Clarification requested regarding TDS applicability on S/W

Dear CA Club Members,

I Think you all will be aware of the taxation issues that software industry is facing. Before 16-5-2008, that is before introduction of Service Tax on Software Products, Only VAT/Sales Tax was applicable depending upon whether the software is a product type or Licence and there was no TDS issues. But after introduction of Service tax on Software, the licence part is also covered in Service Tax. Because of this there is dual taxation of VAT and Service Tax and since we charge service tax, the customer deducts TDS

Previously when only VAT was applicable, there was no TDS issue on Software Licence. But after the introduction of Service Tax, We charge VAT and Service Tax and our customers now deduct TDS u/s 194J @ 11.33%. because we charge Service Tax

Since we are distributors, ie buying and selling them as a commdity with thin margin of 4 to 5%, and our customers deducting 11.33% TDS, all our working capital gets blocked under TDS.

Now My question is

1. Can we take a stand as no TDS is applicable, since there is no service element involved. ( before the introduction of Service Tax, the software licence was covered only under VAT/Sales Tax and hence no TDS was deducted by the customer).

2. is there any case laws, notification to support the above stand.

3. Is the action of the customer by deductiing TDS @ 11.33% justified

4. There are also case laws which says VAT and Service Tax a mutually exclusive, But here VAT is chargable under Right to use intangile property and Service Tax under information Technology Service clause( vi) which also specifies Right to use(Licence) under electronically downloable Software.The Income Tax TDS treatment has changed after the introduction of Service Tax on Licence part of Software. Which one we have to follow wheather Service Tax or VAT or both.

5. Is TDS applicable on Software Licence.

TDS u/s 194-J is applicable on professional or technical services and it does not include the "licence fees". Services does not include the transfer of goods. In this case, one person sells/licences to other party and this is not a service. However, if a tailormade software purchase (as ,per our requirement) may attract the TDS as this is developed under our instructions and the various technical efforts are made for us.

But in licencing/selling of product the TDS is not applicable.

Secondly, in India, double taxation is applicable. You may charge the service tax or VAT only. In your case, I think, if the licencing is involved, then you may charge the service tax and not VAT. Otherwise, you may charge the VAT. But it differs from the state to state and needs to be cleared from the concerned state acts.