TDS IN RESPECT OF SOFTWARE PAYMENTS NOW MORE TEDIOUS
I. When benefit of notification available –
The CBDT has issued a Notification No. SO 1323 (E), dated 13-06-2012, that no deduction of tax at source shall be made from payment made for acquisition of software, if following conditions are satisfied:
(1) Payment is made by a person (“transferee”) for acquisition of software;
(2) Payment is made to another person (“transferor”);
(3) The transferor is a resident person;
(4) The software is acquired in subsequent transfer. In other words, the transferor should not be the original developer of the software and it must have acquired the same either from the original developer (from within India or outside India) or through a chain of dealers (from within India or outside India);
(5) The transferor has transferred the software without any modification i.e. branded software, etc. (If transferor is customizing the software as per customers’ requirement i.e. unbranded software etc., the benefit of such notification would not be available);
(6) Tax has been deducted by transferor from payment of such software during any previous transfer under section 194J (payment to a resident) or section 195 (payment to a non-resident). In other words, the transferor should have deducted tax from payment made to the original developer or previous dealer, from whom such software was acquired; and
(7) The transferee obtains a declaration from the transferor that it has deducted tax from payment made to original developer or previous dealer (as discussed in point 6).
II. Fallacies in availing benefit of above said exemption –
(1) The benefit of above notification would not be available if payment is made for software which is a specialized one and exclusively custom-made to cater to the needs of an individual client. These are typically referred to as “unbranded software”;
(2) The exemption from tax deduction would be available only if software is standardized and marketed such as Windows etc. These are referred to as “branded software” or “off -the shelf software” or “shrink wrapped software”;
(3) If transferor has taken benefit of favourable judgments for non-deduction of tax at source from payment made to original developers or dealers, the transferees would be under obligation to deduct tax at source from payment made to the transferor.
(4) If Indian customer buys software from a non-resident dealer for his user, he would be under obligation to deduct the tax, as benefit of such notification would be available only if payment is made to a resident transferor.
III. Illustration –
A ‘branded software’ is developed by ABC, Inc. USA. Such software is transferred to Cayman Island subsidiary ‘XYZ, Ltd.’, which, in turn transfers, the same to Indian Subsidiary, namely ‘ABC Pvt. Ltd.’. ABC Pvt. Ltd. sells the software in Indian market through maze of various regional dealers. The impact of the notification can be understood through following illustration: