No Depreciation on Imported Software, treated as Royalty?

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April 18, 2013Income Tax1 Comment

Software Imported shall be treated as Royalty means no Depreciation.

Explanation 4 to section 9 added, retrospectively from 1st June, 1976, by finance act 2012, to clarifies that payment received for transfer of all or any right to use a computer software including granting of a license for computer software is Royalty.

Therefore, if a resident imports a software from abroad/get a license to use the software from abroad, then the payment received by foreigner shall be treated as royalty. Since the software is to be used in India, the royalty shall be taxable in hands of foreigner in India and the resident Indian making the payment shall deduct TDS under section 195 @ 10% on the payment made as given in section 115A.

For e.g. ITU India imports software of Rs 50 lacs from CSW America, now in this case ITU India is liable to deduct TDS @ 10% on Rs. 50 lacs under section 195.

Tax Treatment in hands of Payer of Royalty

Section 40(a)(i) and section 40(a)(ia) provides that deduction for any expenditure by way of royalty paid to non-resident and resident respectively, shall be allowed if TDS is deducted/paid as per the conditions specified therein.

Section 40(a)(i) and Section 40(a)(ia) provides that royalty shall have the same meaning as given in section 9. Now after the amendment (i.e. addition of explanation 4 to section 9), royalty includes payment for computer software. Therefore, amount paid for purchase of computer software is royalty and shall be allowed as deduction under section 37(1).

Income tax Rules, 1962 provides that computer software will be included in block of assets of computer and will be eligible for 60% depreciation but Income Tax Act, 1961 provides that payment made for computer software is royalty.

Income Tax Rules cannot override the Income Tax Act. Therefore, after the amendment by Finance Act, 2012 amount paid to obtain the computer software will be treated as Revenue Expenditure under section 37(1) subject to section 40(a)(i) and section 40(a)(ia) and shall not be added to block of assets of computers.

Extract of Finance Act, 2012:

Explanation 4: For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always includes 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 such right is transferred.

Explanation 5:  For the removal of doubts, it is hereby clarified that the Royalty includes and has always included consideration in respect of any right, property or information, whether or not

Imported Software as Royalty means no Deprecation(a) the possession or control of such right, etc. is with the payer,

(b) such right, etc. is used directly by the payer, or

(c) the location of such right, etc. is in India.

Explanation 6.—For the removal of doubts, it/s hereby clarified that the expression process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber or by any other similar technology, whether or not such process is secret;

It may, however, be noted that if any such payment is made to a non-resident in a country with which there is DTAA, the provisions in DTAA, if favourable, will apply in preference to the above provision.

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  • aaree

    The retrospective amendment in section 9(1)(vi) are by way of Explanations 4, 5 and 6 while Sections 40(a) and 40(a)(i) of the Income tax Act restricts the definition of royalty only to Explanation 2.

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