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TDS on License Fees

shehzad (accounts executive) (140 Points)

03 March 2010

Dear Friends,

Our company purchased a ERP software from a resident reseller for 10 users. After that the company increased the no. of users. The reseller raised the bill for License Fees.

So, whether TDS is to be deducted u/s. 194-J or 194-C & Why?

Please answer.

Thanks

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5 Replies

CA. ANKUR (ASST. MANAGER ACCOUNTS) (54 Points)
Replied 03 March 2010

shehzad

Thw question here is co. purchased ERP with 10 users licence & then they purchased new user licences for other users it will definately fall under section 194 c bcos for two reasons

1. reseller raised invoice for Licence Fees & not for ERP fees

2. this is a purely contract where as request of purchaser the no of users are increased & fees are paid accordingly it can be inother words trems as purchase for user licence or multi user licence

Revert in case of any problem

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shehzad (accounts executive) (140 Points)
Replied 03 March 2010

Dear Ankur,

Thanks for your reply, but we asked software reseller about rate of deduction of TDS & he said to deduct TDS @ 10 % u/s. 194- J. So, the matter is resolved, but that doesnt mean that we should not discuss about actually in which section it will fall.

I too think that it will fall in 194-J as it is not a contract with reseller but he gives service as per our request.

Any ways, thanks

Chintan Shah (-) (534 Points)
Replied 03 March 2010

Dear friend Shezad,

TDS is deductible under Section 194C only if the contract is for work or for some specified services mentioned in the explanation to that section. Since grant of license does not amount to work (which is defined as an activity performed to get some desired result) TDS is not deductible u/s 194C. As is apparent from the word license fees - that you have used in your query - I understand that the vendor is retaining the copyright and is only giving a lisence or is transfering the right to use. I also understand that the software is a custom developed software (and not available on the shelf) that has been developed / implemented based on the specific needs of your organisation. If what i understand is correct TDS would be deductible under Sec 194J being TDS on royalty.

Regards,

Chintan

Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)
Replied 03 March 2010

Dear Shehzad,

194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of
(a) fees for professional services, or
(b) fees for technical services, 46a[or]
(c) royalty, or
(d) any sum referred to in clause (va) of section 28,]
shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax on income comprised therein :”

Further , Explanation (ba) to Section 194J defines Royalty as “royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;”. Therefore , Explanation 2 to section 9(1)(vi) is visited to see the meaning of Royalty which is defined as follows

“Explanation 2.—For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

Although in my personal opinion, one time licence fee for use is a sale , however, if use of the word lump sum in definition of Royalty which is very wide enough to encompass the software license within its ambit, TDS u/s 194J should be done by you at the time of making payment , subject to the condition that Individual and HUF are not liable for TDS if the business turnover is less than Rs 40 lac or gross professional fee is less than Rs 10 Lacs.

regards,

ratan