Shrink-wrap software payments are not royalty when no copyright rights pass, and 234B interest is barred for TDS-covered non-residents.

Consideration for supply of shrink-wrap software was treated as payment for a copyrighted article, not as royalty under Article 12(3) of the Indo-US DTAA, because no right to reproduce, modify, decompile, reverse engineer, or otherwise exploit copyright was transferred. The note also states that interest under Section 234B is not leviable on a non-resident where the Indian income is subject to tax deduction at source, since advance tax liability is computed after reducing tax deductible at source and no advance tax shortfall survives. The revenue's appeal failed on both issues.

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Issues: (i) Whether consideration received for supply of shrink-wrap software constituted royalty under Article 12(3) of the Indo-US DTAA and was taxable in India. (ii) Whether interest under Section 234B of the Income-tax Act, 1961 could be charged from a non-resident where the income was subject to tax deduction at source.

Issue (i): Whether consideration received for supply of shrink-wrap software constituted royalty under Article 12(3) of the Indo-US DTAA and was taxable in India.

Analysis: The software was supplied in packaged form under end user licence terms. Neither the distributor nor the end user obtained any right to reproduce, modify, decompile, reverse engineer, or otherwise exploit the copyright in the software. The transaction was for sale of a copyrighted article and not for transfer of any copyright or right to use copyright. On the facts, the payment could not be characterised as royalty within the meaning of Article 12(3) of the treaty.

Conclusion: The payment received for supply of software was not royalty and was not taxable as such in India.

Issue (ii): Whether interest under Section 234B of the Income-tax Act, 1961 could be charged from a non-resident where the income was subject to tax deduction at source.

Analysis: The assessee was a non-resident and the income arising in India was subject to deduction at source. Since the advance tax liability is to be computed after reducing tax deductible at source, no advance tax liability survived. In such circumstances, interest for shortfall in advance tax could not be levied on the assessee.

Conclusion: Interest under Section 234B was not leviable.

Final Conclusion: The revenue's appeal failed on both grounds, and the additions and interest charge were not sustained.

Ratio Decidendi: Consideration for sale of shrink-wrap software is not royalty where no copyright rights are transferred, and a non-resident cannot be charged interest for failure to pay advance tax when the entire Indian income is subject to tax deduction at source.

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