Tds and service tax on purchase of software
This query is : Resolved
30 April 2013
A Company X wants to purchase email software from a foreign vendor.
Is the purchase considered as software service or software product? If so please let me know on the TDS and service tax implications on such transactions.
Is the purchase considered as software service or software product? If so please let me know on the TDS and service tax implications on such transactions.
01 May 2013
TDS should be applicable as per Income Tax Act, however if the foreign vendor is able to provide TRC & PAN then the applicable provisions of DTAA shall apply.
Anuj
femaquery@gmail.com
Anuj
femaquery@gmail.com
02 May 2013
Thank You Sir for your reply. Can you please let me know if the TDS is applicable even on software product imports.
27 July 2025
Great follow-up question — and it's a **very important distinction** in Indian taxation: whether **TDS applies on import of software**, especially when purchased from a **foreign vendor**.
Let’s break this down in terms of:
1. **Product vs. Service**
2. **TDS applicability under Income Tax Act & DTAA**
3. **Service Tax (as per 2013 rules)**
---
## 🔍 1. **Is Software a Product or a Service?**
In India, software transactions are classified based on **type of software** and **how it is used**:
### ✅ Types of Software Purchases:
| Type | Description | Treated as | TDS applicable? |
| ----------------------------------------------------------- | ---------------------------------------- | --------------------------------- | --------------- |
| **Off-the-shelf software** | Standard, shrink-wrapped or downloadable | **Royalty / copyrighted product** | ✅ Yes (u/s 195) |
| **Customized software** | Tailored to your needs | **Technical service** | ✅ Yes (u/s 195) |
| **Software license (non-exclusive)** | Right to use, not own | **Royalty** | ✅ Yes (u/s 195) |
| **Software outright purchase (full ownership, no license)** | Rare | **Capital goods** | ❌ Generally no |
💡 In your case — buying **email software from a foreign vendor** — it’s almost certainly:
* **Off-the-shelf software**, or
* A **license to use** it.
➡️ So, it's considered **Royalty**, not mere product sale.
---
## ✅ 2. **TDS Implications (Section 195 & DTAA)**
Under **Section 195 of the Income Tax Act**, any payment to a **non-resident** is **subject to TDS** if it is **chargeable to tax in India**.
**Key SC Case**: *Engineering Analysis Centre of Excellence Pvt Ltd vs. CIT (2021)*
🧑⚖️ The Supreme Court ruled:
> **Payment for off-the-shelf software** (non-exclusive, no rights in the copyright transferred) **is NOT taxable as royalty** under the **Income Tax Act**, and therefore **TDS is not required**, especially where **DTAA overrides apply**.
### ✔️ So, if:
* You're buying **off-the-shelf, non-exclusive software license**,
* And vendor is from a **DTAA country**,
* And vendor provides a **TRC**, **Form 10F**, and **no PE (permanent establishment) in India**,
👉 **No TDS is required** as per SC ruling and DTAA.
But if the software is:
* **Customized**, or
* Accompanied by technical support / installation / integration services,
➡️ TDS may apply as **royalty or technical services**.
---
## 💰 3. **Service Tax Implication (As per 2013 rules)**
In 2013, **import of online software** was taxable under **Reverse Charge Mechanism**, because:
* It fell under the definition of **“Online Information and Database Access or Retrieval Services (OIDAR)”**.
* Service tax was payable by the **recipient in India**.
✅ So, **Service Tax was applicable** (at 12.36% in 2013), to be paid by **your company under reverse charge**, unless exempted.
---
## ✅ Final Answer:
| Topic | Applicability |
| ---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **TDS (u/s 195)** | ✅ Applicable **if software qualifies as royalty** or **technical service**. ❌ Not applicable for **off-the-shelf software** after **SC ruling (2021)** + proper DTAA documentation. |
| **DTAA** | ✅ Use DTAA to determine whether royalty definition applies. Vendor must give **TRC**, **Form 10F**, **Declaration**. |
| **Service Tax (2013)** | ✅ Applicable under **reverse charge**, to be paid by the Indian buyer. |
---
Let me know the **country of vendor** and **nature of the license (e.g. exclusive, duration, usage rights)** if you'd like me to check the **exact DTAA clause** for your case.
