4. **Seek Professional Advice:**
- Given the complexity of tax laws and international agreements, it is advisable to consult with a tax advisor or legal expert to ensure compliance and correct TDS treatment.
### **Summary**
- **If Payment is Royalty:** TDS under Section 195 will be applicable based on the DTAA rate.
- **If Payment is Technical Service:** TDS under Section 195 will be applicable based on the DTAA rate.
- **If Payment is Reimbursement:** TDS may not be applicable, but proper documentation is essential.
Always ensure compliance with the latest regulations and seek expert advice to handle such cross-border transactions correctly.
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