Software import payments were not royalty; no tax deduction at source was required on purchase of copyrighted articles.

Payments for importing standard software packages were not royalty because acquisition of a copyrighted article is distinct from use or exploitation of copyright. Section 9(1)(vi) of the Income-tax Act targets consideration for rights in copyright or similar intellectual property, while the India-USA treaty, read with section 90(2), was treated as more beneficial and limited royalty to use of, or right to use, copyright. The software was treated as goods, not a copyright licence, and the non-resident supplier had no permanent establishment in India. Tax was therefore not deductible at source under section 195, and the demand under sections 201(1) and 201(1A) failed.

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Issues: Whether payments made for import of readymade computer software packages from a non-resident supplier were royalty within the meaning of the Income-tax Act, 1961 and the India-USA tax treaty, so as to attract deduction of tax at source under section 195 and consequential liability under sections 201(1) and 201(1A).

Analysis: The payment for acquiring a copy of software was distinguished from payment for the use or exploitation of copyright in the software. Under section 9(1)(vi) of the Income-tax Act, 1961, royalty contemplates transfer or use of rights in copyright or similar intellectual property, whereas acquisition of a copyrighted article without the right to exploit the copyright does not amount to royalty. The India-USA treaty, read with section 90(2) of the Income-tax Act, 1961, was held to be more beneficial and its Article 12(3) confined royalty to consideration for use of, or right to use, copyright and not merely purchase of a software copy. The software packages were treated as goods and not as a licence of copyright, and the foreign supplier had no permanent establishment in India.

Conclusion: The payments were not royalty, tax was not deductible at source under section 195 of the Income-tax Act, 1961, and the demand under sections 201(1) and 201(1A) could not be sustained.

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