The Indian Government has issued a notification on 13 June 2012
("Notification"), pursuant to which tax
will no longer be deducted on multi-level software payments made to
a resident, subject to certain conditions discussed below. The new
provision will come into force from 1 July 2012.
Background & Budget 2012
The Indian tax laws, until recently, were capable of varying
interpretations on characterization of income from software
payments in view of the conflicting decisions of the various courts
on whether or not payment for use of software is royalty.
The Finance Act, 2012 clarified the above issues by inserting
explanations to section 9(i)(vi) of the Income Tax Act, 1961
("IT Act") with retrospective effect
from June 1, 1976 stating that the consideration for use or right
to use of computer software is royalty.
Although, the Finance Act, 2012 cleared the ambiguities
surrounding the characterization of software payments, under the
extant provisions, withholding tax on royalty payments is
applicable at the rate of 10% without any exceptions. In case of
multi level software distribution, this would mean that the
withholding tax would be applicable at every level of the software
distribution chain for e.g from a non-resident software owner to a
resident distributor, from a resident distributor to the resident
retailer and finally to the end consumer, resulting in multi-level
taxation on such payments.
The Government has pursuant to the powers given under section
197A (IF) notified that tax is not required to be deducted at each
level for acquisition of software if the stipulated conditions are
Conditions stipulated in the Notification
As per the Notification, no deduction of tax need to be made on
the following specified payment under section 194J of the Act,
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-
(i) the software is acquired in a subsequent transfer and the
transferor has transferred the software without any
(ii) tax has been deducted-
(a) under section 194J (withholding tax on payment of royalty to
a resident) on payment for any previous transfer of such software;
(b) under section 195 (withholding tax on taxable payment to a
non resident) on payment for any previous transfer of such software
from a non-resident, and
(iii) 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
Effect of the Notification
As a result of the Notification, the Government has provided
relief to a number of domestic tax payers in the software industry
by doing away with the multi-level domestic withholding tax on
This news flash has been written for the general interest of
our clients and professional colleagues and may be subject to
change. It is not intended to be exhaustive or a substitute for
legal advice. We cannot assume legal liability for any errors or
omissions. Specific advice must be sought before taking any action
pursuant to this news flash.
For further clarification, you may write to the tax team,
comprising of Aliff Fazelbhoy at firstname.lastname@example.org, Statira
Ranina at email@example.com, Kruti Desai at
firstname.lastname@example.org, Astha Chandra at email@example.com,
Anamika Pandey at firstname.lastname@example.org, Santoshi Varma at
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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