Type of computer software:
|Shrink-wrap software||is the readily available software that is sold “Off-the-shelf”. Here, the software is packaged with the license agreement. The license gives the endorser the limited right to use the software for the perpetual period. The right is neither transferable nor can the buyer sub-license the software. Any user operating the package is deemed to have knowledge of the copyright of the software. Payment for the purchase of such a product would not be regarded as payment for royalty.|
|Customized software||is the software that is tailor-made based on the specific needs of the customer (single user). Customization of canned software includes individualized configuration of software to work with other software and computer hardware but doesn’t include routine installation. Customization of canned software does not change the underlying character or taxability of the original canned software.|
|Bundled software||is embedded with the hardware and is bought along with the computer. Most of the application software is available in “unbundled” form, especially if it is bought subsequent to the purchase of a computer.|
|Canned software||is independent software that can be used by a variety of hardware and may be applied for management, consulting, and administration.|
Meaning of terms “ROYALTY”:
|As per DTAA – Article 12||As per the income tax act|
|Payments of any kind received as a consideration for the use of or the right to use any copyright of a literary, artistic, or scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof.||Under Sec 9(1)(vii) of the Income Tax Act in Explanation 2 the term ‘fees for technical services’ is defined as any consideration (including any lump sum consideration) for the rendering of any managerial, technical, or consultancy services (including the provision of services of technical or other personnel).|
Thus, what is considered to be royalty is – If the consideration is for the right to commercially exploit the intellectual property in the software, then the same could be considered as royalty. It is also pertinent to mention here that where the consideration paid is for the purchase of a product and not for the transfer of the intellectual property per se, it may not be regarded as royalty.
Taxability under the income tax act:
Domestic sale: The domestic transactions involving the sale of software/copyright/license or rendition of IT-enabled software services are taxable as “INCOME UNDER THE BUSINESS” head and are taxed as per normal provisions of the Income Tax Act.
Sale from a foreign land: Transactions in relation to computer software may fall in any one of the following categories:
|Transfer of a copyright right in the computer programme||Transfer of a copy of the computer programme||Services for the development or modification||Software related services|
|Indian entity acquires almost all the rights.||Indian entity acquires right to use the same for personal use||Customer engages a software development company to develop or modify software for the former, whereby all the rights in relation to such software will belong to the customer.||All other services such as installation, maintenance, training, etc.|
Taxed as business income.
Taxed as business income
Taxed as business income.
Taxed as Fees for Technical Services
Mode of taxation and its business impact:
|Mode of taxation||Business impact|
|Royalty||Payments are subject to withholding tax (similar to TDS) at 20%, subject to reduced rates if any given in DTAA, on a gross basis|
|Business Income||Such payments taxed in India only if the foreign company has a business connection (permanent establishment in case there exists a DTAA between India and the country of residence of the concerned foreign entity) in India.
Only that portion of income that is attributable to BC and/or PE in India will be subject to tax in India at the rate of 40% on a net basis.
|Fees for Technical Services||These could be subject to withholding tax in India at the rate of 20% on a gross basis. However, if a reduced rate of withholding tax has been prescribed in the DTAA between India and the country of residence of the foreign entity, then that reduced rate shall be applicable.|
The amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that
The same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act.