Let’s break this down in terms of:
1. **Product vs. Service**
2. **TDS applicability under Income Tax Act & DTAA**
3. **Service Tax (as per 2013 rules)**
---
## 🔍 1. **Is Software a Product or a Service?**
In India, software transactions are classified based on **type of software** and **how it is used**:
### ✅ Types of Software Purchases:
| Type | Description | Treated as | TDS applicable? |
| ----------------------------------------------------------- | ---------------------------------------- | --------------------------------- | --------------- |
| **Off-the-shelf software** | Standard, shrink-wrapped or downloadable | **Royalty / copyrighted product** | ✅ Yes (u/s 195) |
| **Customized software** | Tailored to your needs | **Technical service** | ✅ Yes (u/s 195) |
| **Software license (non-exclusive)** | Right to use, not own | **Royalty** | ✅ Yes (u/s 195) |
| **Software outright purchase (full ownership, no license)** | Rare | **Capital goods** | ❌ Generally no |
💡 In your case — buying **email software from a foreign vendor** — it’s almost certainly:
* **Off-the-shelf software**, or
* A **license to use** it.
➡️ So, it's considered **Royalty**, not mere product sale.
---
## ✅ 2. **TDS Implications (Section 195 & DTAA)**
Under **Section 195 of the Income Tax Act**, any payment to a **non-resident** is **subject to TDS** if it is **chargeable to tax in India**.
**Key SC Case**: *Engineering Analysis Centre of Excellence Pvt Ltd vs. CIT (2021)*
🧑⚖️ The Supreme Court ruled:
> **Payment for off-the-shelf software** (non-exclusive, no rights in the copyright transferred) **is NOT taxable as royalty** under the **Income Tax Act**, and therefore **TDS is not required**, especially where **DTAA overrides apply**.
### ✔️ So, if:
* You're buying **off-the-shelf, non-exclusive software license**,
* And vendor is from a **DTAA country**,
* And vendor provides a **TRC**, **Form 10F**, and **no PE (permanent establishment) in India**,
👉 **No TDS is required** as per SC ruling and DTAA.
But if the software is:
* **Customized**, or
* Accompanied by technical support / installation / integration services,
➡️ TDS may apply as **royalty or technical services**.
---
## 💰 3. **Service Tax Implication (As per 2013 rules)**
In 2013, **import of online software** was taxable under **Reverse Charge Mechanism**, because:
* It fell under the definition of **“Online Information and Database Access or Retrieval Services (OIDAR)”**.
* Service tax was payable by the **recipient in India**.
✅ So, **Service Tax was applicable** (at 12.36% in 2013), to be paid by **your company under reverse charge**, unless exempted.
---
## ✅ Final Answer:
| Topic | Applicability |
| ---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **TDS (u/s 195)** | ✅ Applicable **if software qualifies as royalty** or **technical service**. ❌ Not applicable for **off-the-shelf software** after **SC ruling (2021)** + proper DTAA documentation. |
| **DTAA** | ✅ Use DTAA to determine whether royalty definition applies. Vendor must give **TRC**, **Form 10F**, **Declaration**. |
| **Service Tax (2013)** | ✅ Applicable under **reverse charge**, to be paid by the Indian buyer. |
---
Let me know the **country of vendor** and **nature of the license (e.g. exclusive, duration, usage rights)** if you'd like me to check the **exact DTAA clause** for your case.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Notice from IT DEPTT IF FD AMOUNT EXCEEDS 10 LACS
- Applicablity on tds
- Unable to generate and save json file for updated return
- GST payable under RCM
- Regarding TDS not deducted on rent
- Tax audit & Switching from Presumptive taxation
- Which SAC code should be selected??
- PRODUCT AND SERVICE CATEGORY CODE
- WRONGLY UPLOADED 10IF FOR COOPERATIVE SOCIETY
- GSTR9- ITC
- Import purchase entry
- Rule 54(1A) for Distributing ITC
- EXCESS CREDIT REALTED GST REVERSAL
- Export invoice not reported
- CA Articleship Extension Matter
- GST OFFICER WRONG NOTICE
- "Please ensure that the Total of the Deductions u/s 54F match the same in Table D in Sch CG"
- Composition Dealer GST Annual Return Filing process
- Revision under Section 264 in The Income Tax Act, 1961
- TDS under section 195.
Trending Online Classes
-
LIVE Course on GSTR-9 & GSTR-9C (Technical | Practical | Concept - Based)
Sachin Jain03 November 2025
CAclubindia
