Software licence payments treated as royalty, making withholding tax mandatory despite no permanent establishment.

Amounts paid for shrink-wrap or off-the-shelf software to non-resident suppliers were treated as royalty where the agreements granted a licence to load, copy, back up and use the software for internal business while ownership of the copyright remained with the supplier. The right to make such copies was regarded as part of the copyright, bringing the consideration within the statutory and DTAA meaning of royalty. Because the sum was chargeable to tax in India as royalty, tax was required to be withheld under Section 195. The absence of a permanent establishment did not change the result once the receipt was characterised as royalty rather than business income.

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Issues: Whether amounts paid for import of shrink-wrap or off-the-shelf software to non-resident suppliers constituted royalty under the Income-tax Act, 1961 and the applicable DTAA, and if so, whether the payer was obliged to deduct tax at source under Section 195.

Analysis: The payment was not for a mere copyrighted article. The agreements conferred a licence to use the software by permitting loading, copying, and backup use for internal business, while the non-resident retained ownership of the copyright and other intellectual property rights. The right to make copies for such use was treated as part of the copyright itself, and therefore the consideration fell within the statutory and treaty meaning of royalty. The definition in the DTAA was considered restrictive but still covered consideration for the use of, or right to use, copyright. Since the sum was chargeable to tax in India as royalty, Section 195 applied. The absence of a permanent establishment did not alter the position once the receipt was held to be royalty rather than business income.

Conclusion: The payment constituted royalty and was taxable in India. The payer was liable to deduct tax at source, and the Tribunal's view to the contrary was incorrect.

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