Whether Payment for Purchase of Computer Software is Revenue or Capital Expenditure

Whether Payment for Purchase of Computer Software is Revenue or Capital Expenditure

As per Income Tax Rules provide that computers including computer software are eligible for depreciation at the rate of 60%, But Explanation 4 inserted by Finance Act, 2012 to the definition of royalty under section 9, clarifies that payment made towards purchase of computer software is royalty. Income Tax Rules Cannot Override the Income Tax Act.

Therefore amount paid to towards obtaining computer software shall not be added to the block of assets of computer.

Its Conclude with amount paid for the purchase of computer software is royalty and shall be allowed as a deduction under section 37(1) as Revenue Expenditure subject to the provisions of TDS compliances (section 40(a)(i) and section 40(a)(ia) of the Income-tax Act 1961).

 

Section 9 of the Income Tax Act 1961

Income deemed to accrue or arise in India.

Section 9.  (1) The following incomes shall be deemed to accrue or arise in India :—

(vi) income by way of royalty payable by—

(a) the Government ; or

(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or

(c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government :

[Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.]

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 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.

Analysis

1.    Royalty includes payment received for transfer of all or any right to use computer software.

2.    Royalty includes payment received for transfer or granting of license for computer software.

3.    On purchase of software from a resident TDS shall be deducted @10% under section 194J.

4.    On purchase of software from a non-resident TDS shall be deducted under section 195 at the rates in force. (Also check provision of section 115A & DTAA)