Software licence payments for a copyrighted article were not royalty, so no withholding tax arose absent a permanent establishment.

Consideration for software supplied under a restrictive end-user licence was analysed under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the India-USA DTAA. Because the licensee obtained only a non-exclusive, non-transferable right to use the program internally, with no right to copy, modify, sublicense, reverse engineer, or commercially exploit it, the payment was treated as consideration for a copyrighted article and not for any transfer of copyright rights. On that basis, it was not royalty; the foreign recipients' income was characterised as business income not taxable in India in the absence of a permanent establishment, and no tax was required to be deducted at source under section 195.

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Issues: Whether consideration paid for software acquired under a restrictive licence amounted to royalty under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the India-USA DTAA, and whether tax was required to be deducted at source under section 195.

Analysis: The software was acquired only for internal use under a non-exclusive, non-transferable, perpetual licence with no right to copy, modify, sublicense, reverse engineer, or commercially exploit the programme. On those terms, the payer obtained only a copyrighted article and not any part of the copyright itself. The distinction between a right to use copyright and a right to use the copyrighted product was treated as decisive. Payments for a copyrighted article were held not to fall within royalty under the domestic provision or the treaty. As the foreign recipients had no permanent establishment in India, the payment was treated as business income not taxable in India.

Conclusion: The software payment was not royalty, no tax was deductible at source, and the Revenue's appeals failed.

Ratio Decidendi: Where software is acquired only as a copyrighted article under restrictive end-user licence terms, without transfer of any copyright rights or commercial exploitation rights, the consideration is not royalty but business income, and no withholding obligation arises absent a permanent establishment in India.

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