Page 49 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes The definition of ‘royalty’ for this purpose is wide enough to cover both industrial royalties
as well as copyright royalties. The deduction specially excludes income which should be
charge able to tax under the head ‘capital gains’.
Consideration for Use or Right to Use of Computer Software is Royalty within the
Meaning of Section 9(1)(vi)
As per section 9(1)(vi), any income payable by way of royalty in respect of any right,
property or information is deemed to accrue or arise in India. The term “royalty” means
consideration for transfer of all or any right in respect of certain rights, property or
information. There have been conflicting court rulings on the interpretation of the defi nition

of royalty, on account of which there was a need to resolve the following issues –
Does consideration for use of computer software constitute royalty?
(i) Is it necessary that the right, property or information has to be used directly by the
payer?
(ii) Is it necessary that the right, property or information has to be located in India or
control or possession of it has to be with the payer?
(iii) What is the meaning of the term “process”?
In order to resolve the above issues arising on account of conflicting judicial decisions

and to clarify the true legislative intent, Explanations 4, 5 & 6 have been inserted with
retrospective effect from 1 June, 1976.
st
Explanation 4 clarifies that the consideration for use or right to use of computer software

is royalty by clarifying that, transfer of all or any rights in respect of any right, property or
information includes and has always included transfer of all or any right for use or right
to use a computer software (including granting of a licence) irrespective of the medium
through which such right is transferred.
Consequently, the provisions of tax deduction at source under section 194J and section 195
would be attracted in respect of consideration for use or right to use computer software
since the same falls within the definition of royalty.

Notes The Central Government has, vide Notifi cation No.21/2012 dated 13.6.2012 to be
effective from 1st July, 2012, exempted certain software payments from the applicability of
tax deduction under section 194J. Accordingly, where payment is made by the transferee
for acquisition of software from a resident-transferor, the provisions of section 194J would
not be attracted if:

1. the software is acquired in a subsequent transfer without any modification by the
transferor;
2. tax has been deducted either under section 194J or under section 195 on payment for
any previous transfer of such software; and
3. the transferee obtains a declaration from the transferor that tax has been so deducted
along with the PAN of the transferor.

Explanation 5 clarifies that royalty includes and has always included consideration in
respect of any right, property or information, whether or not,
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.

44 LOVELY PROFESSIONAL UNIVERSITY