Software licence payments held to be for a copyrighted article, not royalty, so no withholding tax applied.

Payments for standard software acquired for internal operational use under a non-exclusive, perpetual, irrevocable and royalty-free licence were treated as consideration for a copyrighted article, not royalty. Because the purchaser received no right to exploit, modify, sublicense, reverse engineer or otherwise exercise rights in the underlying copyright, the amount fell outside the domestic and treaty definitions of royalty. In the absence of a permanent establishment in India, the foreign suppliers' receipts were not taxable as business profits, and no tax was deductible at source under section 195.

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Issues: Whether the payments made for purchase and use of standard software from Singapore-resident suppliers constituted royalty so as to require withholding tax under section 195, or whether they were payments for a copyrighted article taxable only as business income in the absence of a permanent establishment in India.

Analysis: The software was supplied for internal operational use under a non-exclusive, perpetual, irrevocable, royalty-free licence, and the purchaser obtained no right to transfer, modify, reverse engineer, sublicense, commercially exploit, or otherwise exercise rights in the underlying copyright. The arrangement showed acquisition of a copy of the software on media, not transfer of any part of the copyright itself. On that footing, the payment fell outside the definition of royalty in the domestic law and in the treaty, and the treaty position was in any event consistent with the view that only the copyright holder's exploitation rights constitute royalty. As the foreign suppliers had no permanent establishment in India, the resulting business profits were not taxable in India.

Conclusion: The payment was not royalty but consideration for a copyrighted article. No tax was deductible at source under section 195, and the Revenue's challenge failed.

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