Software licence payments treated as purchase of a copyrighted article, not royalty, under the India-Singapore tax treaty.

Consideration paid for a non-exclusive, non-transferable software licence was analysed under the India-Singapore tax treaty and the Income-tax Act, 1961. The arrangement granted only a right to use the software for internal business purposes, without any transfer of copyright or ownership in the software. Applying the distinction between a copyrighted article and rights in copyright, the payment was treated as purchase of a copyrighted article rather than royalty for use of, or the right to use, copyright. It was therefore not taxable in India as royalty, and no tax was deductible at source under section 195.

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Issues: Whether consideration paid for acquisition of computer software under a non-exclusive, non-transferable licence was royalty taxable in India under the India-Singapore tax treaty and the Income-tax Act, 1961, so as to require deduction of tax at source.

Analysis: The payment was examined in the light of the treaty definition of royalty and the terms of the software agreement. The arrangement gave the assessee a licensed right to use the software for internal business purposes, without transfer of copyright or ownership in the software itself. The Court followed the principle that software embodied in a medium and sold as a product is goods, while mere permission to use a copyrighted product without conferring any right in the copyright does not amount to a transfer of rights in respect of copyright. On that basis, the amount paid was treated as consideration for purchase of a copyrighted article and not as consideration for use of, or the right to use, copyright.

Conclusion: The payment was not royalty, was not taxable in India under the treaty, and no tax was deductible at source under section 195 of the Income-tax Act, 1961.

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