We are an IT company based in India. We would like to know whether we are required to withhold TDS (Tax deducted at Source) from the foreign remittances that we make to the foreign vendors with whom we have agreements.
We enter into agreements with some foreign vendors (which have no PE in India) for the following:
1. Server Hosting Companies in USA
We host websites on the servers located in the USA and for this, these foreign vendors charge monthly server hosting fees.
2. Electronic Data Licensing from USA based Vendors -
We license some electronic data (content, images, news, articles, etc) from 3rd party USA based vendors which we receive in a downloadable format from the Internet. We process and post this content on the websites hosted on the US based servers.
These foreign vendors have given us the license to use their copyrighted content (electronic data/goods) on an annual basis. The data is published on our website and viewed freely by website visitors.
We do not sell any products/goods in India. The websites that we create are hosted in USA and the data that we license from USA based vendors are posted on those websites that are hosted in USA.
----- Our Queries:
1. Would the server charges for hosting in USA fall under "royalties"?
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According to section 9
(vi) income by way of royalty payable by:
(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 :
For the purposes of this clause, "royalty" means consideration for:
[(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;]
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Thus according to the above clause, would server hosting fall under the use of equipment?
We spoke to many other software companies using similar USA based server hosting providers like we do, and none of them are aware of the exact rules, and hence are not applying any TDS currently to the remittances done to these foreign vendors.
2. Would the Electronic data Licensing from USA based Vendors fall under "royalties", or would they be exempted from TDS since they fall under Computer Software (customized electronic data)?
""
According to: section 9
(vi) income by way of royalty payable by:
(c) a person who is a non-resident, .......
80[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.]
84[Explanation 3.] For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data
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Thus, according to the above clause, any customized electronic data would fall under "Computer Software", and the granting of a licence in respect of computer software supplied by a non-resident manufacturer would not fall under the category of Royalty. Is my interpretation correct?
Also, there is another clause which mentions,
""
For the purposes of this clause, "royalty" means consideration for:
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ;
""
The above clause mentions that granting of a licence in respect of any copyright would be deemed as "Royalty".
So, does our "Electronic Data/Content Licensing" fall under "Royalty" or "Computer Software" and is TDS applicable to the remittances that we make to these foreign vendors.
3. PAN Application Requirement for Foreign Vendors?
According to IT section 206AA, we have to deduct the TDS @ 20% in case the foreign payees do not provide their PAN cards. Since most of them are unwilling to apply for PAN cards, how should we proceed ahead. Is this clause relevant in case we are exempted from withholding any TDS? Does this section 206AA overrides the DTAA?
If the foreign company has a PAN and that is quoted during the TDS withholding, would they be required to file Income Tax returns in India?
Looking forward to hearing some feedback.
