Software licence payments treated as royalty where copyright rights are transferred, triggering withholding tax obligations.

Payment for shrink-wrapped or off-the-shelf software to a non-resident supplier was treated as royalty because the licence permitted use, installation, copying and backup, involving transfer of rights in copyright. On that basis, the consideration fell within the definition of royalty under the Income-tax Act and was taxable in India. Once the remittance was characterised as royalty, the payer's obligation to deduct tax at source under section 195 followed. The jurisdictional High Court ruling in the assessee's own case governed the analysis, and the issue was decided against the assessee and in favour of the Revenue.

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Issues: Whether the payment made to a non-resident supplier for purchase of software was royalty, and consequently whether the assessee was required to deduct tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The dispute was covered by the jurisdictional High Court decision in the assessee's own case, which held that payments for shrink-wrapped or off-the-shelf software are not mere purchase price of a physical medium. The arrangement confers a licence to use the software and to make copies for installation and backup, which involves transfer of rights in copyright. On that basis, the consideration was held to fall within the definition of royalty under section 9(1)(vi) of the Income-tax Act, 1961. Once the payment was taxable as royalty, the obligation to deduct tax at source under section 195 followed.

Conclusion: The payment was royalty and the assessee was liable to deduct tax at source under section 195. The issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The appeal failed because the software remittance was treated as royalty chargeable to tax in India, attracting the statutory withholding obligation.

Ratio Decidendi: A payment for software that carries a licence to use, install, and copy the program constitutes royalty where the transfer includes rights in copyright, and such payment attracts deduction of tax at source under section 195.

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