Software payments and royalty characterization remitted for fresh examination where source code rights were absent.

Software-related payments were examined for whether they constituted royalty attracting tax deduction obligations or were merely distributor payments for resale on a back-to-back basis. The assessee argued that it had no right to modify, reproduce, or access source code, and therefore the payments did not fall within royalty under section 9(1)(vi) read with Article 12(3) of the India-US DTAA. The Tribunal also noted that a co-ordinate bench had already remitted a similar issue for fresh examination. The matter was remitted to the Assessing Officer for reconsideration, with liberty to the assessee to raise all contentions and file supporting material; the disallowance was not finally sustained.

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Issues: Whether the disallowance under section 40(a)(i) of the Income-tax Act, 1961 for alleged failure to deduct tax at source on software-related payments as royalty was sustainable.

Analysis: The dispute turned on whether the assessee was only a distributor of software purchased from overseas associated enterprises and resold to Indian customers on a back-to-back basis, or whether the payments were in the nature of royalty attracting section 195 of the Income-tax Act, 1961. The Tribunal noted the assessee's contention that it had no right to modify, reproduce, or access the source code of the software and that the payment was therefore not royalty within section 9(1)(vi) of the Income-tax Act, 1961 read with Article 12(3) of the India-US DTAA. It also noted that an earlier co-ordinate bench had remitted the assessee's own similar issue for fresh examination, and that the facts and supporting material required reconsideration by the Assessing Officer.

Conclusion: The issue was remitted to the Assessing Officer for fresh consideration, with liberty to the assessee to raise all contentions and produce supporting material; the disallowance was not finally sustained.

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