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Tds on foriegn payments

02 July 2016

HI Experts.. We have purchased Software from Bulgaria so that while making payments we are going to deduct TDS on DTAA but, the seller is saying that, "We are selling you a royalty free license and not delivering services in India. You should transfer us the whole amount without deducting the TDS. Know I am In confusion kindly help me to avoid this confusion.

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Shreesh Kumar (CA Final) (122 Points)
Replied 02 July 2016

Dear Imam.

As per section 9(1)(vi) of Finance Act 2012, Royalty includes payment received for transfer of all or any right to use computer software it also includes payment received for transfer or granting of license for computer software.

As per section 195,

Any person who is responsible for paying to a Non-Resident or Foreign Company any sum by way of “Royalty” shall deduct TDS @ 25% as provided under section 115A or lower rate if provided by relevant DTAA.

In your case Exporter claimed that he is providing royalty free license which is not a tax deductable expenses but there is a fact too that he is transferring all or any right to use the computer software which falls under the definition of Royalty. Therefore you need to deduct TDS on prescribed rate.

Thanks and Regards

Shreesh Kumar

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sourabh singh (....) (73 Points)
Replied 03 July 2016

Sir u/s 195 of I.t act ...any payment to outside india is required to pay after deducting tax .. so u r require to deduct tax at the rate specified u/s 195 or the rate specified in DTAA which ever is lower ..
but DTAA rate apply only if non resident submit u the tax residency certificate ...

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