Withholding tax in india for software

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Learn More Accept. Your LinkedIn Connections with the authors. To print this article, all you need is to be registered or login on Mondaq. The underlying question was whether shrink-wrapped software being sold by non-residents to residents gives away the 'copyright' in the software or was it mere transfer of a 'copyrighted article'.

Whereas a series of judgments 3 by High Court of Delhi had held that in case of payments made towards purchase of software, no grant of right in or interest in a copyright is being transferred and thus, the payment does not qualify as 'royalty'. Thus, the SC held that there is no obligation to withhold tax at source while making remittance for purchase of software on the premise that the nature of software does not qualify as 'royalty' as being taxable in India.

The Software Ruling settles the principle of law as regards taxability of software payments in the hands of non-residents whilst reinforcing the withholding tax implications, i.

The Supreme Court of India, also, did not find merit in the argument that an Indian payer may not be able to rely on the provisions of the DTAA at the time of making the remittance as regards withholding tax is concerned. The Supreme Court of India distinguished the position held by the PILCOM ruling 5 and held that a taxpayer is entitled to rely on the provisions of the DTAA while ascertaining its obligation to withhold tax while making remittances to a non-resident recipient.

The Supreme Court of India disregarded such expression of reservation as impacting the tax position on the premise that a mere expression of reservation cannot be translated into the existing provisions of the DTAA. It observed and held that India had occasions to, and infact did, re-negotiated the DTAA with some country-partners and yet it did not make any changes to scope of what constitutes 'royalty'.

Therefore, upholding the earlier principles as laid out in the decision of Azadi Bachao Andolan6, it dismissed the DTAA override argument. This principle, however, may have far-reaching implications insofar as any question that may arise on entitlement of DTAA benefits as regards taxation of indirect transfers 7. The threshold limit for WHT for non-specified type of interest is INR 5,, except in the case of interest received from a bank or deposit with post office, for which it is INR 10, This threshold limit is increased to INR 50, in case of interest provided by a co-operative society, and INR 40, if recipient of interest is a senior citizen i.

Transfer of all or any rights in respect of any right, property, or information includes transfer of all or any right to use computer software including granting of a licence , irrespective of the medium through which such a right is transferred and irrespective of whether any right or property is located in India.

Hence, while applying WHT on such payments in the nature of royalty, one needs to consider the definition of royalty as amended by the Finance Act, with retrospective effect from 1 June Further amendment in definition of royalty is brought in by Finance Act, to include consideration for sale, distribution, or exhibition of cinematographic films within its ambit. As per the provisions under the Indian Income-tax Act, the higher TDS rate applied will be the higher of anyone of the following: twice the rate specified in the relevant provision of the Indian Income-tax Act; or twice the rate or rates in force; or the rate of five percent.

Application for permanent account number PAN Every person not being an individual who enters into a financial transaction of an amount aggregating to INR , or more shall be required to apply to a tax officer for a PAN. Income from units of specified mutual funds received on or after 1 April is now taxable in the hands of the unit-holders. Dividends received from Indian companies prior to 1 April are tax-free in the hands of the shareholder. There is no threshold for payment to non-resident companies up to which no tax is required to be withheld.

The government has notified rules that do not mandate quoting of PAN, subject to certain conditions. The payer is obligated to report specific information in the prescribed form whether or not such payment is chargeable to tax. Where taxes are withheld as per the rates provided above with respect to dividend, interest, royalty, or FTS and there is no other income chargeable to tax in the hands of the non-resident, then compliance obligations relating to filing of return of income by such non-resident in India are not required.

Tax Deduction at source on purchase of goods The Finance Act, has introduced the provisions related to tax deducted at source on purchase of goods which is applicable from 01 July, The salient features have been mentioned as under - Applicable on purchases made in excess of INR5m. Applicable on buyers whose total sales, gross receipts or turnover from the business exceed INRm during the immediately preceding financial year.

Tax is required to be deducted 0. Tax collected at source on sale of goods is applicable. Tax collection at source on sale of goods The Finance Act, has introduced provisions for tax collection at source for sale of goods at the rate of 0.

However, this scenario has changed since DDT is abolished and tax is now levied in hands of recipient of dividend income with effect from 1 April In absence of specific provision, it may be treated as business profits or independent personal services under respective treaties, whichever is applicable.

As per the tax treaty definition, payments towards the use of, or the right to use any copyright of a literary work amounts to royalty, and the definition is exhaustive and narrower in scope than the definition under domestic law. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analysing the character of the transaction for tax purposes.

The OECD commentary also clarifies that arrangements between a software copyright holder and a distribution intermediary will grant to the distribution intermediary the right to distribute copies of the program without the right to reproduce that program. In these transactions, the rights acquired in relation to the copyright are limited to those necessary for the commercial intermediary to distribute copies of the software program.

In such transactions, distributors are paying only to acquire the software copies and not to exploit any right in the software copyrights. Payments in the aforesaid types of transactions would be dealt with as business profits and not as royalty. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically without the distributor having the right to reproduce the software , or whether the software is subject to minor customisation for the purposes of its installation.

The tax authorities highlighted that India had expressed its reservations on the OECD commentary, particularly to the parts dealing with copyright and royalty and should not be relied upon.

In this regard, the Supreme Court held that mere positions taken with respect to the OECD commentary do not alter the provisions of a tax treaty India has negotiated and signed unless it is amended by bilateral re-negotiation. Since the agreements in question did not create or transfer any interest in the copyright of the software, the Supreme Court held that the consideration in question would not qualify as royalty even under the domestic tax law.

The Court noted that applying the amendment to the years prior to would lead to an expectation to do the impossible. An important consideration to bear in mind is that this decision clarifies matters for transactions pre and places domestic law and tax treaty provisions at par. Accordingly, software manufacturers from treaty as well as non-treaty jurisdictions should be treated at par.