Software licence payments for a copyrighted article are not royalty where no copyright rights are transferred.

Payment for an off-the-shelf software copy supplied under a limited licence was not royalty because no copyright rights were transferred. The recipient could only use the software as a copyrighted article and was barred from copying, modifying, reverse engineering, sublicensing, or commercially exploiting it. On that footing, the amount was treated as consideration for purchase of a copyrighted article, not for use of, or right to use, copyright, so no tax was deductible at source under section 195. The foreign recipient's income was characterised as business income, and absent a permanent establishment in India, it was not taxable in India.

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Issues: Whether payment made for purchase and use of off-the-shelf software from a Canadian non-resident constituted royalty so as to require deduction of tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The software was supplied for internal use under a limited licence that did not transfer any copyright or any right to exploit the copyright. The recipient was permitted only to use the software as a copyrighted article and was prohibited from copying, modifying, reverse engineering, sublicensing, or commercially exploiting it. Applying the distinction between a copyright and a copyrighted article, the payment was held to be consideration for purchase of a copyrighted article and not for the use of, or the right to use, copyright. In the absence of royalty character under the Act, the treaty analysis did not alter the result, and the foreign recipient's income was treated as business income not taxable in India in the absence of a permanent establishment.

Conclusion: The payment was not royalty and no tax was deductible under section 195.

Ratio Decidendi: Consideration paid for a software copy, where no copyright rights are transferred and only use of the copyrighted article is permitted, is not royalty but business income.

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