Royalty on equipment and software licences triggers tax deduction at source where only a limited right to use is granted.

Consideration paid for connectivity facility and maintenance of co-located equipment was treated as royalty because the foreign entity permitted use of industrial, commercial or scientific equipment, bringing the payment within the expanded domestic royalty definition and the treaty royalty article; tax was therefore deductible at source. Payments for use of True Dial software under a limited, non-exclusive licence were also treated as royalty because the arrangement conveyed only a restricted right to use the software, while ownership and intellectual property remained with the licensor; tax was therefore deductible at source. The combined effect was that both categories of payments were chargeable to tax in India as royalty, sustaining the deduction obligation.

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Issues: (i) Whether payments made for connectivity facility and maintenance of co-located equipment to the foreign entity were royalty so as to attract tax deduction at source; (ii) Whether payments made for use of True Dial software under a licence arrangement were royalty and therefore subject to tax deduction at source.

Issue (i): Whether payments made for connectivity facility and maintenance of co-located equipment to the foreign entity were royalty so as to attract tax deduction at source.

Analysis: The payment was examined in the light of the expanded domestic definition of royalty after insertion of the clause covering the use or right to use industrial, commercial or scientific equipment. The equipment used for connectivity was found to be commercial and scientific equipment, and the foreign entity was found to have allowed the assessee to use that equipment for deriving connectivity services. The payment also fell within the royalty article of the treaty as consideration for use of industrial, commercial or scientific equipment.

Conclusion: The payment was held to be royalty and the assessee was liable to deduct tax at source; the finding was against the assessee.

Issue (ii): Whether payments made for use of True Dial software under a licence arrangement were royalty and therefore subject to tax deduction at source.

Analysis: The software arrangement was found to be only a limited, non-exclusive licence to use the software, while ownership and all intellectual property rights remained with the licensor. The transaction was not an outright purchase or transfer of ownership rights, but a restricted right to use the software, which falls within the royalty definition applicable to licence-based use of software.

Conclusion: The payment for the software licence was held to be royalty and liable to tax deduction at source; the finding was against the assessee.

Final Conclusion: Both categories of payments were treated as royalty chargeable in India, and the assessee's obligation to deduct tax at source was sustained.

Ratio Decidendi: Consideration paid for a limited right to use equipment or software, where ownership remains with the foreign supplier, constitutes royalty under section 9(1)(vi) and is chargeable to tax in India, attracting section 195 deduction obligations.

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