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K. Giriprakash

BANGALORE, March 7

THE Income-Tax Department has slapped notices on several software companies and those that use data link asking them to pay withholding tax of up to 20 per cent on the software they use.

Companies that have leased data link from AT&T and others and those which source data from companies like Gartner too have been given notices.

The latest missive from the I-T Department states that those companies which purchase computer software would have to deduct tax as per Section 195, holding a view that they are in the nature of royalties as per Section 9 (1)(vi).

In the case of data link, the department said that when an Indian company pays for getting lease line or telecom links, tax is deductible at source under Section 195 as they are for providing technical services covered under Section 9 (1)(vii). A spokesperson of Infosys Technologies declined to comment on the issue.

Interestingly, the Madras High Court in its judgment in the case of Skycell specified that payment to telecom services does not necessarily come under technical services.

According to a taxation consultant, three situations can arise in the case of software purchase. In the first instance, in case of payments made where the full rights in the software are transferred, the transaction is regarded as a sale of software.

In the case of partial transfer of rights, the consideration is likely to represent a royalty in certain cases. For example, where the transferor is the author of the software and has placed part of the rights at the disposal of a third party to enable him to develop or exploit the software itself commercially.

Thirdly, in the case where the acquisition of the software is for personal or business use of the purchaser, the payment would be taxable as business profits.

According to Mr K.R. Girish of RSM Company , a one-time licence fee should not constitute royalty income since payment is for the purchase of a copyrighted article as opposed to use or right to use any copyright in the software programme.

Mr Girish said software is considered as a taxable commodity under the customs and sales tax laws.

Hence the purchase of the software would tantamount to the purchase of goods and the same cannot be classified as royalties.

This issue is now before the Supreme Court in the TCS case where the Andhra Pradesh sales tax authorities had said that it is classified as goods. "Pending legislative clarification and contrary to internationally accepted position it is not correct on the part of the tax department to tax such software payments as royalties," he said.

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