Software licence payments as royalty: limited-use rights in copyright triggered tax withholding under the Income-tax Act.

Payment for software acquired from a non-resident was treated as royalty because the licence granted only limited use and did not transfer ownership of the copyright. The right to install, copy and create backups was held to be part of the copyright itself, and the transaction was characterised as a transfer of rights in copyright rather than a mere sale of a physical medium. On that basis, the consideration fell within royalty under section 9(1)(vi) of the Income-tax Act, 1961 and the relevant DTAA, with the Copyright Act, 1957 supporting the conclusion that such acts would otherwise infringe copyright. The payer was therefore liable to deduct tax at source under section 195, and the appeal failed.

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

Analysis: The payment was examined in the light of the software licence terms, which permitted only a limited use of the software and did not transfer ownership of the copyright. The Court held that the right granted to make copies, install the software on hard disks, and create backup copies formed part of the copyright itself. It further held that the transaction was not a mere sale of a CD or physical medium, but a transfer of rights in copyright, making the consideration royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961 and the relevant DTAA. The Copyright Act, 1957 was relied on to explain that the licensed acts would otherwise amount to infringement without permission.

Conclusion: The payment was royalty and the assessee was liable to deduct tax at source under section 195 of the Income-tax Act, 1961. The appeal failed.

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