Shikha Singhania

Implication of service tax and TDS on purchase of software

Introduction

Service means any activity carried out by one person for another for a consideration and including
declared service. This definition further provides that ‘Service’ does not include activities that constitutes
only a transfer in title of goods or immovable property by way of sale, gift or in any other manner.

Declared service_______________________________________________________________

One of the declared services includes Development, design, programming, customization, adaptation,
up gradation, enhancement, and implementation of information technology software.

Taxability of Information Technology service

Given below is a summary of the taxability of IT service

Purchase of Software__________________________________________________________

Excise Duty (In

case of Customs Duty (in
Category of service Service Tax VAT/CST
manufacture in case of imports)
India)

No Basic customs
Packaged Software with
Yes duty but CVD and No Yes
MRP
SAD is payable

No Basic customs Service tax

Packaged Software
Excise duty on cost duty but CVD and on transfer
where MRP is not Yes
of media SAD is payable on of right to
required
cost of media use software

Tailor made (customised)

No No Yes Yes
software
Paper License of
No No Yes Yes
software and PUK cards

Yes -
Software downloaded
No No payable by No
from Indian supplier
supplier

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Not
Software downloaded via Yes as applicable to
internet from outside No No import of person
India service downloading
software

Maintenance of software________________________________________________________

Business Auxiliary services

 Any customer care service provided on behalf of the client; or

 Procurement of goods or services, which are inputs for the client;

Business Support services

It is a service provided to any person by any other person in relation to support services of business or
commerce. According to section 65(105c) Support services of business or commerce include
operational or administrative assistance in any manner.

Management, Maintenance or repair Services

Maintenance or repair of any goods is liable to service tax, while services provided in relation to
maintenance or repair or servicing of computer software is liable to service tax under "management,
maintenance or repair" service section 65(105)(zzg).

Implication of TDS

A provision made in the Finance Bill 2012-2013 now identifies the purchase of software products from
non-resident (foreign) companies as royalty and hence the transaction is subjected to a withholding tax,
which is currently 10 per cent [plus Surcharge 2%(if applicable), EC at 2% and SHEC at 1%] of the
gross purchase amount. In this case, the Nonresident should possess a PAN. Once the person is a
PAN holder, it is necessary to file return.

If the non-resident company doesn’t hold PAN, then withholding tax should be @ 20%.

The amendment made to section 9(1)(vi) in the Finance Bill to clarify that the consideration for use or
right to use of computer software is royalty by clarifying that transfer of all or any rights in respect of any
right, property or information as mentioned in Explanation 2, includes and has always included, transfer
of all or any right for use or right to use a computer software (including granting of a license)
irrespective of the medium through which such right is transferred.
To amend section 9(1)(vi) to clarify that royalty includes and has always included consideration in
respect of any right, property or information, irrespective of whether
 The possession or control of such right, property or information is with the payer;
 Such right, property or information is used directly by the payer;
 The location of such right, property or information is in India.

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Section 9 defines transactions which deems to be accrued in India, so this section is for the
transactions entered with Non - residents, hence if we sell the product in India we are not governed
under sec 9, 115 and sec 195, but the same comes under Sec 194 J, though a reference of section 9 is
made in section 194J.

Notification no21/2012 dated 13/06/2012 says that no deduction of tax shall be made on the following
specified payment under section 194J of the Act, namely:-
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-
 The software is acquired in a subsequent transfer and the transferor has transferred the
software without any modification,

 Tax has been deducted-

a) under section 194J on payment for any previous transfer of such software; or
b) under section 195 on payment for any previous transfer of such software from a
non-resident, and

 The transferee obtains a declaration from the transferor that the tax has been deducted
either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account
Number of the transferor.
Thus if TDS has been deducted under the earlier transaction then no TDS is required again if it is
transferred without any modifications.

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