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IT Software purchase

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Tanveer

Salaried

23 Points Posted on 31 October 2021

Hi all, I have started a new technology sales sole proprietorship as I am doing free lancing. So i need to purchase software and security solutions from North American supplier and I need to pay in US$ and CAD$. I want to know about the implication of TDS while making outward remittance and also the purpose code for the payment. Thanking you in anticipation.

Replies (9)

Quick Summary

This discussion addresses the tax implications of purchasing IT software from North American suppliers, specifically concerning Tax Deducted at Source (TDS) under Section 195. It clarifies that payments for software obtained via a non-exclusive license, where only usage rights are granted, generally do not constitute royalty and thus are not subject to TDS. The conversation also touches upon the appropriate purpose code for such payments and the applicability of Reverse Charge Mechanism (RCM) for book-keeping deductions.

CA Aakarsh Jain

4330 Points Posted on 31 October 2021

The judgment was based on cross appeals filed by the Revenue authorities and assessees alike on the question as to whether money paid by Indian buyers to foreign, “non-resident” software suppliers amounted to royalty and, thus, tax deductible at source under Section 195 of the Income Tax Act.

Justice Nariman reasoned that payment of royalty is made only for exclusive use of copyright of a work.

Here, the computer software is sold in the form of a CD to an Indian buyer under a non-exclusive licence. Again, the Indian buyer only receives the right to use the software. He does not get any copyright on the software. Hence, the amount paid for a computer software from a foreign manufacturer does not qualify as royalty and so tax should not be deducted at the source.