Taxability of Software Payments under Income-Tax Act, 1961

There have been multiple views about the taxability of software payments. The Finance Act, 2012 has brought a consensus to it by amending section 9(1) (vi) of Income-tax Act, 1961 by inserting Explanation 4 with retrospective effect from 01.06.1976.

Amendments by Finance Act, 2012

Section 9(1) (vi) of the Income-tax Act,1961 treats  income by way of royalty payable as Income deemed to accrue or arise in India. Explanation 4 has been inserted w.r.e.f 01.06.1976 to Section 9(1) (vi). It reads as under

“For the removal of doubts , it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software(including granting of a licence)irrespective of the medium through which such right is transferred”

Henceforth, payments for acquiring computer software falls within the ambit of Royalty u/s 9(1) (vi). As a consequence, the provisions of tax deduction at source u/s 194J and u/s 195 would be attracted in respect of consideration paid/payable for use or right to use computer software.

In light of the above and to exempt multi-level deduction of tax at source, the CBDT has issued notification no.21/2012 dated 13.06.2012.  The Central Government notifies that no deduction of tax at source shall be made on the following specified payment u/s 194J of the Income-tax Act

Specified Payment covered by Notification

Payment by a person (hereafter referred to as the transferee) for acquisition of software from another person, being a resident, (hereafter referred to as the transferor), where-

a)     the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification,

b)    tax has been deducted-

 i. u/s 194J on payment for any previous transfer of such software; or

 ii. u/s 195 on payment for any previous transfer of such software from a non-resident, and

 iii. the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (i) or (ii) of clause (b) along with the Permanent Account Number of the transferor.

 This notification shall come into force from 01.07.2012

Scope of the Notification

Software is made available to end users by software developers either directly or through distributors. In case of direct transfer, the EULA (End user Licence Agreement) prevents the end user from effecting resale of such software. Hence there is no question of multiple level deduction of tax at source. Tax has to be deducted at source either u/s 194J or u/s 195 of Income-tax Act.

However in case of transfer through distributor, the chain is Software developer-Distributor-End-user.  The scope of the notification is captured in the following table

S.No	Software developer	Distributor	End-user	TDS u/s	Benefit of Notification
1	Resident	Resident	Resident	194J by Distributor to Software Developer. End user need not deduct Tax at source	Available
2	Non-Resident	Resident	Resident	195 by distributor to Software developer. End user need not deduct tax at source	Available
3	Non-Resident	Non-Resident	Resident	195 by distributor to Software developer and by End-user to distributor.	Not Available
4	Non-Resident	Resident	Non-Resident	195 by Distributor to Software Developer. End-user need not deduct Tax at Source	Available

 Conclusion

Even though the Supreme Court in the case of Tata Consultancy Services held that the Programmed Software when put on a medium like CD are Goods under the Sales Tax Act as well as under Article 366(12) of the Constitution, we have to apply it only in the context of Indirect Taxation. Under the Income-tax Act, the payments for acquisition of software is subject to Tax deduction at source either u/s 194J or u/s195 as the case may be.

Note The article is based on the provisions of Income-tax Act, 1961 as amended by Finance Act, 2012.