Software distribution receipts treated as royalty where licence allowed copying, installation and use of copyrighted software.

Consideration for distribution of software products under a licensing arrangement was treated as royalty because the distributor and end user were permitted to copy, install and use the software while copyright and other intellectual property rights remained with the non-resident supplier. The Tribunal followed binding jurisdictional High Court authority and applied section 9(1)(vi) of the Income-tax Act and Article 12 of the India-USA DTAA to conclude that the receipts were not simple sale proceeds but payments for use of copyright rights. On that basis, tax was required to be deducted at source, and the addition and first appellate order were sustained.

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Issues: Whether consideration received for distribution of software products under the licensing arrangement constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA, and whether tax was required to be deducted at source.

Analysis: The Tribunal followed the jurisdictional High Court decision holding that the software distribution arrangement did not amount to a mere sale of goods. The licence granted to the distributor and end user permitted copying, installation and use of the software, while the copyright and other intellectual property rights continued to vest in the non-resident supplier. On that basis, the consideration was treated as payment for use of copyright rights and not as simple sale proceeds. The Tribunal also noted that the issue had already been settled against the assessee in identical facts by the binding High Court ruling, which concluded that such payments fell within the definition of royalty and attracted the obligation to deduct tax at source.

Conclusion: The software distribution receipts were held to be royalty, and the assessee was bound to deduct tax at source. The addition and the first appellate order were sustained.

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