Mundle Venkatraman & Associates

TDS on Software Purchases

By: Vaidehi Nalwaya - 3rd December, 2021

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As per The Hon’ble Supreme Court’s decision in the lead case of Engineering Analysis Centre of Excellence Pvt. Ltd [TS-106-SC-2021] dated 2ndMar 2021, there is no TDS deductible u/s 195 for payment to non-residents for software purchases. However, DTAA with respective countries has to be considered.

The Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT1 has held that payments made to non-resident computer software manufacturers/ suppliers for the resale/use of the software is not taxable as Royalty.

Some Insights on the Case

This case deals with two situations which are related to each other. The first one being whether or not payment to foreign companies by Indian companies to use foreign software can be charged as royalty. The second issue being whether or not TDS can be deducted for purchase of software from foreign software suppliers.

The court has ruled that software firms have now been exempted from deducting TDS for purchase of software from foreign software suppliers. The ruling will lower the cost of software purchases for Indian firms as the overseas sellers may choose to lower prices, taking advantage of the tax relief. This ruling is said to greatly benefit software firms. While citing the definition of royalties contained in Article 12 of the double taxation avoidance agreements (DTAAs), the Hon’ble Supreme Court clarified that, “there is no obligation on the persons mentioned in Section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright.”

As far as chargeability of royalty in payment to foreign firms to use their software by Indian firms is concerned, the court held that payment for using foreign software did not amount to royalty which is taxable in India.

Conclusion for Software Purchase

Payment for online software download (Microsoft office, etc.), SaaS/cloud service (Atlassian, google apps etc.), shrink wrapped software (software in CD/DVD, etc.) paid to Non-Residents is not Royalty or income chargeable to tax in India – so no TDS u/s 195. However, the same paid to Resident is Royalty – hence TDS u/s 194J @10% is applicable if payment exceeds Rs.30,000 p.a.

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