Shrink-wrapped software licence payments treated as royalty, while section 234B interest was denied for a non-resident.

Consideration for shrink-wrapped software licences was treated as royalty where the licence transferred only a restricted right to use copyright-protected software, including restrictions on copying, alteration, reverse engineering, sublicensing, rental and further distribution. On that basis, the royalty issue was decided against the assessee. The Tribunal also held that interest under section 234B was not leviable on a non-resident where the relevant tax was deductible at source by the payer under section 195 and had to be excluded from advance-tax computation. That issue was decided in favour of the assessee.

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Issues: (i) Whether consideration received on sale and marketing of shrink-wrapped software licences constituted royalty under the Income-tax Act and the relevant DTAA. (ii) Whether interest under section 234B could be levied on a non-resident where tax was deductible at source from the relevant payments.

Issue (i): Whether consideration received on sale and marketing of shrink-wrapped software licences constituted royalty under the Income-tax Act and the relevant DTAA.

Analysis: The Tribunal followed the binding decision of the Karnataka High Court which had held that payments for shrink-wrapped or off-the-shelf software are not mere payments for a physical medium, but represent consideration for the right to use copyright in the software. The licence terms restricting copying, alteration, reverse engineering, sublicensing, rental, lease, and further distribution showed that what was transferred was a limited right to use the software, which fell within the meaning of royalty under the statutory provision and the treaty article relied upon.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether interest under section 234B could be levied on a non-resident where tax was deductible at source from the relevant payments.

Analysis: The Tribunal held that for a non-resident recipient of payments subject to deduction at source, the obligation to deduct tax rested on the payer under section 195, and such tax had to be reduced while computing advance tax under section 209(1)(d). In the absence of any statutory duty on the assessee to make advance-tax payment on sums fully liable to deduction at source, levy of interest for default in advance tax was not attracted. The Tribunal relied on the settled position expressed by High Courts that the non-resident cannot be treated as being in default for this purpose where the payer's withholding obligation exists.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The royalty issue was decided against the assessee, but the levy of interest for non-payment of advance tax was set aside, resulting in partial relief.

Ratio Decidendi: Consideration for shrink-wrapped software licences is royalty where the licence grants use of copyright-restricted software, and interest under section 234B is not leviable on a non-resident when the relevant tax was required to be deducted at source by the payer and therefore does not enter the assessee's advance-tax liability.

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