Software distribution payments were not royalty because no copyright rights passed, so tax deduction and disallowance failed.

Payments for purchase and distribution of software were held not to constitute royalty under section 9(1)(vi) because the arrangement involved supply of a copyrighted product, not transfer of copyright. The distributor received no right to reproduce, modify, commercially exploit, or otherwise exploit the copyright; the contractual clauses were treated as incidental to distribution only. As the software was separately downloaded by end customers under licence from the foreign supplier and the assessee acted merely as a margin-based distributor, the payment was not chargeable as royalty. Consequently, no obligation to deduct tax at source under section 195 arose, and disallowance under section 40(a)(i) could not be sustained.

---

---

Issues: Whether payments made for purchase and distribution of software were royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961 and, consequently, liable to disallowance under section 40(a)(i) for failure to deduct tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The software supplied to customers was a copyrighted product and not a transfer of copyright. The distribution arrangement did not confer any right to reproduce, modify, commercially exploit, or otherwise use the copyright in the software. The clauses relied on by the Revenue were read as imposing duties incidental to distribution, not as granting proprietary rights in the software. The software was directly downloaded by end customers under a separate licence with the foreign supplier, and the assessee acted only as a distributor on margin. In these circumstances, the payment was for purchase of software and not royalty. As the amount was not chargeable as royalty, the obligation to deduct tax under section 195 did not arise, and the disallowance under section 40(a)(i) could not stand.

Conclusion: The payment was not royalty and the disallowance under section 40(a)(i) was rightly deleted.

---