Subscription - TDS to be deducted or not?

CA final Student



Dear Prithi

In my opinion you will have to deduct TDS u/s 194 J (1) c ie. under royalty depending upon the terms of your agreement.

Further,royalty under sec 194j shall have the meaning as in explanation 2 to clause (vi) of subsection (1) of section 9.

It would be better if you read the terms of your agreement with reference toSec 194 j and  explanation 2 to clause (vi) of subsection (1) of section 9.

For your reference i am mentioning two case laws defining the word Royalty


Royalty 1988 Cal-HC N.V. Philips V/s. CIT
The dictionary meaning of the term royalty makes it clear that the said term connotes payments
periodic or at a time for user by one person of certain exclusive rights belonging to another
person. The examples of such exclusive rights are rights in the nature of a patent mineral rights
or rights in respect of publications. It is possible for a person carrying out operations of
manufacture and production of a particular produce to acquire specialised knowledge in respect
of such manufacture and production which is not generally available. A person having such
specialised knowledge can claim exclusive right to the same as long as he chooses not to
make such specialised knowledge public. It is also conceivable that such a person can exploit
and utilise such specialised knowledge in the same way as a person holding a patent or owning
a mineral right or having the copyright of a publication to allow a limited user of such specialised
knowledge to others in confidence against payment. There is no reason why payment for the
user of such specialised knowledge though not protected by a patent should not be treated as
royalty or in the nature of royalty. [65 CTR 103, 172 ITR 521]
Royalty 2000 Mad-HC CIT V/s. Neyveli Lignite
Corporation Ltd.
………..the term royalty normally connotes the payment made by a person who has exclusive
right over a thing for allowing another to make use of that thing which may be either physical
or intellectual property or thing. The exclusivity of the right in relation to the thing for which
royalty is paid should be with the grantor of that right. Mere passing of information concerning
the design of a machine which is tailor-made to meet the requirement of a buyer does not by
itself amount to transfer of any right of exclusive user, so as to render the payment made
therefor being regarded as royalty. [162 CTR 206, 243 ITR 459]



Dear J.K. Shahi sir,


could you please explain that how can license fees will come under royalty.

According to my understanding royalty means payments for exclusive rights to a person.

But incase of license fees it is not like that.


For eg:


ERP called NAVISION has been made by microsoft. A company X ltd. pays license fees per year to microsoft for its usage. If company Yltd. comes to microsoft for setting up NAVISION software in its company, then according to you microsoft should not give the license to Y ltd.


But in reality there are no exclusive rights to use the software. If Microsoft want, then it can give the license to as many no. of companies as it want to.


Since there are no exclusive rights, so payment of License fees does not form Royalty.


Is there any mistake in my understanding?

Chartered Accountant

There is a case law - Kohinoor Infrastructure V/s CIT which provides for deduction u/s 194C.(Contract for "work" and labour).

Since it is not a specified profession, no need of 194J.




Dear nitin,

First of all it should be clear that license fees for renewal of subscripttion will not include any type of labour charges. Its only the fees which we give yearly for using the software.


See it like this:-


Suppose you subscribe to the monthly subscripttion of ITR(i.e. case law book). This fees is paid by every CA firm yearly.


Now can you please tell, that whether this payment of fees will attract TDS u/s 194C. I think no. But if you think its YES then WHY?


Thank you all for your reply.... But it would be nice if i can get more responses...
Its really very urgent and important
Chartered Accountant

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



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
ITA No. 847/Del/2008
Assessment Year : 2003-04
NEW DELHI – 110020
Please restrict your reading to sec 9 and the meaning of royalty and read the judgement in full.You will get the judgement on
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

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


@ 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.



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