Software licence payment for internal use was not royalty, so no withholding tax applied on the remittance.

Payment for a licensed software copy used internally, without transfer of copyright or any right to exploit the software commercially, was treated as consideration for a copyrighted article rather than royalty. On that basis, the amount did not fall within the royalty definition under the Income-tax Act or the treaty, and no tax was deductible at source under section 195. The absence of a permanent establishment also meant the non-resident's business income was not taxable in India. The Revenue's challenge therefore failed and the software remittance was not subject to withholding tax as royalty.

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Issues: Whether the consideration paid for acquisition and use of software from a 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 as a licensed copy for internal use, without transfer of copyright or any right to exploit the software commercially. The recipient obtained only a limited right to use the software, while the ownership of copyright remained with the foreign supplier. On these facts, the payment was for a copyrighted article and not for use of, or the right to use, any copyright. Since the amount was not royalty under the Income-tax Act, the treaty provisions also did not alter the position, and the non-resident's absence of a permanent establishment meant the business income was not taxable in India.

Conclusion: The payment was not royalty and no tax was deductible at source; the Revenue's appeal failed.

Final Conclusion: The order confirming that the software remittance was taxable only as business income not chargeable in India was sustained, resulting in rejection of the Revenue's challenge.

Ratio Decidendi: A payment for a copyrighted article, without transfer of any copyright rights, is not royalty and does not attract withholding tax under section 195.

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