Software licence payments for a copyrighted article are not royalty, so no withholding arises absent a permanent establishment.

Payments for operational software supplied under a limited licence, without any transfer of copyright or rights to modify, reverse engineer, sublicense, or commercially exploit the software, were treated as consideration for a copyrighted article rather than royalty. On that basis, the sums did not fall within the definition of royalty under the Income-tax Act or the applicable treaty. As the non-resident suppliers had no permanent establishment in India, the receipts were characterised as business income not chargeable to tax in India, and no withholding obligation arose under section 195. The issue was decided in favour of the assessee.

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Issues: Whether payments made for purchase or use of operational software from non-resident UK suppliers constituted royalty so as to require deduction of tax at source under section 195, or whether the payments were consideration 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 use under limited licence terms that did not transfer any copyright, did not permit modification, reverse engineering, sublicensing, or commercial exploitation, and only allowed use of the software as a copyrighted product. On those facts, the consideration was held to be for a copyrighted article and not for use of, or right to use, any copyright. Consequently, the payment did not fall within the definition of royalty under the Income-tax Act or the applicable treaty. Since the foreign suppliers had no permanent establishment in India, the receipts were treated as business income not chargeable to tax in India, and no withholding obligation arose under section 195.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

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