Subscription - TDS to be deducted or not? - Income Tax

Subscription - TDS to be deducted or not?

Page no : 2

Prithi (Student) (166 Points)
Replied 31 December 2009

Thank you all for your reply.... But it would be nice if i can get more responses...

Its really very urgent and important

CA Nitin Wadhwani (Chartered Accountant) (4469 Points)
Replied 31 December 2009

The answer is in the afirmative as supported by the case law.

J.K.Shahi (Service) (44 Points)
Replied 01 January 2010

Dear Shailendra & Prithi

Happy New Year

Shailendra you are correct but here we have to stick to what has been defined as royalty in Explanation 2 to Sec. 9(1)(vi).As per the sec the meaning of royalty is exhaustive.

As per provisions of section 9(1)(vi), the royalty income should satisfy twin conditions that there has to be consideration, and this consideration should be for transfer of all or any right (including the granting of the license) in respect of the copyright, patent, invention, design, secret formula or process, scientific work.

On a plain reading of the definition of 'Royalty' given in the sec. 9(1)(vi)explanation 2 it is clear that the payment for rights in respect of the computer software is not specifically covered, but includes consideration for transfer of all or any rights in respect of copyright or literary work. Computer software are protected under the Copyright Act. Under the Copyright Act the term 'literary work' includes computer programmes, tables and compilations, including computer data base.Hence any transfer of right or licence to use a software is also likely to be covered as royalty.It should be noted that the payment for transfer of rights not only in part but also in full is covered under definition of royalty.

There is lot of confussion & litigation related with royalty on software payments and withholding tax of NRI income involving section 195,sec 9 and DTAA and unless higher court or govt clarifies and settle this it will create problem for the people.

However,I am mentioning two case laws in which it has been held that Income from Transfer of licensed software is not royalty

Infrasoft Limited v. ADIT [2009-TIOL-21-ITAT-DEL]

And second one is

IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH ‘F’ : NEW DELHI

ITA No. 847/Del/2008
Assessment Year : 2003-04

M/s INFRASOFT LIMITED
INDIA BRANCH OFFICE,
C/o BENTLEY SYSTEMS INDIA PVT LTD
203, OKHLA INDUSTRIAL ESTATE, PHASE-III,
NEW DELHI – 110020
PAN NO : AAACI5073L

ASSISTANT DIRECTOR OF INCOME-TAX
CIRCLE-2(2), INTERNATIONAL TAXATION, NEW DELHI

Please restrict your reading to sec 9 and the meaning of royalty and read the judgement in full.You will get the judgement on taxguru.com

Further I am still of the opinion to give plain reading of section with reference to the agreement and apply common sense approach to sort out the problem.

As far as I know I would like to mention someof the type of software agreenment kindly correct me where I am wrong.

Take the example of SAP or Navision in which initial payment is for licence fee and all the subsequent payments are in the nature of maintenance contract for regular updates of software and maintenance of the software.Once you have paid the initial payment you can use the software as long as you desire even if you do not pay AMC .Here the ownership of the copyrighted software is with you.In this case there will not be any TDS on Initial payment ie on licence fee.

Take another example where activation key is provided when you make the payment for the use of the software and you can use as long as you are paying the annual licence fee.When you stop the payment you cannot further use it .In this case you are not the owner and you have been given only right to use.In this case in my opinion TDS needs to be deducted on licence fees

Kindly suggest for more improvement on this issues

shailendra (C.A. FINAL) (189 Points)
Replied 01 January 2010

Thankyou shahi sir for such a detailed explanation and quoting the case laws. But it's a very debatable issue.

CA Jayesh Gokalgandhi (CA in Industry) (126 Points)
Replied 06 January 2010

@ Shailendra following is my understanding of the example quoted by you:

Mircrosoft own a software called NAVISION and has created infinite number of licenses which it can issue for usage of this software by it buyers. In effect it has multiplied one unique software into infinite unique softwares.

A license, say A0001, once sold to Mr. X cannot be again sold to Mr. Y, but it can sell license number A0002 to Mr. Y. Each such sale of license becomes payment of royalty to the owner of the software for using the software for any specified period of time.

Hence, when Mr. X is making payment of the license fees he needs to deduct TDS under Section 194J.

@ J.K.Shahi AMC is a totally different contract and should not be mixed with license payment.

shailendra (C.A. FINAL) (189 Points)
Replied 07 January 2010

Dear jayesh sir,

In your case Microsoft holds infinite number of licenses of the same software. According to me License no. is only a medium to differentiate between the users of the software. Only a license number cant be the basis of holding that the payment are made for the exclusive rights of the software. I think exclusive rights means what one person is using, the other person don't have the option to use it. It's only the end use is to be seen and not the license number which is only a medium to differentiate between users.

CA Jayesh Gokalgandhi (CA in Industry) (126 Points)
Replied 07 January 2010

@ shailendra Pls. note that in the eyes of law each and every license is a different product altogether, it is not merely a differentiator. If you see from Mircosoft's point of view, how will it show these sale of licenses. Can it argue that only the first sale is towards royalty and balance are all capital receipts?

Your arguement may be valid for a customised software which is built according to specification of each individual buyer. Sale of such software may be termed as sale of goods and hence not fall under perview of TDS.

deepak sharma (accounts executive) (21 Points)
Replied 22 April 2010

this matter is iltrigation of law in both section u can deduct tds.

GOPAL R. JHANVAR (CA) (30 Points)
Replied 27 January 2011

deduct tds u/s 194J to avoid unneccesary litigations. Refer to Section 194J (c) "royatly" and Explanation 2 to section 9(1)(vi) for your answer.

Bhaskaran Chackrapani Warrier (Chartered Accountant) (80199 Points)
Replied 26 June 2012

This is a usage-based payment made by one party (the "licensee") to another (the "licensor") which comes under the term " royalty" and accordingly section 194J attracts.

1 Like

kishor (Tax Executive) (27 Points)
Replied 23 January 2014

Finance Act 2012 has amended the definition of “royalty”. The amendment in section section 9 (1) (vi) now defines ‘royalty’ as any ‘right for use’ or ‘right to use’, a computer software (including granting of a license), irrespective of the medium through which such right is transferred. Section 194J provides for deduction of tax at source on payment of professional fees, technical fees, directors remuneration and royalty payments Hence payments towards right to use computer software will be liable to tax deduction at source under section 194J @ 10%